Holiday Trading

The major equity indexes all finished Friday at the top of their weekly ranges, as did the tech indexes–the Morgan Stanley high-tech index (MSH), the semiconductor index (SOX) and the NDX 100 (NDX). The institutions are tripping over themselves to run up the major tech and key Internet-related stocks.

The banks backed off last week with the increase in the long bond yield, while the drugs are consolidating in a flag pattern after a good run-up. The S&P 500 index’s rally to new highs has been very narrow, as evidenced by the number of stocks trading above their 200-day moving averages. At the 1420 July high, 60% of NYSE stocks were above their 200-day moving averages. When the market made new highs last week, only 34% of stocks were above their 200-day moving averages. This, despite every TV pundit telling us how broad the current rally is. Don’t believe anything you hear. But as a trader, it’s very easy to select stocks when there is such a narrow feeding frenzy taking place.

There could be a good move (in either direction) as the market comes out of Friday’s narrow-range bar The S&P 500 closed in a narrow-range pattern (only 7 3/8 points from high to low) on Friday, consolidating after Tuesday’s wide-range bar move to new highs. There probably will be a good move (in either direction) as the market comes out of Friday’s narrow-range bar. The VIX (CBOE volatility index) closed below its lower Bollinger Band for the second day in a row, making a 29-day low. Look for a close above the high of the low day on the VIX, along with a close below the low of the high day on the S&P 500, as an indication of a possible change of direction (to retrace at least 38% of the 15.5% move off the October 18 low of 1233.65). When it happens, it will come very quickly because of the air beneath many of the techs the Generals have been running up.

Pattern Setups  From now until the end of the year, we’ll focus on S&P 500 stocks that have given the Generals their performance boost, at least those that are over-weighted in them. But even the ones who are under-weighted will buy more of these stocks to show their stockholders they have the right stocks, but their timing was just a bit off (standard spin).

Save these stocks for your continuing list: America Online [AOL>AOL], a narrow-range pattern–take it only in the direction of the trend; Amazon.com [AMZN>AMZN]; Clear Channel Communications [CCU>CCU]; Adaptec [ADPT>ADPT]; Apple Computer [AAPL>AAPL]; Network Solutions [NSOL>NSOL]; Morgan Stanley Dean Witter [MWD>MWD]; Nextel Communications [NXTL>NXTL]; LSI Logic [LSI>LSI]; Sun Microsystems [SUNW>SUNW]; Gateway [GTW>GTW], and our old friend Tandy [TAN>TAN].

Program Trading NumbersBuySellFair Value5.953.604.80Again, save this commentary to build a list of stocks that will continue to be marked up and will get extra kick from program trades and hedge fund front-running when they see the Generals coming.

Here’s some trivia regarding the holiday week. Last year, the Dow traded the four days before Thanksgiving as follows: +104, +215, -73, +13 (the day before the holiday, with volume dropping 23% from the three preceding days). The day after Thanksgiving, the Dow was up 19 points on volume of 257 million.

Keep in mind that a lot of rookies will be on the books, especially tomorrow and Wednesday. There could be a great deal of movement, and many stocks can be marked up very easily. You might see some very good opportunities in the kinds of patterns setups we’re talking about here.

If you want to learn more about Kevin Haggerty’s trading strategies, click on the link below to go to his series of tutorial articles.