Off To The Races?

  • May 24, 2001
  • Dave Landry

On Thursday, the Nasdaq open
flat and chopped around because of a senator who wasn’t really sure what he
wanted to be when he grew up. The good news is, it found its low by mid-morning,
and rallied back to breakeven. Then, late in the day, it continued its rally and
closed well.

 

The S&P also had a decent
day. It found support near its recent lows (a) and above the top of its recent
range. It too closed well.

 

So what do we do? I’m very
positive about Thursday’s price action but I’m concerned that we didn’t correct
enough. It’s almost too pat–a relatively painless one-day correction, a
reversal day and then it’s off to the races again? So, don’t fight the tape but
realize that this market can and will likely soon be overbought again. For
instance, notice below that VIX hit new lows on Thursday and is closing in on a
new low for 2001.

 

Looking to potential setups,
Storage Technology (STOR),
on the Trading
Where The Action Is List and on the  Pullbacks
Off Highs List, looks like it has the potential to resume its strong uptrend
out of a pullback/big picture cup and handle. Just don’t overstay your welcome
here as there is overhead resistance above 24 (not shown).

 

Gilead Sciences (GILD),
on the  Pullbacks
Off Highs List, gapped lower on the open, but reversed to close well. This
action suggests that its uptrend remains intact.

Symantec (SYMC),
another pullback, appears to be finding support near the area of its recent
breakout.

Walk Through 

Note: If you are new to this
column or have been on vacation, you might want to review the archives for the
last week or so before continuing.

Thanks for all the kind emails
regarding the recent walk through. Last night (Wednesday), I did receive one
email asking me why I didn’t discuss what went wrong with the trade. First,
let’s discuss what went right. RF Micro Devices (RFMD)
offered a clean entry above the prior day’s high (a). It also had a logical stop
point below the low of the pullback (b). It then offered a chance to lock in
half of our profits at (c) and move our stop to breakeven (d)–2-for-1 Money
Management. It then provided a chance to trail a stop (e). Further, after being
up nearly 25% since entry (in just five days), it offered a chance to lock in
another piece of profits on this parabolic move (f)–worth considering when you
factor in the overbought nature of the overall market (see recent commentary
regarding market timing signals). And finally, on Wednesday, it stopped us out
of any remaining shares on the trailing stop at (g). 

Following up, on the next day
(Thursday) the stock continues to implode (second f…whoops!). As you can see,
without money management, a great trade would have been a losing trade as the
stock trades back below the entry.

So
what went wrong? Nothing, as far as I’m concerned. This is about as good as it
gets. When a stock provides an opportunity like the one above, I thank the
market gods and immediately begin looking for the next setup. True, it could
have gone another 100 points before hitting the trailing stop. And, that’s what
we were all hoping for. But, hey, I’m not complaining. The market is like a box
of chocolates– “you’re never really sure what you’re going to get.”
That’s why you set yourself up to capture a potential large gain but protect
yourself through protective stops, trailing stops and by taking partial
profits–just in case. 

 

Best of luck with your trading
on Friday! 

Dave
Landry

P.S. Reminder: Protective stops on every trade!

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