Pulling The Plug

The reinvestment week last week was excellent, with the S&P 500 up 4.2%. Friday was light with only 716 million shares traded and institutional blocks of 14,387.

A special thank you to several of the mutual funds for pounding the table over the weekend about beating the S&P 500 so far this year by being in all the right stocks–overweighted in techs, Internet, and any other momentum stocks necessary to outperform.

It’s great to see the managers fighting back and outperforming the index funds, but it’s scary when you think about how they’re doing it. It also confirms a “ride the elephant” trading strategy.

This morning we’ve got the Compaq story weighing on the market. What we’re looking at here is the combination of surprise news with a market that’s bumping up against the high channels of the fifth wave of the September-October 98 low.

Right now the four Nasdaq Generals–MSFT, DELL, INTC, CSCO–are all off. The market makers will pull the plug on these stocks (on the retail orders that sell on the Compaq news). But they could pull the plug hard enough that the institutions come back in at a certain level. But what usually happens is that the institutions sit back to see what happens, wait for the NYSE opening and for the dust to settle.

Target Stocks Of The Day  Let’s look at stocks as if the Compaq story didn’t happen. Instead of becoming continuation trades to the top, these are stocks that you can look at as pullback patterns, which we’re sure to get today on a gap down opening with the futures down as much as they are. Narrow-range patterns include: American International Group [AIG>AIG], Broadcast.com [BCST>BCST], Comcast [CMCSK>CMCSK], and Ascend Communications [ASND>ASND]

Some consolidation patterns that look good are American Express [AXP>AXP], Proctor & Gamble [PG>PG], BankAmerica [BAC>BAC], and Nextel Communications [NXTL>NXTL]. Keep in mind the opening gaps will be big. If you get a gap down on one of these strong stocks, take a look at the range over the last 3-5 days. If it gaps down at least 75% of the average daily range, it might be a good buying opportunity on a quick trade.

To give you an idea of some of the program activity today: The buy programs come in at 11.55 (the spread between the S&P cash and the S&P futures); sell programs come in around the 7.43 level, and fair value is 9.26. Disregard the fair value you see on CNBC–they don’t do it like the program traders do it.

Look for opportunities on the pullback side today. Look for those bottom consolidations, 8-10 bars, where the stocks get overdone on the downside.

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