Rally Potential, But Critical Resistance Still Ahead

alfgthe
..diecrs
lies
a.
On
Wednesday the Nasdaq shot through critical resistance on good volume like a hot
knife through butter. Leadership breadth
also soared — look at the new highs number on our Top
RS/EPS New Highs
list, 59, one of the only days over 50 since the Sept. 21
bottom!
But some critical tests remain, and we’ll need more broad-based rallies
filled with a lot more breakouts than we’ve had to date to get REALLY
excited about this market.
 


The
long bond is again testing its trend channel. If
it can slice through the 101-15 level on good volume, that will be a huge sign
that another market is SERIOUSLY discounting recovery big time.
We would like to see the Dow breakout through 10,200 and the S&P at
least over 1185, as well, on good volume to confirm the Nasdaq explosion.

Commodities
appear to be basing, which is a positive, though it would be much more
convincing if they had already formed bases and were breaking out in earnest of
valid patterns. Is the copper explosion a
short-covering affair that is over, or can it now bust through the critical 7300
level and launch a real sustainable rally? Can
nearby cotton futures base and bust through the 3800-4100 level to launch a
sustainable move up? And can nearby
lumber futures do more than make a short-term double bottom by spending some
time in the 215-255 range before busting above this key level?
The Aussie dollar and NZD are basing beautifully, but can they break
above their ranges to confirm yet another asset class is discounting true
long-lasting recovery economically?

Clearly
if the Dow and S&P can break above their resistance levels on good volume
and leadership numbers are above 50 on several more subsequent days, we will not
wait for commodities to confirm, and we advise investors to DROP THE RULE OF
ONLY TAKING TWO LONG TRADES A WEEK IF THIS DEVELOPS — BUT ONLY IF LEADERSHIP
AND RESISTANCE LEVELS ARE CLEARLY BULLISH IN THIS MANNER.

Until then, we’ll remain a bit cautious in terms of taking on new
positions.

Investors
need to remember that the decision to allocate more aggressively into leading
stocks is not the same as market timing. Leadership
usually develops from two to four months after a true bottom in stocks.
But by waiting, investors can get into stocks that make manyfold the
gains of the total market move. That’s
where the top reward/risk exists, and our job is to wait patiently for a
low-risk, highly reliable move in these leading stocks that is clearly evident.
We’re getting a lot closer with this week’s action, but we’re not
quite there yet. 

Let’s
look at the breadth numbers on our lists for the week.
Breadth and leadership are BEGINNING to look interesting, but they
need to CONTINUE this kind of action.
Top
RS/EPS New Highs
vs. Bottom
RS/EPS New Lows
for the latest week were 18/2, 21/1, 17/4, 26/4 and 59/1.
Still not a whole week with 20 or greater new highs, but the 59 reading
gave a glimpse of potential if it can continue. Look
for longs to reach 20 or higher consistently in a week and over 100 on at least
one day before becoming very bullish. Breakouts
vs. breakdowns of four-plus-week consolidations on our lists for the week were
4/0, 3/0, 2/0, 2/0 and 17/0. Nothing on
the short side of breakouts is incredible! But
long-side breakouts are still weaker than a truly positive environment.
We did have a long trade in the leading builders group in Ryland Group
(
RYL |
Quote |
Chart |
News |
PowerRating)

and some close calls that were not quite in leading industries in CGI Group
(
GIB |
Quote |
Chart |
News |
PowerRating)
,
Ectel Ltd.
(
ECTX |
Quote |
Chart |
News |
PowerRating)
and THQ Inc.
(
THQI |
Quote |
Chart |
News |
PowerRating)
.
Without clearer leadership, more breakouts by leading stocks and groups,
and broader breakout participation, this move will be difficult to capture with
substantial risk/reward. 

Our
overall allocation remains DEFENSIVE with 76% in T-bills awaiting new
opportunities. For year 2001, we are
now up about 13.79%, with a heavy cash position
. 


For
those not familiar with our long/short strategies, we suggest you review my 10-week
trading course
on TradingMarkets.com, as well as in my book “The
Hedge Fund Edge
,” course “The Science of Trading,” and new
video seminar
most of all, where I discuss many new techniques.
Basically, we have rigorous criteria for potential long stocks that we
call “up-fuel,” as well as rigorous criteria for potential short
stocks that we call “down-fuel.” Each
day we review the list of new highs on our “Top RS and EPS New High
list” published on TradingMarkets.com for breakouts of four-week or longer
flags, or of valid cup-and-handles of more than four weeks.
Buy trades are taken only on valid breakouts of stocks that also meet our
up-fuel criteria. Shorts are similarly
taken only in stocks meeting our down-fuel criteria that have valid breakdowns
of four-plus-week flags or cup-and-handles on the downside.
In an environment unclear directionally, we also only buy or short stocks
on leading or lagging industries according to our group and sub-group new high
and low lists. We continue to buy new
signals and sell short new short signals until our portfolio is 100% long and
100% short (less aggressive investors stop at 50% long and 50% short).
In early March of 2000, we took half profits on nearly all positions and
lightened up considerably as a sea change in the new-economy/old-economy theme
appeared to be upon us.Upside
breakouts meeting up-fuel criteria (and still open positions) so far this year
are: Apogee Enterprises
(
APOG |
Quote |
Chart |
News |
PowerRating)
@
15.82 — out on 14.25 ops; Possis
Medical [
POSS|POSS] @15.3 (16.81) w/14.75 ops;
Central European Distribution [CDEC|
CEDC] @10.3 (11.4) w/8.65 ops; and
new Ryland Group
(
RYL |
Quote |
Chart |
News |
PowerRating)
@64.3 (66.7) w/55 ops.
Continue to watch our NH list and buy flags or cup-and-handle breakouts
in NH’s meeting our up-fuel criteria — but continue to add just two per week
and only in leading groups until we get breakouts in the S&P and Dow and
three more days with top RS/EPS New Highs above 50
.
If we get two or more of our breadth criteria for the overall market
developing from here on, we’ll also then drop the “two per week only”
advice on longs — but until that develops, we’re letting this market prove
itself.
 


On
the short side this year, we’ve had breakdowns from flags (one can use a down
cup-and-handle here as well) in stocks meeting our down-fuel criteria (and still
open positions) in: NONE.
Continue to watch our NL list daily and to short any stock meeting our
down-fuel criteria (see 10-week
trading course
) breaking down out of a downward flag or down cup-and-handle
that is in a leading group. The oversold
nature of the market leads us to suggest that investors remain cautious by
only adding two shorts in a week
.

Let’s
watch and see carefully whether this market can continue to develop into a
decent investing environment for our strategies or not.
Pay attention NOW.