Remain Patient

March 4, 2002
Dave Landry

On Monday, the Nasdaq opened flat but after a brief blip
down, mounted a strong rally. Then, after some mid-day drifting lower, it
resumed its rally going into the close. This action has it closing well.

The S&P also continued its melt up. And, to my
surprise, is now slightly above its 200-day moving average.

So what do we do? The market is now WAY overbought. I
measure this by looking at the 3-day average NYSE TRIN readings, the CHADTP (the
5-day average of advancing issues less the 5-day average of the declining
issues), the McCllellan Oscillator and simply price itself. Further, the VIX is
approaching levels not seen since last summer. If it also gets stretched away
from its moving average (i.e., a CVR-III/CVR-III Modified) then this will be even
more cause for concern. Now, here comes the disclaimer: Just because the market
is way overbought, doesn’t mean that it can’t become way, way overbought.
Therefore, there’s no need to fight the tape. However, I would use this
opportunity to tighten stops on existing longs, think twice before establishing
new ones (at least until we see some sort of pullback) and keep an eye out for a
short or two.Â

I had a tough time finding setups, this is normally a sign
for me to stay on the sidelines. Therefore, no setups tonight. If you are very
nimble, you might look to short the Q’s should the market “pop
up” and reverse on Tuesday’s open. Just don’t overstay your welcome (e.g., a
day trade).

Coach, What Now?

Lately, I have been doing a “walk through” on Coach Inc.
(
COH |
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PowerRating), a stock mentioned recently (see archives on the right side of this page for more details).Â
After you have taken partial profits and tightened stops to a profitable level
(i.e. at a level well above your initial entry), you now have a chance for a
“home run” (barring overnight gaps) on the remainder of the position.
This is a good place to be from a psychological perspective. It allows you to
give the remaining shares a little more “room”Â than would
normally given to a new swing trade. With that said, if you are a bit of a
longer-term player, the low of the breakout bar (a) would be a good place for a
trailing stop. For purposes of this column, let’s assume that we will tighten
the stop to just below a three-bar low (b). One last point, there’s nothing
wrong with “lightening up” after such a big move especially when you
consider the overbought nature of the overall market and the consumer
non-durables.Â