Risk And The Trading Tree

August 24, 2000
Kevin Haggerty

Yesterday
we had an early down for the
S&P 500 until 10:15 a.m., and then a lightning-fast 15-bar rally until the
11:35 a.m. bar. We then went sideways until the index advanced to new intraday
highs on the 3:20 p.m. bar and closed in the top of the range at 1505.95, +0.5%
on the day. The Nasdaq 100
(
NDX |
Quote |
Chart |
News |
PowerRating) led by the semis and Internets, did better,
finishing +1.8% on the day at 3897. Institutional activity was the most we have
seen this week, with total volume of 871 million and institutional blocks
increasing to 19,018, but certainly still in a vacation mode.Â

On the year, the scoreboard
reads: S&P 500 +2.5%; Nasdaq
-1.4%; and the Dow -3.1%. This has
been a difficult eight months for money managers, with the collapse of many
momentum-growth stocks and the constant overreactions to economic and
company-specific news. This has led to a significant increase in trading around
positions to try and generate incremental gains vs. the flat indexes.Â

The parabolic breakout mode
for the growth stocks has ended for now and the moves are now much shorter and
more volatile with many whipsaws. This is great for short-term traders and very
frustrating for longer-term position traders with finite capital, as they are
constantly getting stopped out, only to see their stocks regroup and possibly
move higher. Pullbacks in uptrends are always lower-risk entries especially in
this market environment where breakouts after extended moves very rarely hold on
the first trade-through entry and often fail if some analyst takes a shot at it,
trying to pick a price top. This creates reactions that are detrimental to
smaller position traders with limited capital.

I suggest you start looking
at the beginning of the trading tree which is around the 200-day moving average,
and find stocks that are just beginning their advancing stage again. An example
of this is
(
EMLX |
Quote |
Chart |
News |
PowerRating) which you can see by looking at your one year daily
chart. When you start playing breakouts after the third or fourth consolidation
up top, and price is extended, you are
prone to some nasty surprises. Short-term
traders are better off playing the
middle to high end of the trading tree so they can ride the momentum, as
institutions attack these momentum stocks to create performance.

Next week, I will include a
list of stocks that have been generating many explosive Slim Jims, because they
are now in the advancing stage. When they get extended, they generate a similar
pattern, which gives you good daytrading short entry just as you have seen in
the air-pocket shorts I have mentioned in previous commentary.Â

face=”arial, helvetica”>(September Futures)
Fair Value	size=2>Buy	size=2>Sell
6.00	7.10	4.75

Pattern
Setups

There are many good ones today, so if
we get any kind of carry-through, you should get a pretty good move. If you
don’t get a first or second trade-through entry, you should scroll these stocks
all day for intraday setups. Trust me, it will be rewarding.

I gave you extra ones because when you
have a good day, you have a good day. You might as well take a look at all of
the ones that set up.

Have a good trading day.

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Risk And The Trading Tree

BUY THE FEAR, SELL THE GREED

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