The Answer

August 3, 2001
Kevin Haggerty

After
the gap up, the trend was
down until about 2:00 p.m., where we got a reflex move up, then a late program
push into the last half-hour that enabled both the
(
NDX |
Quote |
Chart |
News |
PowerRating) and
(
SPX |
Quote |
Chart |
News |
PowerRating) to
finish positive. The volume on the NYSE declined to 1.2 billion, with the volume
ration slightly better at 59 and breadth about the same as the previous day with
+511 advancers over decliners. The Nasdaq dynamic certainly retreated from the
previous day. Volume dropped about 6% to 1.6 billion shares, and the volume
ratio fell to 60 from 81 the previous day. The breadth dropped off to just +78
advancers over decliners from a +653.

The NDX is right at the
50-day EMA, and this is the eighth day of the rally. Just a reminder: three- to
eight-day pullbacks into a moving average in declining dynamics is always a red
flag to traders or institutions that are too aggressive into higher price
levels. The
(
SOX |
Quote |
Chart |
News |
PowerRating), which I discussed yesterday, closed at 657, up against
its 200-day EMA of 661 with many of its components having already rallied 20% to
30% during this short move. Take, for example,
(
NVDA |
Quote |
Chart |
News |
PowerRating). We caught the
excellent buy setup at the 200-day EMA with entry above 72.40, and it has
rallied to an 88.19 high yesterday in just six days, closing at 87.88. From low
to high, it’s +31%, and from entry, which is the only scorecard that counts,
it’s +22%.

What now? Well, the SOX
is at the 200-day EMA, NVDA has retraced exactly .618 to the June 7 99.60 high,
closing at the top of its range seven of the last eight days on more than its
average volume. I would sayÂ you are on red alert for a pullback of sorts.
If you get another continuation long entry today, play it smaller than usual
with tight stops. Take the intraday short setups because the initial pullback
will be swift. The point of this exercise is for you to apply this type of trade
logic to all of your setups, both long and short. It’s the awareness and
dynamics combined with good Change of Direction or continuation setups that keep
you in the ever-changing dynamics of the market and stocks. There is nothing
absolute. If you want that, then buy it and drink it. Don’t think you can trade
it.

You have noticed I
haven’t attempted to tell you why NVDA rallied or why it’s not real or shouldn’t
have happened. The only fact is it did, giving us a good Change in Direction
without ever getting stopped out if you played it from a position standpoint.
Daytraders got excellent continuation entries on five of the six days without
the overnight risk. What I could of said was that NVDA ran from a Dec. 2000 27
1/2 low to a May 23, 2001, par high, making a double top at 99.60 on June 7. It
has since retraced to the .38 zone of that move which also converged with the
rising 200-day EMA at 71. It is at this convergence we got the setup, and many
of you took it, based on your e-mails. You took a high reward-to-risk entry at a
key level with a tight stop right below. What took the stock up? Was it
short-covering? Generals buying? Or both? You’re right. It doesn’t matter
because you took a good entry on the Change in Direction above 72.40, and the
stock ran without you getting taken out on your trailing stops. Now you know the
answer to what comes first, the chicken or the egg. The answer is “Change
in Direction.”

(September
Futures)

Fair Value

Buy

Sell

3.85

5.05

2.65

Stocks
Today

In the Semis, take
yesterday’s list. If you get any kind of continuations on the long side, be
careful on first entry, second entry is preferred. Take all intraday short
setups on the Semis. Yesterday you had top-of-the-range closes in most of the
Semis, rising prices on declining volume.Â

Have a good trading day.

Five-minute chart of
Thursday’s SPX with 8-, 20-,
60- and 260-period
EMAs

Five-minute chart of
Thursday’s NYSE TICKS

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The Answer

BUY THE FEAR, SELL THE GREED

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