The Nemesis Of Momentum Trading

October 29, 2002
Dave Landry

On Tuesday, the Nasdaq opened flat but began to sell off
hard. It found its morning low fairly quickly and then bumped sideways for most
of the day. Then, late in the day, it mounted an impressive turnaround. This
action has it closing fairly well.

Also of interest is that fact that the 50-day moving
average (the thick red line) continued to hold.

The S&P put it a similar performance. It too continues to
hold above its 50.

So what do we do? Tuesday’s action is encouraging–the
market was able to recover after selling over fairly hard. This action suggests
its uptrend from lows (call it a bear market rally if you want) remains
intact. The only problem is that the recent choppy action (the nemesis of
momentum trading) makes for difficult trading. Therefore, probably the best
advice is to continue to keep it light while the situation develops.

Looking to potential setups, even though telecom corrected
on Tuesday, it still looks like it has the potential to continue its strong
uptrend from major lows. With that said, Inter Tel
(
INTL |
Quote |
Chart |
News |
PowerRating), mentioned Monday
night, still looks like it has the
potential to rally out of a Bow Tie.