This Week’s Battle Plan

When we decided to start writing
“This Week’s Battle Plan” a month and a half ago, our
intention was to help you filter out a lot of the noise created by the
financial press (TV, print and now Internet). The goal has been to
look at the markets each week from a fresh perspective and ask
“What is the market telling us? Where are the
opportunities?” The markets talk all the time, and by asking the
above two questions, combined with the help of TM’s databases,
indicators, and the long-term “real world” experiences of
many of the TM contributors, we can likely get a pretty good feel as
to what the market is saying.

When we published the first piece a
month and a half ago, things could not have looked more bleak. The
economy was in shambles, the market had 18 months of declines,
terrorism attacks had led to war with Afghanistan and anthrax fear was
rampant. Yet, the averages were not going lower. Bad news was met with
quick selloffs and immediate recoveries. And this behavior has been
further played out since then. Each week we have continued to point
out that if the market can’t go lower on bad news, what will happen
when the bad news lessens and/or good news comes in?

Well, this week, we’ve gotten a piece
of that answer. No real new bad news, and the averages rise four out
of five days. And tonight, look at our Proprietary
Momentum list. The stocks on this list are the strongest
performing stocks. If we were heading into a deep recession, this list
would be cluttered with defensive stocks like food, beverages and
utilities. But tonight we see among the top 15 strongest stocks,
construction, home building, transportation, banks and gaming stocks.
NONE OF THESE STOCKS ARE DEFENSIVE COMPANIES. THEY ARE STOCKS FROM
INDUSTRIES THAT RISE IN ANTICIPATION OF FUTURE ECONOMIC GROWTH.

Now, you
can listen to a bunch of journalism majors preach to you that because
they have a four-year degree in writing proper sentences, this
qualifies them to analyze and interpret markets for you…but this may
not be the smartest way to go. And while their focus this week was on four things: 1) why the market is now grossly overvalued, 2) Enron, 3) Enron, and 4) Enron, the real story has been the leadership action in
the
(
$SOX.X |
Quote |
Chart |
News |
PowerRating) (read Haggerty every day…he reads this index better than
anyone in the game), the rise in consumer stocks and the emergence of
upward stock movement in the industries mentioned above. The
journalists want you to focus on looking backwards at corporate
earnings and their incessant writing about the management and former
management of an energy company. The former may or may not help you
make money (it did not from 1995-1999). The latter is simply
gossip and with thousands of other publicly traded companies to focus
on and make money from, why waste your time on gossip?

The surest way to
improve your trading is to focus on what the market is saying and how
it responds to news. Which stocks are shrugging off bad news? Which
are rising in spite of the preaching of Main Street journalists? These
are the clues as to where the best trading opportunities lie. And this
is the type of “variant perception” Michael
Steinhardt told us he used for 28 years to grow his
fund 480 times(!) its original investment.

This Week’s Market
Action

On a short-term basis we are very
overbought. We have short-term sell signals all over the place,
including with the VIX,
CHADTP and the McClellan Oscillator. A few days’ selloff would be
healthy…very healthy. What would be even healthier is a
“walk-off” of this condition. A “walk-off” is when
a trending market (higher for example) becomes overbought, triggering
short-term sell signals. But instead of the market selling off, it
“walks-off” the overbought condition by churning for 3-5
days (Friday was an example). After the overbought condition is walked
off, you often see a solid rally ensue. If you look at the markets in
1995, 1996, and 1997, you’ll see this having occurred numerous times.
Short-term overbought condition were walked off and then the market’s
upward trend returned.

Again, we are in short-term overbought
territory and a sell-off this week is expected. But a walk-off would
be another healthy bigger-picture signal to look for.

Specific
Markets To Focus On

Mark Boucher pointed out in his
weekly column that if cotton and copper, two highly sensitive
commodities tied to the economy, start rising, it will be early
confirmation that business is picking up. This past week cotton
rose 10% and copper
exploded higher Friday. All good signs. Further moves in these
commodities should keep your energies focused on the long side of the
stock market for your trading.

You can follow these commodities
intraday here.

Naz 200-day MA: More
to Focus On…

It’s hard to believe, but the Nasdaq is
marching quickly towards its 200-day moving average. A crossover is
not a buy signal. (No MA crossover is a buy signal. There is simply no
statistical evidence that crossovers make money. And that’s confirmed
by more than 40 years of exhaustive studies done both by Wall Street
and the academic world.) But a move above the 200-day MA signifies a
trend, and it is a level that many large money managers use to become
more aggressive in their investment decisions. We still have a ways to
go, but psychologically it’s a good level to break above and when it
does happen, it should trigger all sorts of buying into the market.

Growing Your Trading
Arsenal

The Mark Douglas “Psychology of
Trading and Achieving Mental Toughness” seminar is three weeks away
in Santa Monica, Calif. Mark has played a large role in the success of
many top traders. Solid trading strategies are important to success.
Combining these solid strategies with intensive mental training takes
you to an even higher level of achievement. Click
here for details on Mark’s upcoming workshop and how it
can impact your trading.

Until next week, best of luck with your
trading!

Larry Connors and Brice Wightman

Larry Connors is CEO and co-founder of
TradingMarkets. He is also the author of four books on trading,
including Street
Smarts,
co-written with Linda Raschke, Connors
on Advanced Trading Strategies, and his latest release, Trading
Connors VIX Reversals.

Brice Wightman is a market analyst with
TradingMarkets.