This Week’s Battle Plan

Now, this week, lets talk about how good and bad markets act. Bad
markets become oversold and then become more oversold. The bounces are
shallow and the ensuing sell-offs are usually pretty rough. Good
markets do the opposite. The pullbacks are short and sweet, and the
ensuing rallies are strong.

A week ago Friday morning, we were in overbought territory as measured
by many different, uncorrelated methods. Friday, the market churned
down a bit, Monday morning had a solid sell-off and by mid-afternoon
the market behaved the way a good market should behave…it was off to
the races. And within 48 hours we were four percent higher on the
averages and even more on the leaders.

Now, let’s look at what led the charge for the week…not recession
stocks (sound familiar?). Home Depot (up 10% for the week on good
numbers and acting as a healthy stock should act on good news) and the
transportation stocks (written off for dead by many), led by UAL, up
30% for the week. All this adds up to further evidence that the market
behavior and action we saw in late September and into October was
simply a prelude to the higher stock prices we are seeing today and
will likely see in the future.

Let’s now move on to this week. On a very short-term basis, we are
vulnerable to a sell-off/correction. Here are the reasons why:

1. The Semiconductor Index
(
SOX.X |
Quote |
Chart |
News |
PowerRating) and the brokers
(
$XBD.X |
Quote |
Chart |
News |
PowerRating),
the two leading groups for the two-month rally, acted tired this week,
especially late in the week. The SOX was down three days in a row; the
XBD barely rose for the past five days. These two industries led us
up and they will remain the leaders until proven otherwise.

2. The VIX
(
$VIX.X |
Quote |
Chart |
News |
PowerRating) is at pre-Sept. 11 levels. Not necessarily
a sell signal, but evidence that complacency has set in.

3. I happened to be watching CNBC on Friday when they flashed on the
screen that Bin Laden’s right hand man was killed. The Dow picked up
40 points almost immediately and then faded. The market will certainly
explode higher when Bin Laden is captured or killed, but Friday’s
somewhat muted reaction to the above news tells us that it has
factored in a large part of the Bin Laden/Taliban demise.

In case you have missed it, on the upper right hand side of the home
page, we added a link to our “What’s
New at TradingMarkets.com” page. As you will see, over the
past 45 days or so, we have added over 25 new lessons, interviews,
features and more to the site, (incredibly, this is normal output for
Eddie Kwong and his team). Check this page often, as something new for
the site pops up every few days. We have many new additions and
features in the pipeline to help your trading, and hopefully you will
profit from these added features.

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