Volatility Back In Full Force

• September 10, 2001
• Dave Floyd

Wow, what a
week of trading. Volatility was back in full force and the bears had
their day/week as share prices were routed. The one concern you get as an
intraday trader under these circumstances, is that you don’t want the market to
get so beaten up that the traders and investors just simply walk away. The early
1970s come to mind. However, I do know that there were some fierce “bear”
rallies during that time, not unlike the one we witnessed in April of this year.

On a short-term basis, it is hard to
argue that the market is not oversold and a bounce is due. Based on that, I
covered some longer-term short positions on Friday not only expecting a bounce,
but also since they were trading around support levels on the daily charts. I
will re-establish these positions in the coming days or week, but for now, I
locked in some nice profits. The stocks I covered were: Lowe’s
(
LOW |
Quote |
Chart |
News |
PowerRating) and Best Buy
(
BBY |
Quote |
Chart |
News |
PowerRating). A look at the
charts below will illustrate why. Both are trading right at their 200-day moving
averages, and experienced sharp sell-offs on Friday. It is not uncommon for this
price action to be followed by a reversal in the days to come. I do plan to
establish another short in Best Buy ahead of their earnings later this month.

Some other stocks however, still
remain viable shorts, especially in the homebuilding sector. I read a great
piece this weekend which clearly illustrated the correlation between a decline
in consumer spending and the decline in home prices. The converse also applied.
The study went back 30 years and showed a correlation in the mid 1970s as well
as in the late 1980s. Will the recent decline in consumer spending, the first in
many years, translate into lower home prices and perhaps a stall in the red-hot
homebuilding sector?  That is a tough call, although statistically it is in
the cards. Stocks like Lennar
(
LEN |
Quote |
Chart |
News |
PowerRating)),
Clayton Homes
(
CMH |
Quote |
Chart |
News |
PowerRating) and Fannie Mae
(
FNM |
Quote |
Chart |
News |
PowerRating)
may not be bad places to be on the short side, if the homebuilding sector does
indeed begin to contract.

Looking ahead to today, the indices
are down yet again, yet off their worst levels. European indices are also taking
it on the chin. As I mentioned earlier, be aware of the possibility of a
“bounce.” This will not affect my bias during the day, but at the same
time, I  will not be caught off-guard by an upside spike.

Key
Technical Numbers: (futures)

Thought For
The Week

“Speculation, in its truest sense, calls for anticipation.”  — Richard
D. Wyckoff

As always, feel free to send me your
comments and questions. Have a great trading day. See you in TradersWire
Interactive.

Dave

P.S. I’m looking
forward to sharing the nuts and bolts of how I trade at TM2001 in early October. You’ll learn the two big keys to my trading: 1) How to
define a powerful intraday trend; and 2) The precise
parameters that tell you where to enter your trade in the midst of that
trend. I will also explain to you the “feel and rhythm”
that enables me to trade with consistency. This is one element of my
trading that I could never convey on paper through a set of rules or a
formula. You’ll just have to meet me in Las Vegas, and you’ll know what I mean!