Wag The Dog

Once again, the tail wagged the dog on Friday, with the big up (almost 10 points) in the S&P futures leading to a gap open on the NYSE. The SPDRs also gapped up over 1%, which proved to be the high of the day. The market immediately sold off and hit the low around 10:30 a.m. ET.

There was no real reason for either move. The market wandered in a trading range before rallying into the close in the last hour of trading; there probably weren’t a lot of people taking home shorts over the long weekend.

The techs acted well, finishing up the week with a decent move, but overall volume was light and the averages gave little indication of the next significant move. Look for clarification this week.

The Dow, S&P, and Nasdaq are all siting in cup-and-handle patterns that have been forming since January and await resolution–or else the market is in the process of correcting the move from the September-October low. If that’s the case, if we even just get a 38% retracement it would take us down to the 200-day exponential moving average; I’m sure the media would absolutely choke on that kind of move.

Around 8:30 a.m., the S&P futures are up almost nine points (like Friday). I hope you’re more aware of how the futures control your short-term destiny. You have to understand the dynamics, regardless of what time frame you trade in.

Target Stocks Of The Day  Based on last week’s action, the techs are the first place to look for high-probability patterns that, given entry, should be rewarding. Some high relative strength momentum stocks with patterns near their highs include Level One Communications [LEVL>LEVL], Vitesse Semiconductor [VTSS>VTSS], and Amgen [AMGN>AMGN]. Others are Solectron [SLR>SLR] and Texas Instruments [TXN>TXN], both of which broke out of (and closed outside of) symmetrical triangles on Friday–look for continuation in these two stocks.

Also, the on-again-off-again stock, IBM [IBM>IBM], bounced off its 50-day exponential moving average on Friday and closed at the top of its range. Micron Technology [MU>MU] made a similar move, re-crossing above its 200-day average. Both these names should do well if the techs get going today.

As I look at the screen, the generals–DELL, MSFT, INTC, CSCO, WCOM–are up. But by now, I’m sure you’re very wary of the early morning agenda. Keep your stops tight, and look into using options to protect any positions you take home.

Editor’s note: If you want to learn more about Kevin Haggerty’s trading strategies, click on the link below to go to his new series of tutorial articles.