Watch The Nature Of The First Pullback

March 17, 2003
Dave Landry

On Monday, the Nasdaq gapped lower but quickly found its
low and began to rally sharply. Then after some sideways trading action, it
generally worked its way higher throughout the rest of the day. This action has
it closing well and well above its recent highs. It also puts it above its 50- and 200-day moving averages.

The S&P put in a similar performance. This action puts
it above its recent highs and its 50-day moving average.

So what do we do? Is this the real deal? Unlike the
talking heads, I’ll admit, I don’t know. The sector action in many tech areas
such as software, semiconductors and biotech is very impressive. However, how
these (and other areas) act on the first pullback will be crucial. Therefore,
wait until then before looking to buy. I wouldn’t worry too much about being
left behind. If this is the real deal, we will have plenty enough time to get
long along the way. Looking to the indices, Monday’s mother-of-all melt ups on
top of the recent rally has the market quickly overbought. However, this in and
of itself isn’t reason enough to fight it just yet. Wait for timing signals and
for signs of a reversal.

Looking to potential setups, gold is setting up as a
pullback from lows.

Considering the above ASA Ltd.
(
ASA |
Quote |
Chart |
News |
PowerRating) looks poised to
resume its downtrend out of a pullback.

Trading Out Of Positions

Last week I mentioned the index shares as a potential
trade. Let’s look at how one could have “traded out” of them on
Monday, using the Spyders
(
SPY |
Quote |
Chart |
News |
PowerRating) as an example. The Spyders gapped lower on
the open (a) but quickly found their low less than 20 cents below their open.
They then rallied sharply. As you can see, in gap situations, you’re often
better waiting to see if the market will reverse before looking to exit. Keep in
mind though, you must have an “uncle point” just in case the market
gaps and keeps on going. For more information on applied trading, see my
article “Applying
A Layer Of Discretion To Your Swing Trades” under TM University.