Watching Relative Strength
Watching Relative Strength Yesterday was a straight-up trend day with triple-witch
program activity, and plenty of action in the favored momentum stocks.
The Dow gained 118 points, but only Chevron (CHV) traded more than 50% of its average
volume. Four stocks–American Express (AXP), JP Morgan (JPM), Merck (MRK), and Philip Morris (MO)
–accounted for 67 points in the Dow
gain, so it wasn’t exactly an upside attack by the Dow stocks, but volume was 831,000,000 shares
overall.
Most significant to me yesterday was how the SPDRs (SPY) traded. The SPDRs have become a
good institutional hedging tool for both buying and selling. They made new highs on the
lightest volume of the year. This is very unusual–it looks to me like we might hit an air
pocket and put in a top some time next week.
Keep looking at the high relative strength momentum stocks–they’ve really taken off. I use
the
TradingMarkets.com Stock Scanner search tool every morning, first
looking for stocks with RS between 90-99, volume of at least one million shares per day, and
priced
over $40. Then I look for stocks with RS between 80-89. After that, I take a look at the charts
and see what the patterns look like.
This is where the action is. We saw America Online (AOL) hit par four days ago;
Wal-Mart (WMT) could do it today if
the programs have an up day. MCI Worldcom (WCOM) is sneaking up, closing at 93 3/4 yesterday.
Other stocks
that look like they could enter the par club soon include Schwab (SCH), Merrill Lynch (MER),
Abercrombie
& Fitch (ANF), Tellabs (TLAB),
and Amgen (AMGN), which could make it if it crosses 80 again.
Target Stocks Of The Day After yesterday’s action, there are plenty of
patterns that look good in the high relative strength stocks. Two narrow range patterns that
look promising are Gap [GPS>GPS] and Yahoo [YHOO>YHOO]. They’re very tight–only trade them
in the direction of the trend.
Cup-and-handle patterns and consolidations near highs that look excellent are Cisco
[CSCO>CSCO], Xilinx [XLNX>XLNX], Qualcomm [QCOM>QCOM], USWEB Corp. [USWB>USWB], Tellabs
[TLAB>TLAB], and Nextel Communications [NXTL>NXTL], which made a wide-range breakout to new highs
yesterday.
One last name that looks very interesting is Global Telesystems [GTSG>GTSG]. It’s got a good
continuation pattern going near its highs, and it’s also a very hard-to-borrow stock. The combination
usually makes for a volatile move if you get continuation through the day.
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.