Where To Look For Opportunities In An Overbought Environment

September 4, 2003
Dave Landry

Looking to the indices, on Thursday, the Nasdaq dipped in
early trading but quickly found its low and began to rally. However, it found
its morning high quickly and began to sell off again. It reversed by mid-day and
generally worked its way higher throughout the rest of the day. This action has
it closing well and, once again, at new one-year plus highs.

The S&P finished slightly higher after tailing slightly
lower. This action keeps it above its recent breakout levels and has it closing
at new highs for the year. Â

Looking to the sectors, most technology sectors, like the
Nasdaq itself, remains at or near new highs. This includes (but not limited to)
the semis, computer hardware, selected telecom, software, and Internet. Many
other areas remain in strong trends. This includes (but not limited to) major
airlines, cyclical stocks (e.g. automotive, metals and mining, manufacturing),
gold (see Wednesday’s commentary) and retail.Â

On the downside, major drugs still look like they have the
potential to resume their longer-term downtrend out of a pullback. .

So what do we do?Â The market remains
overbought based on those reasons given Wednesday night (see that commentary for
more details). Therefore, tread lightly on the long side until we see some form
of corrective action or, focus on those areas such as the semis that have
already corrected or gold which can trade contra to the indices. Once again, for the aggressive, or those looking
to hedge existing longs, you might look for a contra-trend trade (short) in the
indices but only if they show signs of weakness (i.e. trigger an entry). However,
(once again) don’t overstay your welcome
here since the longer-term trend remains up.Â

Looking to potential setups, Actel
(
ACTL |
Quote |
Chart |
News |
PowerRating), in the
aforementioned strong semis, looks poised to resume its accelerated and
persistent uptrend out of a pullback.