Why You Have To Be Careful Not To ‘Chase Your Own Tail’

July 22, 2003
Dave Landry

Looking to the indices, on Tuesday, the Nasdaq lapped
higher but immediately began to chop back and forth. It found its low in early
morning trading and begin to rally. It then traded
mostly sideways throughout the rest of the day.

This action has it closing well andÂ back above its
prior breakout levels.Â

The S&P put in a similar performance.

This action has it bouncing off the bottom of its trading
range/50-day moving average.

Looking to the sectors,Â the bounce in the Nasdaq put
many area of tech back above minor support and/or potential breakdown levels.
However, I’m not convinced that this in and of itself is a reason to buy (see
notes on the indices below). Retail came back fairly strong and so far,
remains in a longer-term uptrend.

On the downside, several areas such as the homebuilders and
utilities that have recently formed tops bounced but still look poised to
continue their rollovers. Selected areas of energy such as oil service appear to
be resuming their downtrends out of pullbacks from lows.Â

Â So what do we do? The major indices have
changed direction three out of the last three trading days. This kind of action
makes it tough for positioning. Bullish one day and bearish the next, its times
like theseÂ you have to be careful not to “chase your own tail.”
True, the Nasdaq now is back above its recent breakout levels but I see no
reason get excited when the S&P and the NYSE Composite are stuck in trading
ranges(a). Therefore, at the risk of preaching, regardless of what you do, I think you probably
should continue to keep positions on the light side.Â

Looking to potential setups, Dominion Resources
(
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PowerRating),
mentioned recently (a) and in the weak electric utilities (b), remains set up as
a pullback from lows.