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trading strategy, day trading
Begin Part 2 of 3
Dow/NYSE: Much as with the Nasdaq, the Dow closed the week at a crossroad, managing to snug up close to its 18 day MVA (9954.46), a point of resistance it has approached each of the last four sessions but has been unable to breach.
Stats: Up 79.79 points (+0.8%) to close at 9878.78.
Volume: NYSE volume climbed on Friday's gain to 1.281 billion shares (+1.7%), its fourth straight session of above average volume. Up volume jumped to 835 million shares while down volume fell to 432 million shares.
A/D and Hi/Lo: Advancing issues jumped back ahead 2.17 to 1. This is a solid confirmation/rally ratio. New highs held at 70 (+0) as new lows fell to 54 (-12).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow has been holding at above average volume for four sessions below its 18 day MVA and the 10,000 level. It is either massing for the assault or churning on higher volume just below resistance. Looking at a 5-day chart the Dow rose on lower volume last week than it sold during the previous two weeks. That shows the selling was more intense than the recent buying. On the other hand, breadth was excellent on the NYSE Friday, indicating buyers were far out numbering sellers. The key for the Dow is whether it can take out its 18 day MVA (9954.46) or he 10,000 level on continued strong, above average volume. It looked weak to us on Thursday, but it rallied again on stronger volume with good breadth. It will show us one way or the other soon enough.
S&P 500: The big caps again showed the same pattern as the Dow, fighting under near term resistance on stronger volume. The index closed right at its 10 day MVA, and faces its 18 day MVA at 1175.81 (where it hit the wall on the last move) and a down trendline at 1185. The 5-day chart also shows the weekly gain on lower volume than the previous two selling weeks. The index needs to make a meaningful run as well up to the 1250 range or better over the next few weeks. The 18 day MVA has been the turning point for the index since January 31; a break over that level on continued strong volume would be a change of character of the downtrend. To be truly significant, however, it needs to take out the down trendline on high volume as well. With earnings season starting in one week, that is a taller order.
Stats: Up 12.38 points (+1.1%) to close at 1160.33.
Volume: NYSE volume remained above average and rose 1.7% to 1.281 billion shares.
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
A big week economically with the NAPM Monday, factory orders Tuesday, and the employment reports on Friday. Expectations are not very bright with some slight improvements and some weakening. Take a look at the economic calendar below for more details. It is also a week of earnings intrigue as investors and analysts try to anticipate more negative earnings warnings and just how accurate current estimates are heading into earnings season.
As we said last week, we have to trust what the numbers are showing us. The Nasdaq gave a follow through to the 3-22 reversal day, and it has yet to breach the low of the rally. Friday it moved up on stronger volume and showed us yet another doji on the candlestick chart at the bottom of its recent range. It looks primed to move up to the top of its range at the 2000 level. That is, but for what appeared to be noticeable and deliberate portfolio shuffling Friday at the close of the quarter, the new lows hit by the big techs, and the problems of the SOX (semiconductor index). If it does not get slammed with bad news Monday, or if it does but is still able to bounce up off of 1794, that will show great resilience and we will look at playing the move up to 2000 with some QQQ, NDX, or MNX options (see 'Subscriber Questions' below). If it falls on bad news and cannot get up, i.e., breaks below 1794 and cannot recover, we will continue to play it to the downside with both index put options and put options on some of the prime put plays.
The same goes for the Dow and S&P 500. The are poised to test resistance and fall or break it and move forward. We have similar suspicions about what Friday's higher volume actually meant as far as accumulation that will have a lasting effect. If they ram into resistance and then fail again, we will be looking to play DJX put options on the Dow and OEX options on the S&P 100. Conversely, if they can break resistance, I would appear that we are on for a decent rally that we can trade to the upside until it falters and heads for a re-test (and perhaps the final one) of the recent lows. Again, a steady 2 to 3 week rally is what is needed to set up that move. We can play that to the upside, watch for it to stall at logical resistance points on telltale volume, and then get ready to play the fall. That would be an excellent trend trade. If they stall at the near term support early this week, another trend trade as we play the continuing downtrend once again.
With all the talk about where the indexes are moving, let's not forget about the plethora of stocks we have been tracking that are setting up strong patterns and then breaking out on strong volume. They did it all week and where doing it again on Friday. These are split pre-announcement stocks and other stocks that are simply in good patterns. Also the pre-split plays keep on racing up into their splits as the momentum turns up; these are great momentum plays when the market shows upward potential. Then there are those individual stocks in weak patterns that look ripe to fall again.
The market is handing us a lot of trades to the upside and downside. We may not get the 50% moves in a week that we had in the past, but capturing the 15% or so moves on breakouts by the use of trailing stop losses and sticking with our target profit levels is racking up a lot of nice gains in a market that many are too frustrated or worried about to attempt to invest in. Stay nimble, follow up gains with trailing stop losses (train your broker!), keep a close eye out when stocks approach target levels or resistance, and log the gains.
Support and Resistance Levels
Nasdaq: Closed at 1840.26.
Resistance: 18 day MVA is at 1962.69; this MVA has stopped the Nasdaq in its tracks for the past two months. Then 2000 appears to be the top of the recent range. Then 2030 to 2050. Support: 1750 to 1800.
S&P 500: Closed at 1160.33.
Resistance: 1175.81 is the 18 day MVA. The down trendline is at 1185.
Support: 1085.
Dow: Closed at 9878.78.
Resistance: The 18 day MVA at 9954.46. There is a down trendline at 10,245 and there is resistance from price lows at 10,300.
Support: 9750 is some support. 8750.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
4-2-01
Auto Sales, March (8:30): 6.6M versus 7.0M prior.
Truck Sales, March (8:30): 7.2M versus 7.5M prior.
Construction Spending, February (10:00): 0.4% versus 1.5% prior.
NAPM Index, March (10:00): 42.5% versus 41.9% prior.
4-3-01
Factory Orders, February (10:00): 0.2% versus -3.8% prior.
4-4-01
NAPM Services, March (10:00): 51.5% versus 51.7% prior.
4-5-01
Initial Claims, 3/31 (8:30): 362K versus 362K prior.
4-6-01
Non-farm Payrolls, March (8:30): 70K versus 135K previous.
Unemployment Rate, March (8:30): 4.3% versus 4.2% prior.
Hourly Earnings, March (8:30): 0.3% versus 0.5% prior.
Average Workweek, March (8:30): 34.1 versus 34.2 prior.
Wholesales Inventories, February (10:00): 0.1% versus -0.3% prior.
Consumer Credit, February (15:00): $95.B versus $16.1B prior.
SUBSCRIBER QUESTIONS
Q: If we enter a prolonged period (6 to 9 months) of volatility switching daily from up to down momentum and back, what is the wisest trading strategy to pursue? Should we become position traders on a few select stocks? Should we focus only on day trading? What will work best?
A: If we do enter a sideways pattern we will more likely have swings up and down that we will be able to measure on a weekly basis, i.e., 2 to 4 weeks up and down. Those are actually very good times to trade as stocks set up more or less predictable rolling patterns. The idea is not to hit the exact high or the exact low, but to skim 50% to 70% of the move out of the middle. In other words, see the move start, take the position, and then sell when it appears the move may be ending. At some point the stocks will break out. Do we say 'darn it, should have hung on and not sold on this rotation? No, we recognize the breakout and jump on it again! In short, that means we won't be day trading, but playing the up and down movement that occurs over a few weeks. We really like that.
What we anticipate may happen, however, is that the Nasdaq tries to make a move sometime during or right after this earnings season. Why? The Nasdaq has made a third leg down in this bear market. While there are not guarantees from one bear market to the next, this resembles 1973-1974 where the indexes made a longer, three leg drop. The Nasdaq tapped close to 1750 and is trying to put in a bottom which would make this leg roughly equal to the previous two legs down. Just as in 1974, it did not take the indexes long to recover after the lows on that last leg were tested after a sharp 5-week rally off of the low. In other words, once the last rally attempt failed and the low was re-tested thus scaring everyone who thought it was over one more time, the indexes started their climb without a trading range. This is what we are watching for; may not happen as planned, but we will be ready when it does.
TEAM TRADES
QQQ: We have been playing options on the indexes frequently of late, and while there were some great breakouts Friday, we wanted to report on these trades prior to this week. We had some QQQ put options heading into Friday's session, and as we noted Thursday night, we held onto them expecting more weakness Friday morning. Well, we got the weakness after a morning gap higher folded. However, we did not get the break below 1794 we were looking for to continue the play. When we saw the index start to bounce, we sold out when it banged through the 15 minute MVA at 38.40. If it had not broken through, we would have let it fall for another test of 1794. Note that you did not have to be watching to do this. 1794 to 1800 was recent support, and if you tell your broker that you want to exit if that holds as support, you are covered.
We looked at the upside, but just were not sure what the day would bring, so we went after other game. We looked back periodically just to see what the indexes were doing. At about 12:15 CT we realized the Nasdaq was etching out a reverse head and shoulders pattern. It ultimately broke out of the pattern and ran to 40. Still, if you waited for the pattern to form, the move would have been just under 1 point on the QQQ. As it turned out, the index rolled over and started to sell. We were thinking of bad news Monday, so we were looking to re-enter some puts if the index broke down through some support. Just after 2:00 it did that, taking out the morning high at 39.45. We jumped in with some May 47 puts for 8.3, anticipating some selling pressure Monday. It sold down but bounced back up to 39.50; we were ready to hit the kill switch, but it sold back down, closing at 39.15. The options closed at 8.5 by 8.7. We will look for that downward pressure Monday, but again will have to be cognizant of the support level at 1794.
For a review of frequently asked questions, please use the link below:
http://www.investmenthouse.com/1questions.htm
End Part 2 of 3
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trading strategy
day trading
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