RealMoney's Technical Analysts Talk About the Markets

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• James "Rev Shark" De Porre

• Jeff Cooper

• Helene Meisler

• Gary B. Smith

• Alan Farley

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James 'Rev Shark' De Porre

Stay Vigilant to Avoid Being Surprised by a Pullback
1/07/04 10:22 AM ET

"Eternal vigilance is the price of liberty."

-- Thomas Jefferson

Market participants always need to be watching for potential dangers, but there are times when it is prudent to be even more vigilant than usual. Now is one of those times.

The market certainly started the year with a bang. We have had tremendous momentum, and anticipating a top in this market has been a very dangerous enterprise. There is a great amount of cash out there looking for a place to go, and that liquidity is helping to keep this market aloft.

Two things are causing me to be increasingly attuned for signs of trouble. First is that action in early January tends to be quite volatile. There are a number of unusual circumstances at work as we start a new year, such as retirement plan contributions, which can cause some quick swings as they dissipate.

Also, many investors simply have a different mindset as the new year kicks off. Some want some quick gains so they chase things, while others do some buying to position themselves for the long haul. The bias tends to be toward putting money to work rather than taking a cautious approach.

The bottom line is that the factors that drive strength in early January simply can't be trusted to last. We certainly have to respect the dynamics at work and go along for the ride, but we have to be wary that they will disappear just as quickly as they commenced.

The second reason for caution is much easier to understand. Simply look at the charts of the major indices, especially the Dow Jones Industrial Average. They are clearly extended. The DJIA has gone straight up since Nov. 21. There are some big profits to protect, and once profit-taking kicks in it can easily gather some momentum. The risk of a pullback is very high. That doesn't mean we will crash, but we badly need a rest.

The Nasdaq is not nearly as extended as the DJIA, but it is overbought. Yesterday we saw pretty heavy rotation out of the cyclicals and industrial stocks and into technology stocks and some momentum favorites. The Chinese industrial stocks were hit particularly hard as investors tried to find less extended alternatives.

I'm looking for the rotation back into technology stocks to continue as the liquidity that is sloshing around looks for a place to go. However, the technology stocks will very quickly become extended themselves after some of the big gains we saw yesterday. There seems to be fairly positive news flow supporting these stocks right now, but folks know that many of these stocks are at extreme levels and they will be quick to sell if they begin to weaken.

My game plan is to continue to play long-side momentum, especially in technology stocks where I see it, but keep stops tight and be less aggressive chasing extended stocks. I'm also building a hedge with short positions in the QQQ (QQQ:Amex) and DIA (DIA:Amex). I'm going to emphasize the DIA more than the QQQ simply because that chart is much more extended.

We are at a particularly tricky juncture right now. There are factors at work that can keep this momentum going, but we clearly are extended and need a rest. In the early going, we have some slight weakness. The dollar continues to struggle, but made some minor gains against the euro overnight. Asian markets were mixed with auto stocks taking some hits. European stocks were weak with oil stocks putting some pressure on the markets.

Stay particularly vigilant right now. The chances of a sharp pullback are very high. We are walking the high wire. The rewards can be great if we successfully navigate our way, but the risks are very high if we stumble.

James "Rev Shark" De Porre is a self-taught trader who primarily trades for his own account from his home on Anna Maria Island, Florida. He is a member of the Michigan Bar Association and a former tax attorney and CPA. De Porre holds business and law degrees from the University of Michigan. He was formerly the host of America Online's The Shark Attack and presently operates SuperTraders.com. He is a pioneer in the online trading world and has been an active participant in chat rooms and message boards since their advent. At time of publication, he was short the DIA and QQQ.

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Jeff Cooper

Market Traveling in the Fast Lane
01/07/2004 07:00 AM EST

A daily chart of the S&P shows that the breakout over our 1050/1060 square-out coincides with the breakout over the top of a price channel that has driven the action since the important June 2002 initial momentum high.

At the same time, the surge that commenced after December options expiration also destroyed what is a typically bearish Ascending Triangle formation (see the dotted trend line in the chart below).

Just as the market was speaking by busting through the 1050/1060 resistance, and in doing so, breaking out of a channel that has contained price action for half a year, as I said yesterday, we must respect the force of the S&P to additionally break out over our 1109 to 1116 square-out area. Closing above this area for a second consecutive day appears to confirm the current strength of the market.

S&P 500 Daily

Conclusion: In breaking out over a price channel that has been respected since June, as well as breaking a potentially bearish Ascending Triangle formation, the S&P is doing what is not expected. When a market does what it shouldn't do, it is speaking. This is when fast moves occur. Moreover, as W.D. Gann stated: The most money is made (long or short) at the end of a move. Now, I am not forecasting the end of a move, just stating the nature of price action. I will refer to the fact that early last quarter I projected that a successful breakout over 1060 should project an advance on the S&P to as high as 1150/1160. The next square, or 90 degrees up, from 1115/1116 is 1149/1150, while 180 degrees up from 1115/1116 is 1182/1183, which, for what it is worth, resonates off the date of Feb. 21. If either of these price levels is hit in that time frame and the market reverses, we will be looking to take money off the table. The fast move continues. The blood on the tracks is that of the bear -- bubble or not.

Jeff Cooper is the creator of the Hit and Run Methodology and the author of the best-selling books Hit and Run Trading (The Short-Term Stock Traders' Bible), Hit and Run II (Capturing Explosive Short-Term Moves in Stocks), as well as a video course, Jeff Cooper on Dominating the Day Trading Market. He also created the Hit and Run Nightly Reports and co-founded a trading markets Internet site. Click here for information about Cooper's email newsletter, The Trading Reports. At time of publication, Cooper held no positions in any of the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Cooper cannot provide investment advice or recommendations, he welcomes your feedback.

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Helene Meisler

Dow Looks Vulnerable to a Correction
01/06/2004 09:30 AM EST

After yesterday's close, someone mentioned to me that this was just like January 2000. I didn't remember that year getting off to such a start, so I went back to have a look. I found that the parallels aren't quite as close as some think.

The first two or three trading days of January 2000 were down -- hard -- in all of the major averages. Only after the Dow Jones Industrial Average fell more than 500 points and the Nasdaq fell almost 10% did we resume the zoom. There was plenty of volatility then, but there's very little now. But what strikes me is how people are still trying to liken this market action to the 1999-2000 time frame. Although I am looking for a correction to begin before the week is out, I still maintain that this is not the same kind of market.

I don't see wild speculation like we had back then. I don't see stocks going up by huge percentages day in and day out. What I see is persistence and continued group rotation.

Things take time. Anything that goes up or down in a straight line becomes vulnerable to a sharp move in the other direction. The Dow Jones Industrial Average has gone up in a straight line for six weeks now. I think it remains vulnerable to a correction as the 30-day moving average reaches an overbought reading Wednesday; the 10-day oscillator is already there.

Overbought/Oversold Oscillators

For more explanation of these indicators, check out The Chartist's primer.

Helene Meisler, based in Shanghai, writes a daily technical analysis column. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, Meisler had no positions in the stocks mentioned here, although holdings can change at any time.

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Gary B. Smith

Trading the Ups and Downs of Congestion
01/06/2004 08:30 AM EST

Few Niches Left to Exploit
01/07/2004 08:31 AM EST

Gary B. Smith is a freelance writer who trades for his own account from his Maryland home using technical analysis. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Smith writes a daily technical analysis column for RealMoney.com and also produces a daily premium product for TheStreet.com called The Chartman's Top Stocks -- click here for a free two-week trial. While Gary cannot provide investment advice or recommendations, he invites you to send your feedback to Gary B. Smith.

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Alan Farley

Process Is Outflanking Predictability
01/05/2004 08:05 PM EST

The markets opened the postholiday period with another push to new highs. The crowd was back in action today and eager to play their favorite four-letter names. It's hard to tell how long the bulls will retain control after the relentless uptrend we've had since the end of December options expiration. Obviously, the last trader left holding the bag will get caught on the wrong side of the market.

We're now in a momentum phase in which process is more important than predictability. The market has risen steadily for the past two weeks without a decent pullback. This makes it very hard to predict short-term swings or find low-risk entries. So traders need to rely a lot more on percentage stops, intraday downticks and common sense to get in and out of positions.

The worst thing you can do right now is to abandon your discipline and start throwing money at the market. The indices are overbought and could turn south at any time. Also, we're approaching major resistance from the 9/11 recovery highs, hit in late 2001 and early 2002. These important price levels may stall the bull market dead in its tracks for weeks or months.

Alan Farley is a professional trader and author of The Master Swing Trader. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. At the time of publication, Farley did not have any positions in any of the stocks mentioned in this article, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback and invites you to send it to [e-mail].. Also, click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

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