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Editor's Note: Our subscription sister site, RealMoney.com, features the writings of some of the best technical analysts in the business. Here are some excerpts from their recent commentary on the market. To sign up for RealMoney, where you can read commentary like this regularly, please click here for a free trial. To find comments from your favorite chartist, please click on his or her name below.
James 'Rev Shark' De Porre
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.
Jeff Cooper
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 |
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Helene Meisler
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.
Gary B. Smith
01/06/2004 08:30 AM EST
01/07/2004 08:31 AM EST
Alan Farley
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 Alan.Farley@TheStreet.com..
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