Editor's Note: Alan Farley's column runs exclusively on RealMoney.com; this is a special free look at his column. For a free trial subscription to RealMoney.com, click here. This article was published Dec. 17 on RealMoney.
I'm a real
fanatic. I watch it religiously and feel like I'm part of the tribe. This year's Kim doesn't measure up to last year's Elisabeth, but I'll take Tom's good-ol-boy over Rodger's Southern charm any day. (By the way, anyone else notice how Big Tom isn't so big any more? That gruel sure dumps those unwanted love handles.)
Last week's pullback tested the market's survival skills. Nervous sellers finally came off the sidelines and pushed many stocks below short-term support. Though technical damage was done, the indices can recover quickly if they hold current levels. We're at a critical price/time juncture, and the next move could set the tone for 2002. In any case, it's a great time to be a swing trader.
The next play should be to the upside, even if we have to wait a few more days for the end of the selloff. Prepare for the trade now by finding stocks that are more bullish than the overall market.
Start by comparing relative strength between an individual issue and its related index. Place the charts side by side, and ask yourself a few simple questions. Does the stock pull back as far as the index? Does one violate an important moving average while the other doesn't? Do either of the charts fill important gaps, or break major support?
Stocks that hold up well through a correction should outperform when a market bounces. Two types of trade setups capitalize on these price mechanics. The first looks for a pullback that mimics an index (like the
Nasdaq 100 Unit Trust
), but with a milder correction and more bullish volume. The second trades a bullish pattern that looks nothing like the index. Both types of candidates should rally well in the coming days.
Let's find some patterns to match against the Nasdaq 100. This popular tracking stock represents a broad cross-section of Nasdaq big-caps. It filled an important breakout gap last Thursday, and was still looking for support when the week ended. If QQQ can't remount that filled gap in a hurry, the selloff will likely continue into the 50-day moving average.
mimics price swings on the QQQ but has a more dynamic pattern. It hit a 52-week high earlier this month after a solid breakout above resistance. Microchip pulled back last week but never broke support.
Unlike the QQQ, it sits well above its 200-day moving average in a well-established uptrend. It has no filled gaps and retraced only half of its move up from 35. More importantly, the volume pattern shows interested buyers and reluctant sellers. Microchip should perform very well when the market bounces.
travels a path that bears little resemblance to other members of the Nasdaq 100. As shoppers gravitated from luxury to necessity in recent months, this retail giant emerged as a popular recession play. The Costco chart shows very bullish volume since September, with price pushing up into a 12-month downtrend line. It appears that all systems are now go after two pullbacks to the 50-day moving average. A break through the yearlong overhead supply should open up the door to a substantial rally.
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 held no positions in any of the stocks mentioned in this column. 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
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