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6/6/2001
In a technical brief last week we highlighted the set up stage were individual issues
or an index vacillated within a choppy pattern, before forming a base. This brief will focus on the next step.
The Consolidation
A number of the stocks in the group mentioned as an example last week (fiber optic) formed a base of some magnitude as did several other sectors. An issue in the
communication IC sector (VTSS) provides an good example below of the consolidation phase. As you can see the choppy pattern may have come to an end near
the 62% retracement of the April rally.
What Next?
We have at least a short term floor in place but the stock above and the major indices are still confined within consolidative trading range. What should we look for
next? In the case of VTSS, it must still worked past and sustain a move beyond its 50 day simple ma at 28.8. Other issues facing the same challenge of working
through their respective 50 day ma, which is in parenthesis, include: AMCC (21.6), NTAP (20.8), AVNX (14.3), NEWP (35.6) and JDSU (20.2).
Tactics
In this case we are dealing with the 50 day simple ma but the situation would be the same if the stock or index were working its way up toward a trendline or
important chart barrier. There are three basic tactics for entering the market under these circumstances, 1) buy in anticipation of the breakout 2) enter on the
breakout itself or 3) wait for a pullback following the breakout. The payoff is higher using the first method but the odds of the trade not panning out are also higher.
Waiting for the breakout is improves the probability of success but the payoff is diminished. The latter strategy is more conservative as you enter a on pullback
toward the breakout point, however, the potential problem here is that there is no guarantee a checkback will be seen. Taking multiple positions is a way to reach a
compromise. This involves entering in anticipation of the move and adding to your holdings on the breakout and the pullback If unwilling or unable to enter in this
fashion because only small positions are being taken, it comes down to how aggressive or conservative your particular approach.
Why the 50 day?
The 50 day simple ma has come into play quite frequently over the last two months. The reason is simply that due to its time length as it often encompasses all the
moves while the stock/index is trending firmly up or down. If a well established trend halts and the index/stock is able to sustain a penetration it raises the
probability that the underlying trend has been reversed. A list of stocks that have recently broken through this level (in parenthesis) and will now view this as a
support includes: ORCL (16.2), ADBE (40.6), CIEN (54), PMCS (33.9), BRCM (35.9), XLNX (42.3), AMAT (50.1), ACTU (11.1), HWP (29.2) and INTU
(31.1). Pullbacks that temporarily exceed support do take place which suggests leaving some room in placing stops but in a market that has strong underlying
momentum it should prove to be very short term.
Similar Developments
As mentioned, using moving averages is not the only way to play a break. Stocks now facing a similar scenario at a trendline resistance that has held for the last
several weeks are ONIS at 37.25 and CIEN at 64.50. Issues facing resistance at a longer term trendline are INTC at 30.2 and CSCO at 21.90.
Conclusion
There are still some concerns about the health of the overall market as it is by some measures reaching overbought territory from a short term perspective. At the
same time the VIX reading is at its lowest level since Sep 2000 (low extreme readings are more closely tied to at least short term tops but this is not a timing
indicator). This reinforces the importance of using chart points, moving averages or trendlines as a way to confirm the development of the next significant trend. |
