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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: orkrious who wrote (78733)	6/14/2001 10:32:29 PM
From: puborectalis	Respond to of 99985

How to Play the Friday Bounce By Ben Warwick 06/14/2001 04:48 PM EST In yesterday's column, I discussed the futility of playing upside breakouts in down-trending markets. With the lack of momentum that has characterized this year's trading, late-day rallies like the one seen on Wednesday are rarely followed by strength on the next trading session. This doesn't mean that short-term bottoms in bear-market conditions are impossible to trade. We discussed a trading strategy called the Friday Bounce that gives traders a good opportunity to cash in when the market gets over-extended to the downside. A New Strategy Our analysis found that if the market (as measured by the S&P 500 cash index) is down wider than 2% in the first four trading days of the week, a Friday rally is likely to be followed by higher stock prices on the next Monday about 70% of the time. The average winning trade is about 1.8 times larger than the average loser, and the trade works equally well in both bull and bear market conditions. Why would the market show such a tendency? One idea may be that since the strategy buys on Friday's close and holds until Monday's close, traders need to be compensated for holding the position over the weekend. Traders may thus be receiving a risk premium for holding the position three days, even though the holding period consists of one trading day. Another related theory is that big players don't want to take the risk of holding positions over the weekend. In order to avoid this, they might sell near Friday's close and reenter the market on Monday's open, thus causing a tradable price increase. Regardless of the reason, I've become a believer in the strategy. After examining its performance record for the last 20 years or so, I'm officially including it in the Quant View Portfolio. This week's market performance gives us a perfect opportunity to test our new strategy. Earnings warnings from such diverse companies as Corning (GLW), Ingram Micro (IM) and Charles Schwab (SCH) caused the S&P 500 to drop about 2.7% since Monday's open, putting the index in prime position for a Friday Bounce trade. In fact, all we need to trigger a Friday Bounce "buy" signal is a higher close Friday. If that's the case, Quant View traders can purchase shares of the S&P 500 exchange traded fund (SPY), or one of the trader-friendly funds from either Rydex or ProFunds. If triggered, the trade will be exited on the close Monday, June 18. Futures Fund Info Last week's column on managed futures funds are a hedge against bear markets generated a lot of reader mail -- so much, in fact, that I've decided to write a special report on the subject. If you are interested in receiving information on these funds, drop me a line at bwarwick@worldlyinvestor.com. I'll send out the report next week. Ben Warwick is Chief Investment Officer of Sovereign Wealth Management, a registered investment advisor that manages assets for high net worth individuals and institutions throughout the United States. His newest book, The Worldlyinvestor Guide to Beating the Markets, is now available.