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The inchworm, inches along

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In yesterday's 01:00 EST update, I talked about how the markets tend to move like an inchworm. The "mechanics" involved and how traders can perhaps monitor the inchworm and rotation taking place. The coiling or consolidation action that takes place and then the eventual expansion.

Today, the Dow Industrials are inching higher, and it's interesting to note where the inchworm is getting some of his movement. While this is a short-term view, it gives hint that the inchworm has the bottom end of the body moving higher, and outperforming the upper-end of the torso. Here's how you can measure such movements and make some similar observations.

Dow Portfolio "hypothetical" $1,000 invested since Sept. 10

What I've done today is to divide the top 15 performers since September 10th's close with a "subtotal" row. I also have a subtotal row for the bottom 15 stocks. I've also added a column "Profit/Loss today." With a nearly equally weighted $1,000 investment in each of the 30 stocks, we see that the bottom 15 stocks were up $127.52 at the time of screen capture, while the top 15 were up $64.67. What this tells me is that the bottom half are "inching" forward at a faster rate right now, than the upper half.

This could also tell me that bearish traders are stepping up their covering in those at the lower end of the scale, which have seen weakness. A smart bear knows he doesn't have as good of chances of success when the broader current is moving against him. When he's got some profits in stocks that have gained to the downside, he'd much more likely to just come in and cover those positions if things look to be too strong and near-term downside vs. risk of the rally no longer is in his favor.

This could also tell us that some bullish traders are also getting more aggressive. They seen some of the early leaders talk on some impressive gains in recent weeks. Not wanting to chase, the newer bulls may decide to give some of the lower parts of the inchworm a shot. I like this type of strategy, but you need to be careful. The stocks I look for are those where relative strength chart is reversing higher. We can "weed out" the weaker ones with our relative strength chart.

One of the better performing stocks in the bottom end of the "inchworm" today are shares of AT&T (NYSE:T). The relative strength chart is on a sell signal, but reversed higher into a column of X's in October (red A).

AT&T vs. Dow Industrials RS Chart -

In October, the relative strength chart for AT%T (T) reversed into a column of X's as the stock jumped from the $17 level to $20 just after the terrorist attacks on September 11th. You can calculate RS simply by taking the stock price of T and dividing it by the Dow Industrials average.

I would consider AT&T more of a "bottom feeder" or "value" type of play near-term. When we look at the bar chart and use retracement, the stock sure could have been a bullish candidate for today's trading, but the upside may have been limited to the $17.50 level near-term. Still that's a decent move for short- term trade and perhaps a stock to still consider on a longer-term basis.

AT&T Corporation Chart -

Recently, AT&T (NYSE:T) has been moving higher, as volume has started to calm down. This morning's break above the $16.43 level could have been a good trade to take long, but I'd only have been targeting the $17.50 level. I think T could have some problems at that level as we also have the 200-day and 50-day MA's near that $17.50 level too. This is one for traders to be keeping an eye on. With RS improving a break above the $17.50 level on volume greater than 30 million shares could be a sign that the T is beginning to gain favor near-term. I think the stock is attractive on a longer-term basis for a retirement account, with a stop just below the $14.60 level.

In my mind, I could see a break below that level, also having the RS chart give a sell signal. Should that happen, I then have no more interest in the stock and would look to change stock symbols. However, should the stock break above the $17.50 level on volume, and RS remain in a column of X, then this stock could find its way back to the top of the leader board and near the head of the inchworm. This stock performed very well just after the terrorist attacks of September 10th. However, by mid- October, we started to see fellow Dow components SBC Communications (NYSE:SBC) "inch" its way lower down the inchworm and AT&T followed.

AT&T might also be a bullish candidate for January. Last January, after tax loss selling season had ended December 29th at $12.71, shares of T surged to the $18 level in just 9 trading sessions. An options trader would have made out quite well during that time frame in a call option. Hey! AT&T is still up 32% for the year. That's better than some technology stocks have done since December 29th, 2000.

Jeff Bailey
Senior Market Technician
Option Investor

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