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Formulating a list of Tax loss bounce candidates

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Last year we got a favorable response from my "tax loss bounce candidates" that I put together for a bounce in January. The obvious "winner" was WorldCom (NASDAQ:WCOM) as that stock surged an incredible 42% in the first two days trading of the new year and jumped to a January high of $22.37 (+59% from December 19th close). Here's part of what I did to find that winner and I wouldn't look to change a thing. I can try and learn from the past and try and duplicate those results going forward.

What to look for. I prefer "NASDAQ" listed stocks for this type of trade, but some of the listed stocks on the NYSE are also good candidates. I prefer "solid" or widely recognized names. You know, the names that most thought would "never go that low" and have now become the festering soar that it is finally time to say goodbye to.

One technical I love to use is relative strength. Here's what WCOM's RS looked like last December, RELATIVE to the S&P 500.

Relative Strength Chart of WCOM vs. S&P 500.

There were a couple of things I like about last year's best bounce in January. I liked that RS had turned positive vs. the SPX, even though both SPX and WCOM were declining, the decline in WCOM was becoming less RELATIVE to the SPX. That may very well have signals the stock was sold out.

The tax loss sell is not an opportunity for traders to load their portfolios with last years losers. Option trader love the strategy as they are able to expose a minimum amount of capital among several candidates if they chose. You don't need to win on all of them. Often times, it only takes 1 out of 5 to actually have the strategy pay off.

Interesting... for 2001, shares of WCOM are up 10% from their December 29th 2000 close of $14.00. The S&P 500 Index (SPX.X) is down 12% from its December 29th, 2000 close of $1,320. That's what I'd call... beating the market!

Yesterday we talked about the Networking Index (NWX.X) maybe having gotten a little bit ahead of the NASDAQ-Telecom Index (IXTCX). Below is a list of sector components. I've also included the North American Telecom Index (XTC.X) components.

Networking Index (NWX.X) Components

ADCT, ADPT, ALA, CIEN, COMS, CSCO, ECIL, LU, NT and TLAB. (source: AMEX Market).

NASDAQ Telecommunications Index (IXTCX) Components

You can get a long and complete list of the NASDAQ Telecom Index (IXTCX) components at (source NASDAQ Market) www.nasdaq.com

North American Telecom Index (XTC.X) Components

ATI, BLS, SBC, AT, FON, T, LU, TMX, AIT, WCOM, BCE, NXTL, NT and Q. (source: Mobydata at www.mobydata.com)

Jeff Bailey
Senior Market Technician
Option Investor

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