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Daily Newsletter, Monday, 05/13/2002

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The Option Investor Newsletter                   Monday 05-13-2002
Copyright 2001, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


Posted online for subscribers at http://www.OptionInvestor.com
******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
      05-13-2002          High     Low     Volume Advance/Decline
DJIA    10109.66 +169.74 10110.97  9920.20  1.10 bln   2002/1204
NASDAQ   1652.54 + 51.69  1653.10  1602.60  1.64 bln   2110/1408
S&P 100   533.76 + 10.52   533.76   522.31   Totals    4112/2612
S&P 500  1074.56 + 19.57  1074.84  1053.90             
RUS 2000  499.72 +  6.99   499.85   492.42
DJ TRANS 2703.51 + 60.41  2712.95  2641.64
VIX        23.50 -  1.53   25.92     23.26
VXN        45.12 -  4.61    49.30    46.12
TRIN        0.62
PUT/CALL    0.85
******************************************************************

The Softer (Under) Side of. . .Merrill?
By Buzz Lynn
buzz@OptionInvestor.com

Not much excitement in the news today that would cause a bullish 
spurt.  But I found it interesting that Sears (S), the retail 
giant that has been marketing it's clothing and soft goods under 
the "softer side of Sears" program, announced it had reached 
agreement to buy Lands End (LE) for $1.86 bln in cash - nearly $10 
per share over Friday's close.  Smart negotiating by LE to get the 
cash - who wants stock these days anyway?  But more interesting to 
me, and what really caught my attention was a Merrill Lynch 
analyst's notes on a competitor, JCP.

Get this.  MER, which has been under investigation by the New York 
AG's office (tip of the iceberg in my opinion) for intentionally 
misleading investors by promoting crummy (though that's not the 
word it used) stock to the public.  Meanwhile it was disparaging 
the companies internally while selling shares into the buying 
public's hands.  So I found it rather odd that it would come out 
with the following "plug" on J.C. Penny (JCP).  

As retold by briefing.com, "Merrill Lynch believes that S's 
purchase of Land's End has positive implications for JCP, which 
has the largest catalog operations in the US; firm thinks the fact 
that JCP has a large catalog offering should be viewed favorably, 
as well as the fact that JCP plans to introduce some specialty 
catalogs that would likely compete with Land's End.

Correct me if I'm wrong, but isn't that tacitly stating that 
because Sears bought LE, JCP might benefit because it has 
catalogue sales too?  That's a mighty big stretch in logic - kind 
of like saying that when Ford bought Volvo, GM would benefit 
because it had a controlling interest in Saab.  Give me a break.  
It's no wonder MER is under investigation.  With a rousing round 
of bull-slinging like that, it plays right into the hands of MER's 
prosecutors.  No wonder the buying public is beginning to keep a 
skeptical eye on brokers and analysts.

Anyway, Fundamentals Guy take on Sears and Merrill aside, a 
decidedly positive day for the bulls emerged for no apparent 
reason.  Again, I caution readers to take days like this with a 
grain of salt.  While today's move looked good in headlines 
(significant gains on all major indexes), the volume was weak, 
which tells us that there was no conviction.  Looking at the gains 
on the NASDAQ too (COMPX +51), a corresponding move on the VXN.X 
showed a drastic drop in volatility from nearly 51 to just above 
46, which indicates that all fear of bearish market just vaporized 
since Friday's close.  So where is the wall of worry?  Nowhere 
that I can find.

And real bull markets are built on a wall of worry.  That's just 
another reason why I think this is a mere bullish rally in a 
bigger bear market, not the time to load up on all the old 
favorites.  

JDSU?  A new 52-wk low at $3.50.  GLW?  Ditto.  Remember when 
those were "compelling bargains" at $50, $30, and $10?  What - me 
worry?  $3.50 has got to be the bottom now doesn't it?  The bull 
will one day return when bears surround it, and even good values 
are left alone due to lack of interest.  When the loan bull feels 
like General Custer uttering "Holy cow!  Look at all those 
Indians!", that will be the true bottom.  The market isn't even 
close.  

Plus in the meantime, the markets are entering a typically slow 
Summer season.  If the past two months of range-bound trading are 
any indication, the range could be even tighter.  Contrary to 
popular belief, markets remain rangebound 80% of the time and make 
huge directional moves as an exception rather than a rule.  The 
heady days of the late '90's are not coming back for years.  If we 
are not already, we should get used to that.

Charts?  Yep, rangebound.  And there is nothing in the way of 
volume to suggest the chart patterns are about to change.

Dow Industrial chart - INDU (weekly/daily/60):


 

I've stared at this chart for a long time and I still have no 
opinion, though I would say the bullish divergence on the weekly 
chart might offer some glimmers of strength in the weeks ahead.  
Yet, there is two month of data on the daily stochastic chart that 
says bears rule.  The lines can't even enter overbought before 
being turned back.  Yet the 10-period stochastic is making a 
valiant struggle to reach the 80% goal line.  On the bullish side, 
we can see the see the series of higher highs and lower lows on 
the daily chart, but there is no guaranty that will hold given the 
sorry state of the daily stochastics.  That same comment applies 
to the 60-min chart too.  But stochastics there are ready to roll 
over any time.  In my opinion, this no time to trade.  I just 
don't see one either way here.

NASDAQ chart - COMPX (weekly/daily/60):


 

NASDAQ too shows a weekly chart giving signs but not yet 
confirming a bullish upturn.  Daily chart, as it has done in 
recent months of trading is falling back to fill the gap, which is 
reflected in the daily stochastic rollover.  However, the 10-
period stochastic is making a strong run in the bullish direction.  
Will that solid red line act as resistance or can a breakthrough 
happen that allows the line to become support?  Jury's out.  60-
min is of little help since it entered overbought at a lower high, 
which might show itself in the coming two days as bearish 
divergence.  Again, no conclusions.  I'm waiting for a trade to 
materialize.

S&P 500 chart - SPX (weekly/daily/60):


 

Once again, little evidence to suggest the bulls are in control 
and that today was little more than a technical, corrective 
bounce.  Weekly stochastic offering hint of bullish reversal, but 
unconfirmed.  Daily shows higher lows and the 10-period stochastic 
flashes bullish.  However, the daily 5-period stochastic has 
reversed at a point of resistance.  Resistance?  Yes, at the 1075 
and 1080 level according to the 60-min chart, which has also 
entered overbought.  Still a glimmer of hope looms as higher lows 
accompany higher highs.  Again, waiting for a trade.

Volume was lethargic but not dead with 1.64 bln shares trading on 
the NASDAQ and 1.1 bln on the NYSE.  Breadth was roughly 3:2 in 
favor of advancers on both exchanges.  But those won't cause 
anyone to holler out, "Gas up the jet, Honey.  We're gong to 
Vegas!"  Better to protect thy wad right now rather than expose it 
to the casino, err, markets.

In economic news, retail sales come out tomorrow.  Modest gains 
expected (+0.6%), but nothing out of the ordinary.  The swing vote 
will be with auto sales.  A poor showing there could cause big 
waves of bearish sentiment, which would spell "back to the 
slaughter house" for bulls since it makes up such a huge part of 
the economy.  Of course, that could work just as easily against 
the bears on unexpectedly good news.

For tomorrow?  One thing is for sure - the topped out 60-min 
stochastics on the major indexes while topping out at resistance 
on the SPX candle chart is going to keep me out of calls.  So will 
the rollover on the 5-period daily stochastics.  Yet the weekly 
charts offer hope for bulls as does the 10-period daily 
stochastic.  My best-educated plan would then be to wait for a 60-
min pullback to support and cross my fingers that the daily 
stochastic doesn't break down further.  If those can be satisfied, 
scalpable calls will see my risk capital only.  No moon shots of 
payoff right now that I can see, and thus no conclusions for 
tomorrow's trading.  We'll have to watch what happens in the 
morning.

See you at the bell.


********************
INDEX TRADER SUMMARY
********************

Up, up and away from gap areas
by Leigh Stevens

TRADING ACTIVITY AND OUTLOOK - 

Last week, I suggested that the chart gap areas were important to 
watch relative to how far the indices retreated on the subsequent 
pullbacks. The gaps areas were: S&P 500 (SPX) at 1054-1056; OEX: 
520.5-521.8; Nasdaq Composite (COMP): 1594.6 - 1625.7; Nasdaq 100 
(NDX): 1167.2-1212.8; Nasdaq 100 QQQ tracking stock: 29.3-29.8.  

Upside gaps are created on the charts when the indices or stocks 
jump higher on an opening relative to the high of the day (or 
hour) before - an upside gap being the difference between one 
bar's high and next bar's low. 

SPX filled in its hourly chart gap, then rallied. OEX got down to 
its hourly chart gap, but buying interest surfaced before its gap 
was filled in then the stock rebounded. COMP filled part, not 
all, of its gap, then rallied today.  Ditto for NDX, the Nasdaq 
100. QQQ almost filled in its chart gap from last week, only 
lacking .2 of covering it entirely.      

It's common that chart gaps get filled in (subsequent trading 
occurs in the gap area) but the low end of the gap acts as 
support. So, as discussed last week, the above areas were the 
index levels to watch. The fact that the chart gaps created over 
Tuesday-Wednesday got filled in, in part or all, followed by a 
rally, builds some technical evidence that a bottom is in place. 

The indexes generated good upside today for traders on the long 
side, especially if you saw the Friday/Monday lows in light of 
this discussion. Along with the gap fills, the hourly stochastics 
were fully oversold in the 5-period time frame, then flipped up. 
The 21-hour stochastic followed, but not from a fully oversold 
area, which I would have preferred.   

Some chart gaps never get filled in - for example bellwether 
Nasdaq stock Cisco Systems (CSCO), has resisted any retreat into 
its upside gap area as the lows of Friday and today, are exactly 
the same low as Wednesday, at the exact high end of it's chart 
gap. So far, this gap has not gotten filled in by even 1 tick, 
which is the most bullish consolidation you can get after a gap, 
when subsequent trading lowa are all at or ABOVE the gap area.   

S&P 500 (SPX) Daily/Hourly charts: 


 

The S&P broke out again to the upside after consolidating in a 
minor bullish flag. The near term upside objective I have is to 
1082.  However, there is resistance at 1078-1080 at the hourly 
down trendline. Near support is in the 1070 area.  

A close above 1088 is needed to suggest that the trend will 
continue still higher in the near term -- if so a target on a 
move higher is up to the upper trading band, around 1130.  
However, the 21-day moving average must hold as support on 
subsequent pullbacks. 

For those holding SPX calls on my suggestion from the 1060 area, 
with a revised stop at 1066.5, I suggest taking profits at 1075. 

S&P 100 (OEX) Hourly/Daily charts:


 


OEX broke out of minor flag consolidation also and projects 
higher, to around 540 at the prior hourly high. Before this 
level, OEX must clear near resistance comes in at the top of the 
downtrend channel at 535. Near support is at 530, then 527. The 
shorter hourly stochastic is showing an very short-term 
overbought situation.  If there is an early rally, take profits 
and don't expect it to last as a correction is "due".    

I don't trust that the S&P 100 will clear 535, but if it does, I 
suggest taking profits on calls bought for a trade, in the 540 
area. A close above 540.7, at the 21-day moving average, would 
suggest potential to still higher levels, maybe to the 560-565 
area.  However, as I noted with the 500, a close over this 
particular resistance should mean that it then becomes support on 
pullbacks.   
 
Dow Industrials 1/100 Index ($DJX.X) Daily/Hourly charts: 


 

The Dow finally broke out above its hourly downtrend channel, and 
DJX is back above its 21-day moving average at 100.7 a second 
time. This action may be an indication that DJX is back in an up 
trend. The Index also held its 200-day moving average on a 
closing basis, unlike any of the other indices. 

It's important to the bullish case that there is another daily 
close above 100.7 and that the index not dip under 100. If so, we 
can anticipate the possibility that DJX can trade up the upper 
band again shown on the daily chart.      

The next important resistance test is at 102.7, at the 50-day 
average (not shown) and at the up trendline that is shown.  

Near support is at 99.5 - 99.3 - if penetrated, we're looking at 
support again in the 98 area.     
 
Nasdaq Composite ($COMPX) Weekly/Daily charts:


 

Near resistance is around 1675, at the top of hourly downtrend 
channel. I don't anticipate a break out move above the upper 
channel line, so this is an area to watch for a shorting 
opportunity. 1688 at the prior highs is an area that I would sell 
into as well, especially if the longer hourly stochastic was then 
at the top end of its range, suggesting an overbought market.  

However, the 5-hour stochastic is already on a downside "sell 
signal", so would be cautious on waiting for much more upside.  
If there is a rally from retail sales or other news, sell into a 
move to near resistance.  

Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: 


  

Trendline resistance is at 31.00 - I favor selling this area, on 
up to 31.75, with stops at 32.50. A CLOSE over 31.9 at the 21-day 
moving average would create a more bullish looking technical 
picture.  One close over this level is not enough however, as the 
next day must then be watched to see if the rally holds up.  

Near support is at 30, then 29.5.

Index Trade Recommendations 

SPX trade could have been done today, 5/13 based on the advance 
above 1060.  The objective has nearly been reached.  Exit if SPX 
trades to 1066.5.  Take profits at 1075 and above.  

FRIDAY 5/10: 
Buy SPX calls (e.g., June 1070's) at 1040-1038
Or, buy on a move to 1060 if rally occurs first
Risk 5 points from entry
Objective: 1075.        

MAJOR MARKET INDICATORS - 


 

Relative to the Nasdaq, the line below plots Daily new 52-Week 
Highs minus the daily new 52-week Lows (black line). A 10-day 
moving average (blue line) is applied to the daily number. 

The net new highs minus new lows difference, on a 10-day moving 
average basis, has been in a rising trend, on balance, over the 
past month. This number should continue to rise if the Nasdaq 
Composite's trend turns up in the coming month.  

Leigh Stevens
Chief Market Strategist 
lstevens@OptionInvestor.com 


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***********************
INDEX TRADER GAME PLANS
***********************

THE SECTOR BEAT - 5/13
by Leigh Stevens

Lots of green columns today -- below are the top 10 sectors in 
terms of their percent gains.  
 


 

Semiconductors ($SOX.X) was the biggest gainer as is typical for 
such a volatile sector. These are many of the same sectors that 
rallied sharply last week.  A decisive move above 512 is now need 
to create an upside penetration of the down trendline in the SOX.  
If this occurs, will present some stock call possibilities that 
could be played as a "proxy" or a representative play in this 
sector.  

I will also look at the other tech sectors for ideas as well.  
This one day rally is not enough, as a period of base building is 
needed. 

AND, what was up before continues to be hit as a source of funds 
or by profit taking.  Rotation is the name of the game for money 
managers to invest in the various market sectors.  



 

SECTOR TRENDS AND TRADING IDEAS - 

Healthcare ($HMO.X) continues in its correction, this one more 
substantially. As said before, after a correction, these stocks 
are likely to have still more upside, so view this pullback as a 
buying opportunity.  Some of the stocks are at or near by suggest 
buy point for stock or call purchases.  

 
Healthcare Payors Index ($HMO.X): 

PacifiCare Health Systems (PHSY) was the first to drop into my 
suggested buying zone at 23.5-24.7. 5/13 close: 25.47. 

Oxford Health Plans (OHP)  - buy in the $43 area. 5/13 close: 
44.87.

United Health Care (UNH) - suggested buy in the 82-83 area. 5/13 
close: 87.87 so current prices are still well above this buy 
point.   
 
Wellpoint Health Networks (WLP) - suggestion was to buy at 72.00 
area, a doable purchase today with dip to nearly 70.  In fact, I 
suggested further purchases be made around $70. 

AETNA (AET) - My revised entry suggestion is in the $44 area. 
Today AET held its up trendline, in its close at 46.66.  Stay 
tuned.  

HUMANA (HUM) - purchase suggestion is first, at 15.60, at 
its support (up) trendline; then if further weakness develops, in 
the 15.00-15.15 area. 5/13 close: 15.39, so initial purchases 
were possible. Low was 15.12.  

MID ATLANTIC MEDICAL (MME) - buy point suggested in the 32.80-
33.00 area. 5/13 close: 33.95

TENET HEALTHCARE (THC) - buy in the 66 area. 5/13 close: 70.52  



LONG/CALL TRADES, PREVIOUSLY RECOMMENDED:

>> Cyclical sector ($CYC.X) - 4/15 suggestion:
1.) iShares Cyclical Trust (IYC)  - 4/16 open: 56.95
Objective: new high above 63.00
2.) OPTION play: CYC Sector stock, - Alcoa (AA) 
May 40 calls (AA EH) - 4/16 open: .60  

UPDATE: suggest exiting on a move to and above $36.  Stock is 
still vulnerable to another downswing. 5/13 close: 35.35.   




NOTE: RISK to REWARD guidelines -  
Determining an objective is important, even if it is a moving 
target, as this is the reward potential.   Determining reward 
potential is critical to establishing whether a stop that makes 
“sense” (e.g., a sell stop that was placed under a key support 
level) would, if triggered, result in a dollar loss that is in 
proportion to profit potential; e.g., 1/3 of it.  (On occasion, 
when the purchase price of call or put is equal to 1/3 or less of 
the estimated reward potential, there may not be a specific exit 
suggestion, as the cost of the option is equal to the amount that 
is being risked.)   

Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com


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The Option Investor Newsletter                   Monday 05-13-2002
Copyright 2001, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


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*****************
STOP-LOSS UPDATES
*****************

LLL  - call
Adjust from $126.50 up to $127.50

MMM  - call
Adjust from $122.50 up to $124.50

RTN  - call
Adjust from $41 up to $42

SII  - call
Adjust from $70 up to $72

IDPH  - put
Adjust from $50.50 down to $49.50

RE    - put
Adjust from $67.50 down to $66


*************
DROPPED CALLS
*************

None


************
DROPPED PUTS
************

LRCX $26.11 +1.80 (+1.80) The big seller that had been lurking
around in LRCX finally capitulated today as the stock broke and
closed above the $26 level.  Today's advance came on an increase
in volume, which may reveal that the move has staying power.
Not to mention that the Semiconductor Sector Index (SOX.X)
rebounded during the session, which certainly helped LRCX's
cause.  Ahead of AMAT, the stock may pullback on nervousness.
Look for an intraday weakness tomorrow as an exit opportunity out
of open plays if today's trade above $26 didn't stop you out.


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*********************
PLAY OF THE DAY - PUT
*********************

KMI - Kinder Morgan $46.47 +0.29 (+0.29 this week)

Kinder Morgan, Inc. is an energy storage and transportation
company in the United States, operating, either for itself or
on behalf of Kinder Morgan Energy Partners, L.P., more than
30,000 miles of natural gas and products pipelines. The
Company owns and operates Natural Gas Pipeline Company of
America, a major interstate natural gas pipeline system with
approximately 10,000 miles of pipelines and associated storage
facilities.

Most Recent Update

Once again we saw the Natural Gas Sector Index (XNG.X) diverge
from the broader energy sector in last Friday's session, which
is more of the seasonal pattern at play that we've been
focusing on in our KMI put play.  The XNG.X wrapped up a lousy
week last Friday, while the Oil Service Sector Index (OSX.X)
moved back towards its relative highs.  As for KMI, we saw a
small amount of divergence there from its sector.  KMI broke
down below its relative lows below the $46 level on an
intraday basis before slightly rebounding later in the day.
Still volume remained weak as the traders appear content to
focus on more active sectors of the market.  But that's not
necessarily a bad thing for this play, as we let the seasonal
trend in the natural gas index take over from here.  Going into
next week's trading, we're still looking for a more solid
breakdown below the $46 level and confirmation from the XNG.X
to the downside.  We'll watch for KMI to move towards to the
$44 level to the downside next week, which should happen if the
XNG breaks below its very short term relative lows around the
180 area.

Comments

The natural gas index bounced during today's trading, but not
before tracing another new relative low below the 180 level.
The rebound in the broader market helped prop up the beaten down
sector.  But with the growing negative sentiment in the broader
energy business, it seems only a matter of time before the XNG.X
heads lower.  Look for the building bad news in the group to
exacerbate the seasonal trend in the natural gas index.  Watch
for KMI to breakdown from its inside day with a trade below
$45.59.

BUY PUT JUL-50 KMI-RJ OI=936 at $5.00 SL=3.75
BUY PUT JUN-45*KMI-RI OI=566 at $2.20 SL=1.25

Average Daily Volume = 2.63 mln



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**************
TRADERS CORNER
**************

Candlestick Charting 101 - Part IV
by Mark Phillips
mphillips@OptionInvestor.com

When we left our heroes, Dirk and Al were fighting for their
lives in a maze of eerily-painted red and green candlesticks...
Ok, so maybe that's a bit over the top, but hopefully somebody
got a chuckle.  I've been reading through the latest Clive
Cussler novel over the past few days and for those of you that
are fans of the adventure novelist, you know how all-consuming
the stories can be.  

Coming back on track, we're all set for another installement
of interpreting these sometimes-confusing, but usually important
Candlestick chart patterns.  If you missed the first three issues
of the ongoing saga, take a quick look at them to get yourself up
to speed before proceeding.

Candlestick Charting 101
Candlestick Charting 101- Part II
Candlestick Charting 101- Part III

One of my favorite patterns to look for when trying to locate
market turning points is the "Tweezer" set of candle formations.
They come in two flavors, with the Tweezer Bottom pointing to an
end to a bearish trend and emergence of a new uptrend, while the
Tweezer Top tells us that the bulls are becoming exhausted and
it is the bears' turn to come out and play.  

Here's the basic formations that we need to look for.  In a
Tweezer Top formation, a long green candle is immediately
followed by a long red candle, with both of their real bodies
having the same (or very nearly the same) highs.  Ideally there
will be no upper shadow on either candle, but I'm not very rigid
in that criteria.  While the formation is stronger without upper
shadows, I'm willing to overlook the shadow, depending on other
factors like the position of my oscillators or the location of
resistance zones.

Likewise, the Tweezer Bottom signal is composed of a long red
candle, followed immediately by a long green candle, both with
the bottoms of the real bodies at the same (or nearly the same)
level.  Here also, we are looking for little or no lower shadows
on the candles.  Here also, we want to also keep an eye on the
position of oscillators such as Stochastics or MACD and the
proximity of meaningful support.

These patterns carry even greater weight if the second candle in
the formation exceeds the range of the first candle.  So in the
Tweezer Top formation, we would look for the bottom of the body
on the red candle to actually be lower than the bottom of the
body on the green candle.  And on the Tweezer Bottom signal, we
want to see the top of the body of the green candle exceed the
top of the preceding red candle.  This isn't a requirement, just
a feature that can increase the pattern's reliability.

Oh, there is one more criteria for applying these formations to
make trading decisions.  The Tweezer Top signal follows an uptrend
and signals the reversal into a downtrend, while the Tweezer
Bottom signal follows a downtrend and signals a reversal into
an uptrend.

As we all know, a picture is worth a thousand words, so let's go
look at some charts, shall we?  I've been watching the Retail
index (RLX.X) with great interest over the past month due to the
unusual proliferation of Tweezer formations.  It is rare to see
this many of the Tweezer formation on a single chart in such a
short span of time, but for our purposes here, it provides
fertile ground for education.  Let's start by looking at an
expanded view of the RLX daily chart in April.



 

Look at that!  After just completing a trip from the $920 to
$970 level, the RLX gives us a Tweezer Top on April 11-12.  This
is a good warning of a change in trend about to unfold, but not
yet tradable in my opinion.  Note that the daily Stochastics are
still rising towards overbought.  That tells me that the top (if
it is going to form here) needs a bit of time to mature.  Then,
the next 2 days gives us a repeat performance with another Tweezer
Top.  Daily Stochastics are starting to look a little toppy here,
and I'm starting to pay attention.  The final straw comes with
the 3rd consecutive formation over the next 2 days, because this
time the Stochastics have rolled down out of overbought territory
and are giving us a clear sell signal.  Short entries taken here
performed quite well over the next 2 weeks with the RLX falling
as low as $904.75 on May 1st.  That's a nice little drop, don't
you think?

Ah, but it gets better!  Scrolling forward in time a scant few
days and we get another treat from the purveyor of Tweezers!



 

May 6-7 produces a nice little Tweezer Bottom signal, very near
the $895 support level and after last Wednesday's euphoric little
rally and subsequent selloff, we got another Tweezer Bottom
formation over the past 2 days.  Stochastics are trying to
turn/remain bullish and support is holding firm.  While the
Tweezer Bottom would be stronger if today's candle had actually
closed above the Friday's opening price, I think the pattern
still has validity.  It will be interesting to see if we are
looking at the setup for another rally in the Retail sector,
don't you think?

While the RLX is not a tradable vehicle, we can easily choose a
proxy for the index, a stock that effectively mirrors its
movement.  How about the grand-daddy of Retail stocks, Walmart
(NYSE:WMT).  Take a look at the chart of WMT below and you can
see how the stock tends to mirror the action in the RLX.  We
don't see the Tweezer formations here in the stock, but we can
use what we observe in the sector to trade one of the more
liquid and predictable of its components.



 

Isn't that interesting, how we can apply what we see in an
index to identify a solid trade candidate?  But here's the
clincher.  WMT announces earnings in the morning and I'd be
willing to bet that whether the report is good or bad, it will
be the catalyst for the next substantial move in the Retail
sector.

Tweezer patterns are not the most common of chart formations,
but when they do form, they deserve to be paid attention to.
Remember that not all chart formations are a signal to enter a
trade.  Sometimes they just give us that one last push that we
need to exit a winning trade.  If I had been playing the downward
slide in WMT over the past few weeks, I would look at the setup
in both WMT and the RLX and definitely would have taken the
opportunity to get out of the bearish play ahead of the company's
earnings report.

So far we've covered a handful of different candle patterns
including Dojis, Morning and Evening stars, Hammers, Hanging Man
and the Tweezer Top and Bottom.  Hopefully you've found this
series useful.  I'll likely cover a few more patterns in the
future, as time permits.  Of course if there is a particular
formation that you're just dying to learn about, send it along
and we'll cover it in one of our future visits.

In the meantime, happy exploring.  I'm going back to check on
Dirk and Al!

Mark


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