This Week's Battle Plan

When we decided to start writing "This Week's Battle Plan" a month and a half ago, our intention was to help you filter out a lot of the noise created by the financial press (TV, print and now Internet). The goal has been to look at the markets each week from a fresh perspective and ask "What is the market telling us? Where are the opportunities?" The markets talk all the time, and by asking the above two questions, combined with the help of TM's databases, indicators, and the long-term "real world" experiences of many of the TM contributors, we can likely get a pretty good feel as to what the market is saying.

When we published the first piece a month and a half ago, things could not have looked more bleak. The economy was in shambles, the market had 18 months of declines, terrorism attacks had led to war with Afghanistan and anthrax fear was rampant. Yet, the averages were not going lower. Bad news was met with quick selloffs and immediate recoveries. And this behavior has been further played out since then. Each week we have continued to point out that if the market can't go lower on bad news, what will happen when the bad news lessens and/or good news comes in?

Well, this week, we've gotten a piece of that answer. No real new bad news, and the averages rise four out of five days. And tonight, look at our Proprietary Momentum list. The stocks on this list are the strongest performing stocks. If we were heading into a deep recession, this list would be cluttered with defensive stocks like food, beverages and utilities. But tonight we see among the top 15 strongest stocks, construction, home building, transportation, banks and gaming stocks. NONE OF THESE STOCKS ARE DEFENSIVE COMPANIES. THEY ARE STOCKS FROM INDUSTRIES THAT RISE IN ANTICIPATION OF FUTURE ECONOMIC GROWTH.

Now, you can listen to a bunch of journalism majors preach to you that because they have a four-year degree in writing proper sentences, this qualifies them to analyze and interpret markets for you...but this may not be the smartest way to go. And while their focus this week was on four things: 1) why the market is now grossly overvalued, 2) Enron, 3) Enron, and 4) Enron, the real story has been the leadership action in the ($SOX.X | Quote | Chart | News | PowerRating) (read Haggerty every day...he reads this index better than anyone in the game), the rise in consumer stocks and the emergence of upward stock movement in the industries mentioned above. The journalists want you to focus on looking backwards at corporate earnings and their incessant writing about the management and former management of an energy company. The former may or may not help you make money (it did not from 1995-1999). The latter is simply gossip and with thousands of other publicly traded companies to focus on and make money from, why waste your time on gossip?

The surest way to improve your trading is to focus on what the market is saying and how it responds to news. Which stocks are shrugging off bad news? Which are rising in spite of the preaching of Main Street journalists? These are the clues as to where the best trading opportunities lie. And this is the type of "variant perception" Michael Steinhardt told us he used for 28 years to grow his fund 480 times(!) its original investment.

This Week's Market Action

On a short-term basis we are very overbought. We have short-term sell signals all over the place, including with the VIX, CHADTP and the McClellan Oscillator. A few days' selloff would be healthy...very healthy. What would be even healthier is a "walk-off" of this condition. A "walk-off" is when a trending market (higher for example) becomes overbought, triggering short-term sell signals. But instead of the market selling off, it "walks-off" the overbought condition by churning for 3-5 days (Friday was an example). After the overbought condition is walked off, you often see a solid rally ensue. If you look at the markets in 1995, 1996, and 1997, you'll see this having occurred numerous times. Short-term overbought condition were walked off and then the market's upward trend returned.

Again, we are in short-term overbought territory and a sell-off this week is expected. But a walk-off would be another healthy bigger-picture signal to look for.

Specific Markets To Focus On

Mark Boucher pointed out in his weekly column that if cotton and copper, two highly sensitive commodities tied to the economy, start rising, it will be early confirmation that business is picking up. This past week cotton rose 10% and copper exploded higher Friday. All good signs. Further moves in these commodities should keep your energies focused on the long side of the stock market for your trading.

You can follow these commodities intraday here.

Naz 200-day MA: More to Focus On...

It's hard to believe, but the Nasdaq is marching quickly towards its 200-day moving average. A crossover is not a buy signal. (No MA crossover is a buy signal. There is simply no statistical evidence that crossovers make money. And that's confirmed by more than 40 years of exhaustive studies done both by Wall Street and the academic world.) But a move above the 200-day MA signifies a trend, and it is a level that many large money managers use to become more aggressive in their investment decisions. We still have a ways to go, but psychologically it's a good level to break above and when it does happen, it should trigger all sorts of buying into the market.

Growing Your Trading Arsenal

The Mark Douglas "Psychology of Trading and Achieving Mental Toughness" seminar is three weeks away in Santa Monica, Calif. Mark has played a large role in the success of many top traders. Solid trading strategies are important to success. Combining these solid strategies with intensive mental training takes you to an even higher level of achievement. Click here for details on Mark's upcoming workshop and how it can impact your trading.

Until next week, best of luck with your trading!

Larry Connors and Brice Wightman

Larry Connors is CEO and co-founder of TradingMarkets. He is also the author of four books on trading, including Street Smarts, co-written with Linda Raschke, Connors on Advanced Trading Strategies, and his latest release, Trading Connors VIX Reversals.

Brice Wightman is a market analyst with TradingMarkets.