Going With The Strength

Short term, the market has acted schizophrenically over the prospect of whether we'll get an expedited rate cut between FOMC meetings. But long term, is there any doubt where interest rates area headed?

News of more layoffs and a February contraction in the National Association of Purchasing Management index raised expectations of expeditious rate-cutting at the Federal Reserve. In past commentaries, I've pointed to strength and pattern formation in choice rate-sensitive retailers, financials and home builders. Today I see more of the same Charter One Financial (CF | Quote | Chart | News | PowerRating), Freddie Mac (FRE | Quote | Chart | News | PowerRating) and Fannie Mae (FNM | Quote | Chart | News | PowerRating).

Group action has been known to intermediate-term traders at least since the days of Jesse Livermore, in my view the greatest and most influential stock trader who ever lived. Livermore even applied something akin to his group theories to his commodities trading.

Strong action plays such a key role in stock selection and timing that I will sometimes take limited long positions in leading stocks in very strong industries even in down markets. 

The top field of all charts in this commentary uses a logarithmic price scale and displays a 50-day price average in red. In the second field, a blue relative strength line represents the displayed security's price performance relative to the S&P 500. The third field displays vertical daily volume bars in black with a 50-day moving average in blue for volume.

All stocks, of course, are risky. In any new trade, reduce your risk by limiting your position size and setting a protective price stop where you will sell your new buy or cover your short in case the market turns against you. For an introduction to combining price stops with position sizing, see my lesson, Risky Business. For further treatment of these and related topics, check out the Money Management area of TradingMarkets' Stocks Education section.