This Week's Battle Plan

Last week's swing reversal is heaven for guys like me. The swings are fast and powerful, and when they occur, the gains are nice (except you spend the weekend second-guessing yourself as to why you did not have bigger positions!).

Will these swings continue? I hope so, but one never knows. Markets never do the same thing for sustained periods of time, and that's why yesterday's heroes many times just remain yesterday's heroes. The market goes into a different trading mode and the game changes. The momentum bull heroes of 1999 were replaced by the bear heroes of 2000 and early to mid 2001. And then in September 2001, the bulls again replaced the bears as the heroes. This is what makes this game so challenging on two fronts: first, to avoid (like the plague) yesterday's heroes, and second, to figure out for yourself what the next move is going to be. Correctly anticipating this next move is the secret of all great traders. And it's a secret that takes years and years to master.

As far as this market goes, so far in the first few days (just as it has over the past four months) it's telling us that the momentum game is back. And if this is true, as goes the SOX and the Nasdaq, so goes our market. Watch these markets closely. They have told us since September where we are heading.

I'm in the Wrong Industry!

One of the things I have yet to figure out is how thousands of guys can lose billions of dollars for two years in a row and still earn six and seven figure salaries. And, at the same time, even though they lost so much money, they become glorified by the press because they "outperformed the market." In the investment management world, you lose money (but lose less than the market) you get a raise. You come home and brag to your spouse about the good news. But as traders, we are not granted the same opportunity. Imagine coming home and telling your spouse the news: "Honey, great news, I outperformed the market today." (But, unlike our investment manager friends, our story unfortunately doesn't end there.) "The bad news is that even though I outperformed the averages we don't have any money for the mortgage and the dog food."

But these guys control the game. They move stocks, and as Kevin Haggerty says, they leave trails. And as Kevin has proven, when you read their moves, profits (potentially big profits) many times follow.

Inside Their Heads...

So today let's get inside the heads of our mutual fund money management friends. Most came into the year with healthy cash positions. This means that after two years of losing money (and many under-performing the averages), they are one week into the year and are already lagging the averages. It's now catch-up time (or no more healthy salary). And if you're sitting here today in their position, you are looking to put your money to work...quickly! And what do you buy when you're in the hole playing catch up? Not utility and food stocks. You buy momentum. You buy the leaders. I don't know if that happens immediately, but it will happen.

The leaders today, as we mentioned above, are the SOX, the major Nasdaq stocks, the stocks on our Proprietary Momentum List, and the industries on our Strongest Sector Lists. These are the places where the short-term surges will occur when these guys come in. And these are the stocks that you should be looking for increases in volume and breakouts. Momentum begets momentum. Always has, always will.

Trading The Swings...

With that said, I'll add one caveat to all this. Once these guys are done buying (and who knows, it may be soon), we will not likely see the one-way momentum surges of 1996, 1997 and 1999. The new cash levels coming into this market are just not there. And this likely means we will see sharp corrections and the nice swings I talked about in the opening paragraph.

In summary, as goes the SOX, the Nasdaq, and the stocks on our Proprietary Momentum List, so goes our market. Look at these names throughout the day (or each night). This is today's game, this is where the money has been made since September, and this is where the money will likely be made until proven otherwise.

TraderTalk

This week we will be launching our 1-2 times per week new workshop session we're calling "TraderTalk." This Wednesday at 4:30 pm EST, I'll be leading the workshop, teaching you how to short-term time the market using my VIX indicators. Next week, Dave Landry will be live to teach Swing Trading. The sessions will be interactive, as you'll be able to ask questions. If you are unable to make it, there will be archives for you to learn from at your convenience. The link to the TraderTalk workshops and the weekly schedule will be posted in our What's New at TradingMarkets page.

Have a great week 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 at TradingMarkets.com.