Finding the Next Hour's Winners Using Intraday RS

By Jeff Cooper I'm often asked what my favorite trading strategy is. If a gun were put to my head, what one strategy is my favorite? Well, the short answer, unfortunately, is that there is no Holy Grail. You've got to use all the tools, all the time. The best trades come when a cluster of pieces come together. But...that being said, whether for a short-term trader or position player or an intermediate-term speculator, I believe the most important information that can be gleaned from a stock is its behavior vs. the overall market. Of course, the same concept can be applied to the overall market and its behavior against the prevailing news of the day. Let's take a look at one very bigpicture example: In 1994, the U.S. bond market suffered the worst bear market this century. Congruently, the equities market sold off from February into April 1994, as the S&P 500 declined from 482.20 to 435.85 -- just under 10%. But after that initial decline, the market basically went sideways and consolidated for the balance of the year. In December, 1994, the S&P 500 put in a higher low on a test of the spring lows at 442.85. The rest is history. In January, 1995, the market exploded and never looked back. The market surge continued for five years as the S&P more than tripled, rocketing to 1478 by January, 2000. The message of the market -- if all the worst bond market of the century could do was nick the market for 10% -- then what was going to happen once the pressure of rising interest rates was relieved? The market didn't do what it should have done. It didn't continue lower after the initial break. In its persistence to hang in there after the initial break and resist further downside pressure, the market was speaking. If you allow the market to speak to you, rather than tell the market what it should be doing, the market will be your guide rather than your adversary. That is why I say trading is not about trading, but about watching. Speculation is observation. Understanding is not necessary. If you seek to impose your logical view or the conventional wisdom of what should be happening, you are going to miss the message of the market. The same principle applies to short-term trading. A large part of my success is due to combining the patterns and strategies laid out in Hit and Run I and Hit and Run II, along with the concept of intraday relative strength, what I call "torpedoes"

or, inversely, intraday relative weakness or what I call "sore thumbs." (Sore thumbs are simply stocks that insist on going down when the market at large is rallying and stick out like a sore thumb!) Let's walk through some examples. The first charts I show are from 10/3/2000. An important day, since the Nasdaq Composite broke below its August low and offset the up gap from 6/2/00. As you can see, the charts demonstrate that, typically, individual stocks move in tandem with the markets, especially at important inflection points. On 10/3, the S&P and Nasdaq Composite were moving in tandem while Mercury Interactive (MERQ), Art Technology (ARTG) and Handspring (HAND) virtually mimicked the behavior of the indices.

Speechworks (SPWX) is a recent example of right translation -- where a stock says, "Damn the torpedoes and full steam ahead!" where its persistent intraday relative strength, despite a declining market, boils over when the market turns. On 10/30, despite a dive by the Nasdaq and December S&Ps into 12:00 p.m. (ET), SPWX holds firm in a narrow range. When the market starts to move up, SPWX explodes. Simple enough.

Despite impressive out-performance by HAND through the month of October, a test on the morning of 10/27 by HAND of a Gilligan sell signal set up some severe intraday relative weakness. While the market was in a runaway decline throughout the month of October, money gravitated to HAND, but once the market found its footing, money sought out "cheaper" flushed-out situations.

Despite the strong close by the December S&Ps on 10/27 and a Nasdaq that basically backed-and-filled from its prior day 200-point upside reversal, HAND's relative weakness stood out like a sore thumb. Note that when the Nasdaq Composite rallied up to test the morning high (A), HAND showed little to no buying pressure.

Although the Nasdaq held its morning low, HAND collapsed when it violated its morning range (B). Stock behavior often repeats. Again, on 10/31, although the December S&Ps and Nasdaq both showed a solid trend day, closing near the high of the session, HAND makes lower lows and lower highs throughout the session, only to collapse in the last hour, when it becomes apparent it isn't going to participate in the rally. It gives up the ghost and simply collapses.

Jni Corp. (JNIC) and Interwoven (IWOV) are two recent examples of stocks exhibiting intraday relative strength on 11/1/00. Although the Nasdaq fails from a morning spike both JNIC and IWOV persisted and close near their highs. Both stocks traced out bullish cup-and-handles, while the Nasdaq Composite continued to make lower lows and lower highs.

Conclusion: When a stock tells us it doesn't care about which way the market's going, we should pay close attention.

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