Rhodes: Spyders and Diamonds

07/04/2003 12:00 am EST

Focus:

Richard Rhodes

Founder, Rhodes Capital Management

"The market appears to have further room to move higher, with the potential to move sharply higher by summer’s end," says Richard Rhodes, editor of The Rhodes Report. Despite believing that the general market’s fundamentals warrant lower prices, Rhodes has turned bullish from a trader’s perspective. Here’s his market outlook and some ETFs (exchange-traded funds) to play the trend.

"We don’t say this lightly–and we had expected a correction to develop towards moving average support in all the major indices–but we cannot ignore the predictive value of the recent violent reversal higher in all the averages. If the correction is over, it was indeed shallow. Technically, this would suggest further upside explosiveness. However, we should make ourselves very clear–this rally is not rational in anyway shape or form–and as traders we must understand this.

"When the dust settles at some future unknown date, we believe the economy will be ‘muddling along’, while the equity markets will be at higher levels. The driver of current stock prices is not the economy at all–it is psychology. It is once again the herd mentality of missing this rally and not understanding that at some point reality will once again enter into the equation. If we had our druthers, we'd rather trade on the economic and historical valuations. However, psychology is a far more powerful determinant of equity prices–and at the present time it is overwhelming. As the rally progresses it will become ‘bubble-like’ in its violence once again. Despite obviously overvalued equity shares, prices are going higher.

"We are recommending a long position in the Dow Diamonds (DIA ASE), an exchange-traded index fund designed to replicate the performance of the Dow industrial average. The Diamonds recently rallied above major resistance between $89-$91 after successfully testing the breakout levelInitial resistance will be found at $95, and once that level is broken, our next target will be $107. Our risk is to the recent ’s low at $88.85.

"We also recommend long positions in the S&P 500 Spyders (SPY ASE), which replicates the performance of the 500 index. Several weeks ago, the neckline of the major head & shoulders pattern ( at $96.50) was invalidated–thereby forming a bullish double bottom. Following this breakout, the Spyders rallied on increasing volume. We find this very positive. Our upside target is now upwards of $112."

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