Contracted Volatility Precedes Travel Range

The market game was called off yesterday due to no players. The SPX ($SPX.X | Quote | Chart | News | PowerRating) daily range was all of 3.3 points, so that obviously took all of the futures/index proxy traders out of the game. The SPX gained less than a point, while the Dow ($INDU | Quote | Chart | News | PowerRating) was -5 points. The Nasdaq ($COMPQ | Quote | Chart | News | PowerRating) was +0.3% to 2093 with the (QQQQ | Quote | Chart | News | PowerRating) +0.5% to 37.87. The sectors were nondescript, except the (OIH | Quote | Chart | News | PowerRating), -1.3% and definitely in need of some retracement. There is a negative divergence in a momentum oscillator, and the OIH closed at 93.20. The 10-day EMA is 91.36, 20-day EMA 89.67 and yesterday's high was 1.21x the 200-day EMA and the ratio where the OIH has retraced from several times before.

NYSE volume fell off to 1.29 billion shares, but the internals remained neutral/plus with the volume ratio 55 and breadth +363. The 15-period CMO (Chande Momentum Oscillator) for the SPX is above 50, but hasn't hooked down yet, so maybe the SPX can make a run and take out the 1217.90 high into Feb. 16, 17, 18. That would set up a few things, in addition to some scale-up selling to start reducing some longer-term equity exposure as this bull cycle gets long on time (28 months).

Sectors with better relative performance that could precede the SPX to new rally highs are the XLB (basic materials), 29.81 close/30 high, XBD (brokers), 152.11/152.78, and the XLF (financials), 30.52/30.78.

The XLE and XLU are, of course, the leaders and have already been making new rally highs. Retail has lagged, with the RTH in a 99.80 - 95.36 trading range since 12/01/04. The previous rally high is 102.07. With the (SPY | Quote | Chart | News | PowerRating) in essentially a 121 - 120.50 narrow range since 11:30 a.m. ET on Friday, it is safe to assume this contracted volatility pattern will be resolved soon and then daytraders can turn the lights on again.

Have a good trading day,

Kevin Haggerty