Early Red Futures Sets Up Trap Door/Volatility Band Opening

The SPX ($SPX.X | Quote | Chart | News | PowerRating) closed the week at 1201.59, up less than a point on Friday and -0.3% for the week. It has been a narrow two weeks for the SPX with a daily range of just 1.7% between 1212.44 and 1191.54. The Dow ($INDU | Quote | Chart | News | PowerRating) closed Friday at 10,785, +0.3%, skewed by the +13% gain of (MRK | Quote | Chart | News | PowerRating) on the Vioxx news. The Nasdaq ($COMPQ | Quote | Chart | News | PowerRating), 2059, was -0.6%, and the (QQQQ | Quote | Chart | News | PowerRating) -0.3% to 37.35.

NYSE volume was 1.55 billion shares, with the volume ratio neutral at 48 and breadth negative at -930. The sectors were led by the (PPH | Quote | Chart | News | PowerRating), due to MRK and (PFE | Quote | Chart | News | PowerRating), and energy with the (OIH | Quote | Chart | News | PowerRating) +2.1%. The (TLT | Quote | Chart | News | PowerRating) was -0.9% and -2.4% over the past four days, closing at 90.86, down from a very overbought 94.24 which they took to that level on your typical overreaction. This took other financials down with the XBD -1.7% and BKX -1.0%.

The market action was trend up from 12:00 p.m. to 4:00 p.m. ET on Friday. The (DIA | Quote | Chart | News | PowerRating) reversed from a 107.20 low vs. the 1.0 volatility band at 107.19, closing at 107.81. Daily chart RST and 1,2,3 Higher Top short entries were carried over, with the initial stop above 108.68, which was either 0.2% or 0.5% depending on your entry level. That is what you call entry at the lowest common denominator. The (SPY | Quote | Chart | News | PowerRating) did not reach its 119.61 1.0 volatility band on Friday and instead rallied off its 119.90 intraday low to close at 120.39, just below the 240 and 480 EMAs at 120.52 and 120.50, with the 816 EMA at 120.25 (five-minute chart). The 20-day EMA is 119.74 and the 50-day EMA 118.91. The DIAs closed at 107.81, right on the 240 EMA of 107.82, the 480 EMA of 107.78 with the 816 EMA down at 107.49. The 20-day EMA is 106.98 and 50-day EMA 106.08 and based on the futures this morning, that's the zone we'll probably focus on.

The time reversal continues this morning with the futures red. The Dow is -60, S&P -6.50 and Nasdaq -14.50 as I record this at 7:00 a.m. That kind of reaction is what we like to see, and you should be prepared for Trap Door volatility band setups. Remember your "90% - 60% rule."

Have a good trading day,

Kevin Haggerty