Tech Indices At Inflection Zone For Generals To Squeeze Hedge Fund Shorts

The SPX ($SPX.X | Quote | Chart | News | PowerRating) reversed from last week's key time zone high of 1178.87 (05/09/05) and declined to an 1146.18 low on Friday (05/13/05) before closing at 1154.05. The 4 MA of the volume ratio at that high was 65 and the 4 MA of breadth +750. Last Friday the 4 MA of the volume ratio ended at 31 and the 4 MA of breadth -825, so the four-day reversal became short-term oversold. Yesterday the SPX bounce was +1.0% to 1165.69 on a re-cross of both the 233- and 200-day EMAs. The Dow ($INDU | Quote | Chart | News | PowerRating) was +1.1% to 10,250, the Nasdaq ($COMPQ | Quote | Chart | News | PowerRating) +0.9% to 1994 and the (QQQQ | Quote | Chart | News | PowerRating) +0.7% to 36.48. The Dow continues to lag the SPX.

NYSE volume was on the lighter side at 1.46 billion shares with a volume ratio of 71 and breadth positive at +1350. The primary sectors were led by the RTH (+2.2%), BKX (+1.1%), XBD (+1.5%) and CYC (+1.3%). The major index proxies all traded less than their average volume on the reflex, with the (SPY | Quote | Chart | News | PowerRating) trading only 62% of its average volume, QQQQ 74% and DIA 76%. The (SMH | Quote | Chart | News | PowerRating) was +0.5% yesterday on 75% of its average volume.

In the sector SPDRs, the XLU, +0.7%, traded more than double its average volume (144%) and the XLE, -0.4%, was 40% above its average volume. The rest of the SPDRs all finished below average volume, led by the XLI, +1.4%, on only 43% of average, as did the XLY, +1.2%. Net net, rising price was weak on supporting volume yesterday.

The QQQQ and Nasdaq are at their longer-term moving averages and upper channel lines, so if the Generals and hedge funds push the seasonal technology bias, they are at an inflection point that would force the hedge funds that are heavily short tech to scramble. Daytraders can simply say, "Show me," and maybe take some intraday shorts into the resistance, which is 36.45 -36.70 for the QQQQ and then be in position to reverse and go the other way. The Nasdaq, which closed at 1994.43, has a primary resistance zone from 1990 - 2010.

In yesterday's commentary, you were alerted to the Generals' pullback in the XLE from the long side on any weakness to 37.90 (support) - 37.70 (200-day EMA) zone. The XLE made a 1,2,3 Double Bottom at 37.94, and daytraders caught a +2.0% move from their entry to the intraday 38.70 high, closing at 38.63. There was also a volatility band confluence at 37.92, which was also a 2.618 Fib extension of Friday's last leg up from 38.60 - 39.02. There was even more Sequence as the XLE was extended to the -2.0 standard deviation bands on both the 20-day and three-month charts. Simply put, this setup was all of what you learned in the seminar material. Regardless of what the hedge funds are doing on the sell side of energy stocks vs. any (GM | Quote | Chart | News | PowerRating) position problems, the XLE volume expanded to 24 million, which is 40% above its average volume and closed in the top of its range, so obviously there was long side activity by the buy side accounts, and that is what we anticipated and capitalized on once again.

The S&P 500 long side trades yesterday in futures/SPY was on a re-cross of the SPY 116 200-day EMA, which traded to a 116.84 intraday high, closing at 116.80.

There are six key different economic reports today, so daytraders must focus on any early overreactions to these reports for your initial trading activity, in addition to any price action around the longer-term moving averages for the major indices.

Have a good trading day,

Kevin Haggerty

P.S. I will be referring to some charts here: www.thechartstore.com in the future.