Buying The Retracement Zone And Selling Into The Resistance
What Wednesday’s Action Tells
You
The major indices made it four in a row from
anticipated price zones with the SPX
(
$SPX.X |
Quote |
Chart |
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PowerRating) gaining +3.2% so far
low-to-high since Friday’s 1060.72 low. Yesterday the SPX was +1.2% to close
at
1095.17, while the Dow
(
$INDU |
Quote |
Chart |
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PowerRating), 10,048, was +0.9%, the Nasdaq
(
$COMPQ |
Quote |
Chart |
News |
PowerRating), 1831, +2.0%, with the
(
QQQ |
Quote |
Chart |
News |
PowerRating) +1.8% to 33.85. The Nasdaq,
which had traded to its .382 retracement to the October 2002 low (see chart)
is
+4.6% off that low. There was symmetry with an AB=CD level at 1767.22 and
the
1747 1.618 extension of the previous leg up from 1865 to 2056. The 5 weekly
RSI
was also below 20.
The QQQ has also bounced off its .382
retracement
zone, which is 31.65, and is +4.8% low-to-high. The semis, which had the
sharpest decline, with the
(
SMH |
Quote |
Chart |
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PowerRating) having hit its .618 retracement zone to
the
October 2002 17.32 low, which is 28.19 vs. its 28.30 low and has now rallied
+7.8% low-to-high (see 08/16 commentary). The SMH also led yesterday’s gains
at
+3.0%.
Net net, if you are a sequence trader, you
have
done well from the retracement zone.
NYSE volume was 1.29 billion yesterday, but
there
was +1.13 billion up and 142 million down for a volume ratio of 89, while
breadth was also very positive at +1818. The short-term condition is
obviously
overbought with the 4 MA of the volume ratio now 74 and 4 MA of breadth at
+1209. Initial moves off retracement zones are usually very sharp because
you
have a mix of real buyers, and in this case, some short covering as the
current
short and intermediate trends are down.
For Active
Traders
The opening bar down proved to be the
intraday
lows for the major indices, rallying to 10:45 a.m. ET, then going sideways
in
Slim Jims until the 2:00 p.m. breakout to the upside, and then Slim Jim
again
until a quick upside move from 3:30 p.m. into the close.
If you decided to scale short into that SPX
1085
– 1097 zone of resistance, you got your chance yesterday. I have included a
chart of what the scale trade looks like. Your average would be about 1091 –
1093, so a stop is placed above the previous 1108.60 swing point high, which
is
about 1.4%. There is also previous minor resistance at 1107.23. You could
also
move the stop up to 2.0% if you want, which is about 1115. The .618 retracement
to 1146.34 is 1114. All you are doing is shorting a retracement in the
current
downtrend with entry at a low common denominator with no more than a 2.0%
stop-loss number. The play is if the SPX reverses to the downside due to one
domestic terror attack, or a hint of one, and then the 1010 – 1020 SPX .382
zone
is a quick reality. You are risking at most 2.0% for a potential -7.4%
decline
to the 1012 .382 retracement zone from your approximate cost, which is
around
the 1093 200-day EMA.
In addition, most of you have just made a
nice
longside chop in this rally, and some of you got in early on the RST entry
at
1067.59 that I have outlined on the chart. That RST was bolstered by the
QQQ,
Nasdaq and SMH all hitting key retracement zones.
If you are a buy-and-hold long, for example,
in
your long-term IRA account, and you consider this a high-risk time for the
market, then the 2.0% short-term stop in your trading account would be
offset by
any upside gains in the tax-free account (gains not taxed until you take
money
out at required age). In the meantime, you would continue to take the
intraday
setups, long or short, in the other index proxies/stocks, while the scale-in
trade wasn’t stopped out.
Today’s
Action
The initial resistance levels for the Nasdaq
and
QQQ are outlined on the charts. The SMH, which closed at 30.36, has the
20-day
EMA and downward trend channel line both at about 31. The SPX resistance was
outlined in yesterday’s commentary from 1085 – 1097, as were the
(
DIA |
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PowerRating)
levels.
Because the major indices are bouncing off a
retracement zone, the short-term overbought condition can be extended, but
you
have missed the initial long entry and would be chasing after four days up,
and
that is not high-probability. If you have carryover longs into today, you
can
just tighten those stops and also take the short-side SPX trade into
resistance
with a -1.4% – 2.0% stop (this corner’s choice).
Have a good trading day,
Kevin Haggerty
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