Contracted Volatility Precedes Price Moves

The SPX
(
$SPX.X |
Quote |
Chart |
News |
PowerRating) had an opening range of

1231.80 – 1229.38 until a brief breakout to 1234.09 on the 10:10 a.m. ET bar

which failed at 1234.09 after just two bars. Next, the attempt was made to take

out the range low of 1229.38, which it did by a few ticks to 1229.28. That

didn’t bring in any selling, so it reversed up to 1234.46 by 2:50 p.m. before

fading to close back into that opening Flip Top range at 1231.16, +0.2% on the

day. The futures probes in either direction failed to generate any intraday

trend. If you took the initial Flip Top entry to 1234.09, you made small or

scratched your trade, but if you took the reversal of the 1229.38 low to the

upside, you made a few points. Not a great trading day for the SPX. The Dow

carried over to the XLB (basic materials), -1.4%, with other basic stocks like

the other hand, the
(
QQQQ |
Quote |
Chart |
News |
PowerRating) was +0.4%, led primarily by the semiconductors,

a big opening gap up from a 30.60 previous close to 31.94 and only hitting 31.61

on the second five-minute bar, which was the intraday low. The Nasdaq

(
$COMPQ |
Quote |
Chart |
News |
PowerRating) was also +0.4% to 2176.

NYSE volume expanded a bit to 1.47 billion shares

with the volume ratio 58 and breadth +539. The 4 MA of the volume ratio at 46

and 4 MA of breadth -88 highlight the recent SPX choppy range price action,

mostly knee jerk reactions to announced news.

The SPX is in a contracted volatility pattern for

the past five days which will be resolved quickly. A short-term straddle was

bought to play the resolution of this pattern. This method and the straddle

adjustment is explained in the seminar material. The implied volatility is very

low, and there is month-end trading through Friday, then any new August monies.

If it goes positive, the first upside magnet is 1254. If not, this rally from

the 1183.55 low is 13 days old, and things happen around Fibonacci numbers. The

SPX is 67 days off the 04/20/05 1136.15 low, so any downside retracement of

significance would not be a surprise, especially in light of the current

terrorist situation, i.e., it is a high-probability play, and I don’t care which

direction it goes.

Have a good trading day,

Kevin Haggerty

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