Here’s What You Can Do About Thin Liquidity

  • August 5, 2005
  • Kevin Haggerty


Kevin Haggerty is
the former head of trading for Fidelity Capital Markets. His column is intended
for more advanced traders. If you would like to learn how Kevin trades,

you can find more information here.

The volatility increased into the 08/05 Fib time

ratio as the SPX
(
$SPX.X |
Quote |
Chart |
News |
PowerRating) had a down-up-down trend day. The SPX finished

the day at 1235.86, -0.7%, with a range of 9.9 points. There was an initial Trap

Door long entry, then a .618 retracement contra move to 1241.73 (vs. the

previous day’s last high of 1245.18). The "90% – 60%" rule kicked in, and the

SPX resumed the direction of the down opening, trading to a 1235.15 intraday

low. The initial Trap Door long trade was after the 1238.71 low at the 480 EMA.

If you took the .618 retracement short entry below 1241, it declined 5.8 points

to 1235.15. There was a -1.0 volatility band and also Fib extension sequence for

the initial Trap Door. It didn’t run much, but the short .618 retracement entry

was a bit better. You can’t know the duration and extent of a move, but the

sequence methodology enables you to select both trades (see SPX chart). The Dow

(
$INDU |
Quote |
Chart |
News |
PowerRating) lost 88 points (-0.8%) to 10,610, while the
(
QQQQ |
Quote |
Chart |
News |
PowerRating), 39.67,

was -1.0%. NYSE volume was 1.5 billion shares, but mostly to the downside with

the volume ratio 27 and breadth -1124. The
(
IWM |
Quote |
Chart |
News |
PowerRating) — Russell 2000 — was

-1.8%. All of the primary sectors, except for the
(
OIH |
Quote |
Chart |
News |
PowerRating) — energy — which

was +0.6%, were red. The downside was led by the semiconductors with the

(
SMH |
Quote |
Chart |
News |
PowerRating) -2.1%, with the XBD and RTH each -1.8%. The early selling slowed by

12:00 p.m. ET and the SPX ranged out into the close between 1238.16 – 1235.15,

but did close in the low end of that daily range.

When the liquidity gets thin like it often does

in August, daytraders are better served by reducing position size and keeping

stops tighter.

Have a good trading day,

Kevin Haggerty