Anticipate, Don’t Meditate

August 28, 2001
Kevin Haggerty

The
indexes backed off yesterday after
Friday’s big up day. The volume was very light on both the NYSE at 884 million
with a volume ratio of 42 and breadth -400. The S&P 500
(
SPX |
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1179, -0.5% on the day. For the Nasdaq 100
(
NDX |
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PowerRating) it was even lighter at 1.2
billion shares which is less than 70% of its average. The Nasdaq had a volume
ratio of 46 and breadth negative at -414. It closed down -0.2%.

These moves were preceded
by significant volume and that means Generals, not Retail. Forget the daily
market debates by those that keep looking for the perfect scenario and always
find another reason why not when it is staring them in the face. There are many
great setups preceded by volume.

Looking at the screen, I
see some early red so we must frame the indexes. For example, when you go to
your five-minute chart on the NDX, you see the .618 retracement from yesterday
is about 1576 and the lows of the trading range below that are at about 1560.
Those are the numbers I start to key the downside. Below that, I frame
yesterday’s high and the August 23 late-afternoon low of 1505. That gives me a
.38 retracement of 1560-1562 level, a .50 retracement at 1550 and the .618 at
1537. You can do the .786.

I also see the 10-day EMA
at 1562. That gives me a confluence of three things at the 1560 zone. I then
look at yesterday’s high of 1602 and low at 1560. The 20-day EMA is up at 1590
(1560 is back in the picture for the fourth time) — the NDX closed at 1578. I
then look at the daily chart which shows me the NDX is a three-bar retracement
off the low, right to the 20-day EMA with yesterday being a narrow-range day
with open and close about the same, which is a Doji for candlestick types. It
doesn’t matter whether you use bars or candles.

I then get real cerebral
and anticipate that some of you will be getting ready for a 1,2,3,4 short in
conjunction with a Holy Grail. For you new subscribers, you can find these terms
in Larry
Connors’ books. Then there are those of you that just look at it for what it
is — a pullback to a declining
moving average — and will take the short if the dynamics dictate it.

I have now anticipated the
possible scenarios in the NDX cash, because it
doesn’t matter if you trade the futures or the Qs — it keys off the cash — and
now you only have to watch the dynamics at these levels come into play, rather
than think about what to do when it happens. Anticipate, don’t meditate.

Having done that, I say,
"How will I play the failure, if the early red takes out yesterday’s low
and then reverses to the upside?" There
is no magic about where the upside continuation entry is, which is first above
the 20-day EMA of 1590 and then above yesterday’s high of 1602. Just
a thought process to help you look at the day.

(September
Futures)

Fair Value

Buy

Sell

2.20

3.40

.95

Pattern
Setups

In the Semis, the
(
$SMH.X |
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PowerRating)s had
increasing price on 30% less volume yesterday and you would expect them to
retrace at least one half of their last four days’ move so I would be extremely
careful on any continuation entries from the daily charts.

The
(
$BBH.X |
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Chart |
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PowerRating)s were even lighter, with volume declining by 67% as price increased. To
me, that means to be alert for intraday short setups and pullback or selloff
long setups.

Have
a good trading day.

Anticipate, Don’t Meditate

BUY THE FEAR, SELL THE GREED

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