Are You An Honest Trader? Most Aren’t

  • March 23, 2004
  • Kevin Haggerty

What Monday’s Action Tells
You

Yesterday’s opening air pocket for the SPX
(
$SPX.X |
Quote |
Chart |
News |
PowerRating) at -16.1 points to 1093.42 by the 10:15 a.m. ET bar was the
expected take out of the 2.0% range (see 03/19 commentary) after option
expiration. The contra move traded +7.3 points to 1100.71, then the SPX
traded
down for the remainder of the session to close at 1095.40, -1.3% on the day.
The
initial contra move came from between the 1.5 volatility band at 1095.60 and
the
2.0 volatility band of 1090.87.

NYSE volume was 1.45 billion, which was the
average volume last week, but the volume ratio was just 8 on 1.32 billion
down.
Breadth was what daytraders like to see at -1807. When they throw them away,
the
daytraders get to pick them up for a reflex. The Dow
(
$INDU |
Quote |
Chart |
News |
PowerRating) and
(
QQQ |
Quote |
Chart |
News |
PowerRating)s were both off -1.2%, while the XBD, playing downside catch-up,
was
-2.4%, as money gets taken off the table into announced good
earnings,
and a +135% move from the October 2002 lows. Yesterday’s XBD low of 664 gave
it
a -11% retracement so far from the 746 high. The 200-day EMA is
627.

The
(
SMH |
Quote |
Chart |
News |
PowerRating) rested yesterday at -0.7% after declining
-5.0% the previous two days, so obviously today we’ll look for reflexes in some
of those stocks. The CYC took a -2.0% hit, giving back more of its +93% gain
from the 369 October 2002 low. It hit a 646 intraday low yesterday and has now
retraced about 10% from the 714 high. The 200-day EMA is down at the 612 level.












































































































































































































































































































size=2>  Tuesday

3/16

 Wednesday

3/17

 Thursday

3/18

 Friday

3/19

 Monday

3/22

color=#0000ff>Index          
color=#0000ff>SPX          
color=#0000ff>High 1113.82 1125.76 1125.50 1122.72 1109.78
color=#0000ff>Low 1102.61 1110.70 1113.25 1109.69 1089.49
color=#0000ff>Close 1110.70 1123.78 1122.31 1109.74 1095.44
color=#0000ff>% +0.6 +1.2 -0.1 -1.1 -1.3
color=#0000ff>Range 11.2 15.1 12.2 13 20.3
color=#0000ff>% Range 72 87 74 0 29
color=#0000ff>INDU 10185 10300 10296 10187 10065
color=#0000ff>% +0.8 +1.1 -.04 -1.1 -1.2
color=#0000ff>Nasdaq 1943 1977 1962 1940 1910
color=#0000ff>% +0.2 +1.7 -0.7 -1.1 -1.6
color=#0000ff>QQQ 34.95 35.52 35.33 34.73 34.32
color=#0000ff>% +0.2 +1.6 -0.5 -1.7 -1.2
color=#0000ff>NYSE          
color=#0000ff>T. VOL 1.41 1.50 1.36 1.44 1.45
color=#0000ff>U. VOL 913 1.20 578 340 116
color=#0000ff>D. VOL 478 251 760 1.07 1.32
color=#0000ff>VR 66 83 43 24 8
color=#0000ff>4 MA 44 62 51 54 39
color=#0000ff>5 RSI 34 50 48 26 26
color=#0000ff>ADV 1933 2553 1462 1250 750
color=#0000ff>DEC 1360 784 1824 2002 2557
color=#0000ff>A-D +573 +1769 -362 -752 -1807
color=#0000ff>4 MA -256 +579 +98 +307 -288
color=#0000ff>SECTORS          
color=#0000ff>SMH +1.1 +1.6 -1.4 -3.6 -0.7
color=#0000ff>BKX +1.2 +1.2 -.09 -1.4 -1.2
color=#0000ff>XBD +0.4 +2.1 -0.7 -1.4 -2.4
color=#0000ff>RTH +0.2 +1.3 +0.5 -0.8 -1.5
color=#0000ff>CYC +1.0 +2.0 -0.3 -0.9 -2.0
color=#0000ff>PPH +1.3 -0.7 -0.1 -1.7 -1.0
color=#0000ff>OIH -1.0 +3.2 +0.8 -2.5 -1.6
color=#0000ff>BBH -0.8 +2.6 -0.2 -0.7 -2.2
color=#0000ff>TLT +0.8 -0.2 -0.5 -0.2 +0.6
color=#0000ff>XAU +1.2 +1.6 +2.1 +0.3 -0.7

Table
Legend

^next^

For Active
Traders

There were Trap Door and volatility
band plays after the opening decline yesterday in all of the major indices
and SMHs, and obviously, in many correlated stocks. After the contra moves,
price resumed the direction of the open (90% – 60% rule), trading down to new
intraday lows into that 2:00 p.m. to 2:15 p.m. time slot. This set up 1,2,3
lower bottom trades after reversal of the 10:15 a.m. lows in the
(
SPY |
Quote |
Chart |
News |
PowerRating),

(
DIA |
Quote |
Chart |
News |
PowerRating) and QQQ. These reversal entries carried up into the close.

The afternoon 1,2,3 lower bottom in the SPX
(SPY/E-mini), for example, was from the 2.0 volatility band zone. The SPX
hit a
1089.49 low vs. the 2.0 volatility band of 1090.87, then reversed to
1096.11,
closing at 1095.42. I guess you could say big intraday opportunities/small
profit.

The QQQ synthetic straddle was adjusted to a
long
bias as extra QQQs were bought as they traded down to the 34.03 low
yesterday
and then closing at 34.31. The SPX straddle remains 100% delta neutral, with
significant gains built in, just as with the QQQs, which makes the bias
entry
easy to do.

Today’s
Action

Retracements to rising longer-term moving
averages are zones that generate excellent trades, but fear takes hold, and
traders’ emotions dominate good trade logic. A lot of people talk about
buying
these retracements, but when push comes to shove they don’t because they
submit
to the emotional ghost that dominates crowd psychology and the news. If you
could get a long setup in, say, the QQQs like yesterday at the rising
200-day
EMA zone along with the other confluence, and then have a stop less than 2%
below entry for a position trade, then I have to take it if I am an honest
trader, which at least 85% are not, and therefore fall under the standard
bell
curve with the herd. Option strategies around these levels are also
excellent
setups because price won’t stay around the zone long and will make a good
move.
It’s just another trade in a series of many over the years, so don’t waste
your
time being caught up in the news/emotion. Take the trades when they are
there,
especially when the stops are tight to a longer-term retracement entry
level. If
you get stopped out, then just move to the next setup.

Looking to individual stocks, you would also scan
for those stocks that have shown the best relative strength during this current
retracement. I did this by simply using the TradingMarkets
stock scanner and screen for stocks that are greater than their 20-, 50-
and 200-day moving averages with an up DMI. (You put whatever price and volume
filters you prefer to trade.)

Today, using 15 as the price filter and
volume of
400,000 shares, there were 141 stocks on the list, so that is my starting
point.
I don’t want ADX as a filter in this screen because stocks that are on this
list
are obviously trending, but a high ADX filter eliminates many of the
consolidating narrow-range patterns that are often the best trade setups.
You do
the same screen for short ideas and get ready to short any retracements to
declining key levels. If you have extra time, do the same screen with price
less
than the 20 MA, but greater than the 50 and 200. Once you get your list, the
first charts to check are those stocks that closed in the top 25% of the
range
(filter is on the scanner) or bottom 25% if you are looking for
shorts.

Have a good trading day,

Kevin Haggerty