Are You Doing This Drill Every Day?

September 25, 2003
Kevin Haggerty

What Wednesday’s Action Tells You

The exits did get crowded yesterday in the semis
as the Generals sold stock, but it wasn’t a problem for the professionals that
had locked in a major portion of their gains using the January ’04 puts, or in
some cases, taking their money off the table and replacing all or some of their
position with longer-term calls. The SMHs had made a +124% move from 17.32 to
38.85 and some of the individual semis much more. The time to initiate
protective strategies is when implied volatility is low and into the extended
strength, not on obvious weakness (see the Sept. 22 commentary).

Our friends from the Middle East got it rolling
yesterday with the oil price flap. My guess is that they were long index puts
and long the drillers before making the announcement. The difference is no one
regulates them, so they have a free ticket to ride. We still haven’t heard the
result of the extremely abnormal option activity prior to 9/11, but I guess it’s
because they don’t want the information public for obvious reasons.

For Active Traders

Yesterday’s market action is significant from a
trading standpoint, in that the major indices have dropped to a lower inflection
zone. The SPY closed at 101.11 vs. the 50-day EMA at 100.91, which is 1004.91
for the SPX. The QQQs closed at 33.22 vs. its 32.63 50-day EMA. The SMHs closed
at 35.32 with the 50-day EMA at 34.77, which is the next primary zone of
confluence. 34.50 is the .236 retracement from 38.85, the rally high, to the
February primary low of 20.36. 34.50 is also the .50 retracement from 38.85 to
the last major swing point low of 30.18 on Aug. 8. Looking at this second leg
down from the 38.85 high, you see that AB = CD at 34.69. Net net, 35 – 34.50 is
a key zone for price action and setups. Some other sector examples are the BBHs
at 132.50 vs. 132.52 and the RTH that closed at 86.71 vs. 86.41. You can do the
drill with anything that you are trading, but there is lots of opportunity in
either direction from this zone.

Yesterday’s travel range was good for traders.
The SPY had a Flip Top short entry below 102.92 on the 9:55 a.m. ET bar (not
labeled on chart that I have included today). The first reversal setup was on
the 13th bar with the 102.58 low. This was the .618 retracement to the Sept. 22
102.04 low. Your entry was above 102.77, the signal bar high, which was
short-lived as it was stopped out when the SPY took out the 102.34 20-day EMA
and also the previous day’s low. If you didn’t double up and reverse below
102.58, then you had to take a short entry going through 102.34 with a tight
stop. In spite of all the news and emotion recently, the SPX continues to trade
with excellent symmetry, as I have outlined on the charts, starting with 102.04,
which is the .618 retracement between the Sept. 12, 101.35 low and 104.70, the
Sept. 12 high.

After the 103 top, the SPY made a .618
retracement to the 102.04 low at 102.36. It then rallied to the 102.96 – 103.40
gap at 103.29, which had .618 symmetry to the 104.70 high. It was also the 1.618
Fib extension of the BC leg. The SPY closed at 101.11, just above its 100.91
50-day EMA. The 1.618 Fib extension of the 102.04 – 103.29 leg is 101.26, so its
a price action zone, but the early futures are green, so it looks like early
reflex up. Stay tuned.

Have a good trading day,

Kevin Haggerty

Are You Doing This Drill Every Day?

BUY THE FEAR, SELL THE GREED

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