Beware: Thin Ice

August 20, 2002
Kevin Haggerty

The
market was in a continuation mode yesterday, as
the major indices came out the top of their trading ranges that I outlined in
yesterday’s text of “Know
Your Levels“. The 60-minute chart trading range on the Dow
(
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PowerRating) of 8700 – 8835 got taken out before 10:30 a.m. as the Dow traded
to an intraday high of 8994, closing at 8991, or +2.4%. The SPX
(
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PowerRating)
was also +2.4%, closing at 950.72.

The only real defined
early entry in the indices was a breakout above the previous day’s closing
range, which also put the indices above all of their EMAs on the five-minute
chart. There really wasn’t a good defined long entry after that until a flag
entry in the Dow above 8925 and the same for the SPX above 943. After a run to
just below the 945 resistance, that flag was the beginning of a potential 1,2,3
short pattern, but it didn’t happen as the 2 point was not broken to the
downside.

There were also two short
reversal probe trades prior to that, first, at the 1.27 Fib extension and next
at the 1.618. Both were stopped out with either a scratch or small loss. These
were good probability trades, as the indices traded up into resistance and based
on the current +22.5% move in the SPX low-to-high in just 19 days. If you’re
long and right for some part of that +22.5% move, then any defined short entry
into current inflection points is simply good trading.Â

Overall, NYSE volume was
1.28 billion, 10% below average, volume ratio excellent at 85, and breadth
strong at +1114. The Nasdaq volume was lighter to its average relative to the
NYSE, closing at 1395, +2.5% on the day.

You know your levels
mentioned yesterday, so you are prepared for intraday setups either way, but
certainly from the short side if the Generals don’t charge in here to run the
shorts. A stretch on the upside for the Dow would be to 9200 and the SPX to 975
vs. the current 8900 – 9100 and 935 – 950 levels. There will continue to be much
noise with the earnings reports, telecom merger news, and corporate police work
by the lightweight politicians, so that means price volatility.Â

Just to clear the record,
this is not summer doldrums. The Generals and hedge funds are all over this
market trying to catch a move and salvage the year. Many of them bought the
extreme 3.0 standard deviation level below 825 down to 776, and many of these
hedge funds and puppy portfolio managers don’t want to give back their gains so
easily into a weak late August through September/October period if we even get
that downturn after the severe July air pocket down. The Generals’ trading desks
are fully staffed.

For today, we start out
early red for the futures, but we know how little that means in the game. FYI:
There were numerous buy programs all of yesterday as I am told from the NYSE
floor, and that was obvious watching the NYSE ticks all day.

I have no interest in any
additional long position entries at these levels. Been there, done that at much
lower levels and have protected the downside, but can participate in any
continuation, ex the cost of my strategy. With such a big spread between profit
and cost of protection, I could care less what the Generals do hereÂ
because there is so much room to trade a position with locked-in profits. My
guess is that there will be at least one good defined long and short entry today
because of where the indices are and how much more noise there is coming into
this cycle date, not to mention another big moon day coming up.Â

Have a good trading day.

Five-minute chart of
Monday’s SPX with 8-, 20-,
60- and 260-period
EMAs

Five-minute chart of
Monday’s NYSE TICKS

Beware: Thin Ice

BUY THE FEAR, SELL THE GREED

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