By The Numbers

January 29, 2001
Kevin Haggerty

On
Friday, the S&P 500Â
(
SPX |
Quote |
Chart |
News |
PowerRating) took a page
out of my coming Naples
seminar as it gave you some clearly defined patterns. First, you had a Gap
Down opening and a Trap Door pattern that set up on the 9:45 a.m. bar. Sound
familiar? It should, because the professionals had fleeced the retail selling at
a nice discount and took the stocks down to a level where the buyers came in.
The contra rally reversed the opening, trading up to 1355.59. It was only a six
bar move by the index, but there were some excellent contra moves by individual
stocks, especially in the Nasdaq 100
(
NDX |
Quote |
Chart |
News |
PowerRating).

After reversing the open to
the downside, which should have taken you out of your longs if you were in the
SPYs or futures, and probably most individual stocks, it declined to the
intraday low of 1343 in six bars. The 1.618 Fib extension of the Trap Door leg
up from 1348.37 to 1355.59 was 1343.91. Once you got to that alert zone, you
were watching for any reversal patterns.Â

The very next bar was a
wide-range bar that reversed two closes, one high, while closing at the high of
the range. It was a Change
in Direction bar, confirming the swingpoint low. (See
your SPX five-minute chart.) At this point, a basic 1,2,3 entry setup putting
you back in above 1345.18, and then a second larger 1,2,3 entry above 1347.93.

The rally took the SPX up
to the intraday high of 1357.48 at 2:50 pm. It was a steady uptrend from the
10:45 a.m. bar, without any of the futures manipulation by the program gang. It
was painting by the numbers, but you have to know the numbers and be able to
pull the trigger when you see them, while blocking all else around you — which
is not always easy to do.

The NDX, which is always
more exciting, had a -2.2% Gap Down Opening, then on the fourth bar the Trap
Door setup, and you got entry on the next bar. In addition to Trap Doors in the
index and many individual stocks, there were many excellent Volatility
Band trades. For example,
(
VTSS |
Quote |
Chart |
News |
PowerRating) is in the same Semi sector as
(
PMCS |
Quote |
Chart |
News |
PowerRating) which blew up Thursday after hours. VTSS
had an outstanding 2.0 Volatility Band trade. The previous close was 69.68. It
opened at 64.25, -7.8%, and hit a 63 low on the opening bar. The 2.0 Volatility
Band was 63.52, which is -8.8% based on average Implied Volatility of 84.37.Â

The market makers cleaned
up as the stock rallied +16.3% to 73.25 by 10:00 a.m. Three days earlier, it had
broken out of a trading range and hit 77.25. When it got to the 63 level, you
had convergence with the 20-day EMA of 62.95 and it recrossed the 200-day EMA of
65.18 on the way back up. Obviously, those earlier buyers returned at a level.

(
CIEN |
Quote |
Chart |
News |
PowerRating) did the same thing, rallying
+11% from the 2.0 Volatility Band. Do your work. Capitalize on the crowd
psychology and the deficiencies of the OTC market-making process. Frame the NDX
and SPX, along with five to 10 of the momentum stocks that are in phase, and you
won’t be disappointed.

(March
Futures)

Fair Value

Buy

Sell

8.50

Â 9.80Â

Â 7.20Â

Pattern
Setups

Have a good trading day.

By The Numbers

BUY THE FEAR, SELL THE GREED

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