Contracted volatility precedes Slim Jim breakouts
Kevin Haggerty is
the former head of trading for Fidelity Capital Markets. His column is
intended for more advanced traders. Kevin has trained thousands of traders
over the past decade. If you would like to be trained by him,
ext. 1.
After last week’s big
price move, the market was obviously very short-term overbought, with
the 4 MA of the volume ratio on Friday at 70 and the 4 MA of breadth at +1295.
The SPX treaded water the past two days at the
1291 level, closing at 1289.69, down less than a point from Monday’s 1290.15
close. The Dow was flat yesterday at 11,012, with the QQQQ +0.07% to 42.88. The
market action was in the energy sector once again with the OIH +2.0% and it is
now +10.3% in the past six days, with the CLH6 (futures) -0.4% to 64.10. The XLE
was +1.1%. On the interest rate side, the TLTs were soft, closing on intraday
low at 91.04, -0.8%, with the US dollar index essentially flat at 89.31.On the
other side of the TLT was a +1.7% advance in the GSCI (precious metals index-$GPX).Â
The $TYX (long term T-bond yield) closed at 46.07, +0.9%, and is right back to
its 200-day EMA at 46.13, so this is a test level, as is the US dollar 200-day
EMA at 88.82.
Most all of the daily charts in the strongest
trading sectors are all extended so daytraders get no help there until some
retracement action. That narrows the opportunities and you must be nimble in
your intraday long positions. Yesterday many of the energy plays were
closing-range Slim Jim breakouts that gave entry on the first few bars, so you
had to be prepared with a trading plan in order to capture the trade. The energy
stocks are in the “above the line” trading zone, so they are in play every day
for the daytraders but not so for the short term traders, where buying the
retracemenets is a better way to play the high volatility. Daytraders who
concentrate on contracted volatility give themselves an edge, especially when
trading in the strongest sectors. Contracted volatility precedes significant
moves.
The major indices are all short-term overbought
so daytraders should only play them from the long side on extended intraday
weakness–if at all–and take the short side setups as it is a time week
following a strong upside price move.
Have a good trading day,
Kevin Haggerty