Dead Zone Walking
Yesterday was another bell curve day for the major indices
on NYSE volume of 1.3 billion, the third
day in succession with below-average volume. The volume ratio was 39 and breadth
-353. Techs led the downside, but have been extremely strong during the rally
with real buyers and much short covering because of the extended length of this
rally. It’s never a great tape when household products, beverages and grocers
lead the plus side as they did yesterday. The RLX declined 2.6%, following up a
-2.1% day, and the SOX was off 2.3%.
The SOX still acts well
after a retracement of almost 50% following the 57% rally in the SMHs from 17.32
to 27.16. There was a good trading opportunity in the zone I said that I had an
interest in, as the SMHs retraced to 22.90 vs. the 50% retracement of 22.25.
This current move hit 26.45 on Monday. It closed at 25.05 yesterday, while the
89-day EMA is in play again at 25.18. The extreme bulls will say 36 for the SMHs
on a breakout of the current inverse head-and-shoulders pattern on the daily
chart after it eats through resistance from 27 to 30. I don’t think it can do
that unless the major indices sell off some.
In the
Nov. 5 commentary, I mentioned the two threads that were the least expected
scenarios, and therefore I would give them the most respect. The first was that
the pullback might be less than expected, and second, the market could make new
lows below 769. The market never makes it easy for you to enter. As the length
of this rally extends, especially into this seasonal period, and also with the
Republican election sweep, the 70% probability of 769 as a low has certainly
increased. It also tells me many money managers didn’t put enough money into the
1,2,3 lower bottom reversal above 776 and are frustrated for missing a good
percentage move into the last quarter after such a dismal year, and coming on
the heels of the third year of negative returns for the major indices. Those of
us that made the high-probability zone decision at the lowest common denominator
don’t have that kind of a decision to make, as we can wait until there is an
edge worth a position trade either way.
On a daytrading note, I
was happy to receive so many e-mails yesterday from those of you who have
purchased the
1,2,3 module and caught either one or both of the SPX 1,2,3 setups
yesterday. There was a 1,2,3 higher bottom in the morning, and then the 1,2,3
higher top in the afternoon with entry below 904.79, which carried down to
893.19 before clicking up in the last 15 minutes to close at 896.54. If you
caught both the morning and afternoon trends, I congratulate you. It didn’t
matter whether you traded futures or SPYs and even some of the big cap market
stocks that track the major indices.
The market is neither
short-term overbought or oversold, so there really is not a great edge here, but
there is a building uneasiness about not enough pullback, especially as the
Republicans start to make some progress. But, daytraders, that means that there
will be some excellent setups as the major indices move out of this dead zone of
the past 22 days between 926 and 872.
Have a good trading day.
Five-minute chart of
Tuesday’s SPX with 8-, 20-,
60- and 260-period
EMAs
Five-minute chart of
Tuesday’s NYSE TICKS