Emotions Run Both Ways
After
the last week’s reversal bar week, where,
for example, the SPX
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the previous week’s low, in addition to below the previous two weeks’ closes,
there was a big downside continuation yesterday. The end to this up move was at
the resistance levels previously mentioned in the text in conjunction with a 25%
gain in just 22 days, which was, as I said, unsustainable. Acceleration picked
up below the 930 head-and-shoulders neckline which was also a daily chart 1,2,3
lower top. The index took another dive below last week’s low of 903.33.
After the big down
opening yesterday, the SPX churned around the 2.0 volatility band level of 888
before taking the inevitable program knife down on the 3:05 p.m. bar. As you
recall, yesterday’s gap down opening was preceded by a 2:35 p.m. bar dive on
Friday. The intraday low for the SPX yesterday was 878, and the 3.0 volatility
band 874. The .50 retracement to the 776 low is 870. There is also a longer-term
standard deviation band at 875, and then another down at 844, which is in
confluence with the 848 .618 retracement to the 776 July 24 low. These are my
near-term awareness levels for a reflex.
New lows, or a
retracement to the July low, is the question, and what will be your catalyst
under each scenario? Have you prepared in advance? What are the Fib extension
levels? If new lows, then is there a recognizable pattern, such as three drives
to a bottom (hint) where the previous two drives were 1.618 extension legs? Do
the work. You will get those levels.
If you are waiting for a
positive earnings outlook, don’t hold your breath. You got no warnings in March
of 2000 at the top when earnings were great and projected higher, and as this
second-longest and severe bear market in history bottoms, you won’t have
confirmation of an improved earnings outlook before stocks make substantial
gains.
Yesterday’s continuation
short entries were aborted because of the big gap down opening, and as usual,
and I see as I do this at 7:30 a.m. the Dow futures are +50, S&Ps +5, and
Nasdaq futures +3, so we might not get initial Trap Doors on follow through gap
downs. It’s only 7:30 ET, and you know that can certainly change by the opening
bell.Â
The Dow
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PowerRating)
closed yesterday 8307, right on the 8304 .50 retracement to the July low. It has
declined 445 points from the Friday 2:35 p.m. knife down. The .618 retracement
to the 7533 low is 8122. As the Dow moved up in its rising wedge on your daily
charts with higher prices on declining volume which was highlighted in previous
texts as a major red flag, especially going into the resistance zone, most
people ignored it as emotions took over in spite of the 25% up in 22 days. The
same thing is and will happen as the indices decline, which keeps traders in
business.
The volatility in the
semis and biotechs is great, along with the good daily range, and this continues
to provide excellent opportunity. The
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vs. the 75.94 .618 retracement to the 65.40 July 11 low, so we will keep a heads
up for intraday reflexes entering this zone. The
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longer-term volatility bands, and the news couldn’t be more negative, so I would
expect some major funds to make a play in the semis between 19.50 – 22 in the
SMHs.
The strategy would be to
take the intraday setups in the SMHs and only keep in position if profitable at
day’s end, that way the gap openings against you don’t cause as much pain. Don’t
do this with individual stocks. Intel is back to the low end of its 1997-98
trading range, closing yesterday at 15.89, and needless to say, I suggest you be
in this stock every day because it will give you many scalps and then some
decent moves as the analysts duel it out trying to call the INTC bottom.Â
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