Fade The Overreactions

August 8, 2000
Kevin Haggerty

Activity
dropped off considerably in
front of today’s productivity numbers and also Cisco’s
(
CSCO |
Quote |
Chart |
News |
PowerRating) earnings, as
total New York Stock Exchange volume of 855 million was the lowest since the 829
million on July 12, which preceded four straight up days. Two weeks ago, it
averaged 1.04 billion, and last week 980 million. This is historically the
lowest-volume month and that also means a significant decrease in liquidity —
which is great for short-term traders with the proper risk management and size
of positions.Â

In this period of reduced
liquidity, you can get some great overreactions that can be faded on an intraday
basis as emotional buyers or sellers react to news and the professionals,
specifically the market makers and specialists, give those investors what they
deserve — extreme prices.Â

Despite the drop off in
volume, there was excellent price movement and that’s what matters to the
short-term trader. The biotechs, semis, computer hardware and internets were all
up over 3.5%, with the internets leading +4.3%. Needless to say, there’s
something to do every day. If it doesn’t set up in the daily chart, you can pick
a setup off when you scroll your five-minute charts all day long. Of course the
ideal setup will occur as both the daily and five-minute charts converge,
and give you entry for a short-term trade.

The financials took the day
off yesterday, and pushed. Aside from reduced volume, the breadth remained
positive at 574 advancers over decliners, and the volume ratio was 67 for a
four-day moving average of 58. Coincident with the lower volume, institutional
blocks dropped off to 17,809. The overall market breadth has remained steady,
aside from the major gyrations of the major averages, as the percentage of New
York Stock Exchange stocks above their 200-day moving averages is now at
60%.Â

Yesterday was a solid
uptrending day which started with an excellent setup in the S&P 500 cash
index, with a five-bar pullback to the 20-period EMA, closed at the top of the
range above the 20-period EMA, reversed the prior close — and you entered above
that high which also took it above the previous day’s close. The setup bar was
the 9:55 a.m. ET on your five-minute charts. The first intraday consolidation
breakout to new highs was on the 11:05 a.m. ET bar out of an eight-bar Slim Jim.

Another good opportunity
came on a seven-bar pullback to the 60-period EMA, just before 3:00 p.m., which
took the S&P 500 to new intraday highs in the last hour. That’s a familiar
sound.

There were corresponding
setups in key stocks such as EMC
(
EMC |
Quote |
Chart |
News |
PowerRating), which closed +4 1/4 points at 89
3/4, with a high of 90. EMC broke out of a consolidation at 87 and again at 88
1/2. That kind of a setup corresponding to the S&P 500 is picked off
scrolling the five-minute charts.

We haven’t had a down day
in either the Dow or the S&P 500 for the past six trading days, so with the
S&Ps trading down 6 points this morning at 7:30 a.m. ET, and here at 8 a.m.
where the screen is mixed both green and red, but mostly red, it’s sets up some
air pockets if the news this morning is negative past 8.30 a.m. That would set
up the fade-the-open strategy.
Also, the VIX / Bollinger
20-period two standard deviation bands have narrowed to their tightest level in
a long time. The VIX closed yesterday at 21.54, the upper band at 23.81 and the
lower band at 21.19. This tight pattern won’t last for long so be ready to
react.

face=”arial, helvetica”>(September Futures)
Fair Value	size=2>Buy	size=2>Sell
8.95	10.05	7.85

Pattern
Setups

Have a good trading day.

Fade The Overreactions

BUY THE FEAR, SELL THE GREED

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