Greenspan Down, Expiration Up

May 16, 2001
Kevin Haggerty

Yesterday
afternoon was another in a long list of fire
drills around Greenspan and the Fed. The market had built in and expected a 1/2
point rate cut as the current rally was extended, and then went sideways. You
got the expected rate cut yesterday and then the customary two-way spike, led by
the futures agendas and daytraders trying to push the envelope.

For example, the Nasdaq 100
(
NDX |
Quote |
Chart |
News |
PowerRating) went from an 1803 low on the 2:10 bar to 1853 on the 3:05 p.m. bar,
then a knife down to 1791 on the 3:50 p.m. bar, closing at at 1796.81. Great
game. After a 47% rally, any pop from the rate cut was an opportunity, in my
opinion, a chance to take some money off the table. But that was not the case as
it turned and went south ASAP.

As I have mentioned before,
most corrections are retracements and the surprise would be that the trading
range the NDX and SPX are still in works off the overbought condition and the
sideways move, and the range becomes a base for the next move up to the top of
the resistance area for both indexes.Â

The NDX is bounded by 1982
and 1743.45. The 50-day EMA is just below at 1736. The .38 retracement from 1982
to 1349 is 1741, the .50 is 1665, the .618 1591 and the .786 1485.

I have included a daily
chart of the S&P 500
(
SPX |
Quote |
Chart |
News |
PowerRating) below, and outlined the downside alert levels and
the upside resistance. The .618 retracement between 1383 and 1081 is 1268. The
down trendline is 1275 to 1280. The 200-day EMA is 1305 with the SMA up at 1338.
1306 is the .50 retracement between 1530 and 1081.Â

The downside numbers are
calculated using 1273, which is the top of the current range and the 1081 low.
The SPX closed at 1249.44. The first downside inflection point is below 1241.78
which is the 20-day EMA, and then again below the 1232 level which is the bottom
of the current range. These numbers serve as alerts to possible reversal
patterns, so you want to observe the activity closely as we approach these
zones.

Chart 1. Daily chart of S&P 500
(
SPX |
Quote |
Chart |
News |
PowerRating) with 10-,
20-, 50-
and 200-
day
EMAs.

If you are one of the many
daytraders who sat around waiting for the Fed all day and did nothing, you
missed some excellent opportunities yesterday. There were many trade-through
entries in our stocks and many others, most of which were before the Fed came on
at 2:15 p.m. ET.Â

The other part of this fire
drill is the option expiration Friday, which will add to the current volatility.
Today we start out pre-opening with big red in both the S&P futures and the
NDX futures. The S&Ps are down 10 and the NDX -43, so that certainly
precedes opportunity for Trap Doors and Volatility Band trades.Â

You know where the downside
boundaries for the trading ranges are for the indexes and also yesterday’s lows
on the various Travel Range stocks that closed in the bottom of their ranges, so
that’s a short-side starting point. Remember the drill sequence:

Takes out the low.

Reverses the low
(which means you might cover and/or go long.

Take the second entry
short if it’s given to you.

Stocks
Today

(June
Futures)

Fair Value

Buy

Sell

3.25

4.55Â

1.95Â

These are daily chart long
setups — you still have to keep them in your Trading Plan just like we did
yesterday, regardless of whether you start out big red.

Again, also if you don’t
want to do the work and you want to focus just on the market, stay with those
QQQs and SPYs. There will be lots of volatility during this option expiration
week.

Have a good trading day.

Chart 2. Five-minute chart of
yesterday’s S&P 500
(
SPX |
Quote |
Chart |
News |
PowerRating) with 8-,
20-, 60-
and 260-period EMAs.

Chart 3. Five-minute
chart of yesterday’s New York Stock Exchange ticks.

Gary
Kaltbaum on TradingMarketsWorld! Gary Kaltbaum will be appearing on the
Intermediate-Term Trading board Thursday, May 17 at 8:00 ET. Be sure to take
this opportunity to chat with and have your questions answered by a leading
intermediate-term trader. Click
here to take your trading to a new dimension.

Greenspan Down, Expiration Up

BUY THE FEAR, SELL THE GREED

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