Helmets On Again
Yesterday’s
afternoon reversal party ended when
I turned the idiot box on this morning at 5:15 a.m. to check the futures. The
S&Ps were down about 20 points, the Dow -180. The biggest detriment to the
market is now clearly the Washington politicians. Especially laughable is stock
options. The same politicians screaming about them now are the ones that made
corporations switch to them in the first place because in the 1990 bear market,
the cry was that CEOs were being paid too much cash and their stocks were
underperforming, so let’s make the compensation commensurate with stock
performance. You’ve seen the result. They will overregulate, as always, and the
markets will make lower lows because of it. This bear market didn’t start
because of corporate fraud, which will always be there to some degree, but they
are making it the cause célèbre for obvious political reasons. WorldCom was
trading at 86 cents when fraud charges were announced.
The waterfall yesterday
ended at the 3.0 volatility band, as per your daily volatility
band guide on the site, before the magical reversal that started from a
program time slot, the 2:35 p.m. bar. We’ve been there and done that many times,
but it is usually from the 2.0 volatility band. Extreme panics to the 3.0 band
are rare occurrences. The 3.0 volatility band for the DJX was 82.72, and the
intraday low was 82.55. The reversal rally carried up to 86.44, as the Dow made
up 400 of the early -440 points down. You have the volatility bands each
morning, and it is easy to calculate the 3.0 band from the info on the
TradingMarkets site.
There was a strong
sequence preceding yesterday’s reversal. Once the SPX had broken the September
low of 945 on your daily charts, you had, or should have, prepared your Fib
extension levels for future use. This was done for the leg up from 945 – 1177.
You knew these levels in advance and were prepared for any reversal patterns.
They are: 1.27 is 882, 1.414 is 849, and the 1.618 level is 802.
The intraday low for the
SPX yesterday was 876.46, and the 3.0 volatility band was 876. You knew from
yesterday’s commentary that 890 was the low end of the longer-term percentage
standard deviation 3.0 band. This percentage price deviation will often coincide
with the 2.0 volatility band on my daily service, which is calculated using
average implied volatility and the previous closing price. By referring to both,
I am confusing some of you, so going forward, just focus on the daily numbers
from my service. Net net, there
was a confluence of three yesterday, with the 890, 882 and 876 levels. The
initial 1,2,3 taken at the 890 zone failed, but with your stop just below the
signal bar low, it was an inexpensive probe at a very key level.
The semis once again had
a strong positive divergence, and we have the much-awaited, as always, Intel
after the close. Also, some of the biotechs had some interesting changes in
direction yesterday on decent volume, so it is worth the focus if we get some
short covering.
Unless there is a change
in the early red, it looks like a replay of yesterday, so know your volatility
bands for today. Yesterday’s reversal was clearly in the key index stocks, so
maybe the Gang will show up again today to stem the inevitable fact that the
major indices want to trade lower. Make sure you also take the continuation and
retracement short entries. You saw what happened at the 20-period EMA yesterday
on your five-minute chart for both the SPX and DJX.
Have a good trading day,
and once again, keep your helmet on.
Five-minute chart of
Monday’s SPX with 8-, 20-,
60- and 260-period
EMAs
Five-minute chart of
Monday’s NYSE TICKS