Here’s The Level Where We Get Extended

March 14, 2003
Kevin Haggerty

Yesterday was a moonshot after the initial Trap Door.
The SPX
(
$SPX.X |
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PowerRating) ran to 818.81 on
the 9:40 a.m. ET bar vs. the previous 804.19 close. This was the signal bar with
entry below the 1.0 volatility band of 817.64, which was also the low of the
signal bar. If you were trading
(
SPY |
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below 82.22, and next below the 9:30 a.m. bar low of 82.10, which was an opening
reversal. The SPY traded down to the 20-period EMA at 81.55, then churned a bit
around the 20 EMA, made a small double bottom, then took off on the moonshot,
running to an 83.91 high, closing there +3.5% for the day. The SPX closed at
831.90.

The retracement to the 20
EMA on your five-minute chart was also a Gap Pullback retracement of .618 to
Wednesday’s closing high. From that entry, it was just a question of how you
managed the trade because the SPY and futures traded above the 20 EMA for the
entire day. From the extended -2.0 standard deviation band at the 789 low on
Wednesday, the SPX has rallied three standard deviation bands in one-and-a-half
days to close just above the 1.0 standard deviation band of 830 on this 20-day
30-minute chart at 831.90.

All five stocks in the
cap-weighted basket were stronger than the SPX. This made the decision on the
gap pullback trade to the 20 EMA easy to make. The highest probability, as you
learned in the

First Hour module is that price will most often resume the direction of the
strong opening after the contra move. Yesterday that strong opening to the
upside was an easy read utilizing the five-stock basket and strength of volume,
which indicated more than the normal retail opening emotion.

Yesterday NYSE volume was
obviously big on a relative basis at 1.7 billion, but more important was the
volume ratio at 83, with 1.4 billion up, and breadth +1442. This outburst from
the -2.0 standard deviation band mentioned before carried three bands to just
over the 20-day 1.0 standard deviation band of 830 and closed above yesterday’s
1.0 volatility band for the first time since Feb. 14 when the SPX had closed at
834.89 vs. that day’s 1.0 volatility band of 830.56. The carry through after
that close was to the 852.28 high on Feb. 21. The volume ratio on the 14th was
78, while the SPX gained 18 points. The next day, on the follow-through day, the
SPX was +16 points on a volume ratio of 87. From there, the major indices
continued the decline.

Yesterday’s
(
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high was 25.62, closing beyond yesterday’s 2.0 volatility band of 25.25, and
also close to bumping up against its downward channel at the 26 – 26.25 level.
See the

March 7 commentary for the chart. This rally is from the .618 retracement
level to the Oct. 30 low and from the bottom of the channel. The volume in both
the QQQs and SPYs was big on a gap day, and as you should know, bear market
rallies are very sharp and catch most of the people.

The SPX gets short-term
extended into the 840 – 845 level, and more bond-to-stock activity can get it
there in a hurry, with an air pocket below it when it stops. The early S&P
futures are already trading at about 840, so we have Trap Doors in the waiting.

Have a good trading day
and have a wonderful weekend.

Five-minute chart of
Thursday’s SPX with 8-, 20-,
60- and 260-period
EMAs

Five-minute chart of
Thursday’s NYSE TICKS

Here’s The Level Where We Get Extended

BUY THE FEAR, SELL THE GREED

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