Here’s Where The Volatility Will Be

Market Action And
What It Means

The major indices hit an air pocket yesterday afternoon as the
rubber band snapped after the 2:00 p.m. ET intraday highs, declining into the
close. The Dow
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reversed 120 points before closing at 8896. The SPX
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hit the 975 zone, which is the one-year extended volatility band
level mentioned yesterday, and that was it for the session. After trading
between 975 and 979 from 11:30 a.m. to 2:45 p.m., it broke below 975, trading
down into a 967 close. This afternoon reversal still left the SPX and Dow
positive, with both up about +0.4%. The Nasdaq
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was -0.3%, while
the NDX 100
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was -1.1%. NYSE volume was 1.64 billion, a volume
ratio of 68, and breadth +930, which points out the 45-minute program-initiated
decline from 2:45 to 3:30 p.m. The volume ratio is still overbought and the VIX
has failed to make new lows, as the major indices have made new rally highs.
Buyer beware.

Most all of the major sectors finished positive yesterday, led
by the cyclicals
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+1.6%, as the recovery perception stocks have
done better over the past five days, and the CRB and US dollar were both up
yesterday, along with oil, while the bonds declined, all of which is in
sequence. I seem to remember the media and Greenspan were on the deflation and
slow growth theme just a few weeks ago. It’s not the economy that changes daily,
just the media hype. Other major sectors all advanced yesterday, and they were
the biotechs
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+1.3%, the broker/dealers +1.0%, the banks +0.8%,
and retail +0.8%.

Technology, led by the semiconductors, sold off some yesterday,
as evidenced by the -2.5% decline in the
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, and that is no surprise
after the current move and window dressing last week. It didn’t matter much
which ones you traded yesterday, but there were excellent short setups in
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, which had that +24% move in four days,
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and
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just to name a few. They all declined from 2.5% – 3.0% from entry.

The Status Of The
Current Rally

The current rally off the October bottom is going on its eighth
month as the commentators still debate bull or bear market and over- or
undervaluation. The SPX has advanced 27% low-to-high from the October 769 low,
while the NDX 100, as evidenced by the
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proxy, has made a +54% run
since the October 12 19.76 low. Many technology and Internet stocks have
doubled and tripled and are above all rising longer-term moving averages. Let
the debaters continue, and you just play the moves when the market gets extended
in either direction.

During the decline from the 1553 all-time high for the SPX,
there have been six retracements back to a declining exponential moving average,
and this is the seventh one, but this time the SPX has closed above the 12-month
moving average, which has turned under and started to rise for the first time
since the 1553 high, which is obviously a positive.

If the SPX and other major indices correct in this zone, or a
bit higher, it should be no surprise. The previous major retracements in the SPX
decline were +22%, +25%, +24% to the 965 high, +24% to the 954 rally high, and
the current rally from the 789 March 12 low, which is now +24%. That is why I
have said there is no edge here for chasing price and taking your first initial
position. If you haven’t gotten into the market yet, then wait for a decent
retracement and it doesn’t matter whether it’s even from a higher level.

Today’s Plan Of Attack And Focus

For today, traders should be ready to take advantage of any
downside continuation in the semiconductors and biotechs because that’s where
the volatility will be. The SMH,
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and
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all closed on
wide-range reversal bars with closes in the bottom of the range. After yesterday
afternoon’s decline, there could be an early reflex up and then you find out
whether some more selling shows up, or whether it’s just the hedge funds and
traders selling yesterday after the month-end mark-up. It is always better to
take the second entry in continuation trades after sharp declines like
yesterday’s, or advances. Let the retail chase price. But you take what the
market gives you, and we can’t know that in advance until the Generals show up.
Traders react to situations and don’t dictate them.

Have a good trading day.

Kevin Haggerty


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