How To Look For A Position Trade
What Friday’s Action Tells You
The SPX
(
$SPX.X |
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Chart |
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PowerRating) was gapped up +1.2% on
the open, as the
(
SPY |
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PowerRating), which had closed at 102.45 on Thursday, opened
Friday following the economic report at 103.67. The SPX finished the day at
1029.85, +0.9%, after all the euphoria in the morning. The intraday high was
1039.31 vs. the 1040.29 high on 9/19. It was a sharp three-day move from the
990.36 low on Tuesday, or +4.9%, to Friday’s intraday high, so after the gap up,
it was no surprise that the SPX went sideways, unable to take out the high, and
then selling off at 2:45 p.m. ET into the close. The Dow
(
$INDU |
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PowerRating) closed at
9572, also +0.2%, the Nasdaq
(
$COMPQ |
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PowerRating) 1881, +2.4%, the
(
QQQ |
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PowerRating)s 34.15,
+2.7%, and the
(
SMH |
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PowerRating)s 36.92, +4.4%, hitting an intraday high of 37.47, right
back to the confluence zone. The SMH gapped +3.0% on the opening, up to 36.40
from the previous close of 35.35. NYSE volume was 1.5 billion shares, volume
ratio 76 for a three-day moving average of 76, and breadth was +1055.
For the three days since the 990.36 SPX low on
Tuesday, the leaders of this reflex have been the SMHs, +7.1%, the RTH, +5.8%,
CYC, +4.6%, and the brokers, which is the XBD, +4.5%. This obviously is the
recovery perception being ratcheted up. Laggards for the three days were the
OIH, +3.6%, BKX, +3.0%, BBH, +2.3%, and the PPHs, +1.3%.
For Active Traders
After the gap opening on Friday, the SPX hit
1036.54 on the second bar vs. the 1.0 volatility band at 1035, the 2.0
volatility band at 1040 (both rounded off). The 9:35 a.m. doji bar low for the
SPY was 103.85, followed by a change-in-direction bar with a 103.79 low. Your
entry was below either low, but the contra move to the gap opening only carried
down to 103.43 before resuming the direction of the open. I have included the
SPX five-minute chart today, which also shows the excellent setup from the 2.0
volatility band of 1040, which is also the March rally high. This carried down
to a 1027.97 intraday low, closing at 1029.85. If you waited for the 1,2,3 lower
top setup, your worst-case entry was below 1036.57.
I have also included the SMH chart which depicts
the three different setups on Friday, but it was the third one that was the
winner, but most traders are reluctant to take it, which is incorrect when
trading futures or HOLDRs from extreme levels. With a stock it’s different
because there can be overt news like a deal or surprise company announcement on
earnings, etc., and extreme can get more extreme quickly.
The first setup was from the 36.80 2.0 volatility
band, which was the actual high before retracing to just 36.60. You might have
also taken the early trade below the 9:40 a.m. bar low, but you didn’t really
get a trade-through entry. The first trade was scratched at breakeven or a small
loss. The second setup was from the 37.16 high, which was also the 2.5
volatility band. You had a wide-range reversal-bar entry that only traded down
to 36.85 before reversing above the 37.16 high for another small trade failure.
The SMH then traded up to a 37.47 intraday high
and to its 3.0 volatility band, which was 37.52. At the same time, the SPX was
pushing its 1040 March rally high. At this point, most of you probably caved in
emotionally and froze like a deer in the headlights, reluctant to take the 3.0
volatility band trade. Therein lies the biggest hurdle traders face and most
can’t get over it, resulting in just being part of the herd all reacting the
same way. Instead, you should think of it as just another trade of the many you
will take over the course of the year.
I have also included a chart of the XLE, which is
the energy SPDR, to highlight one of the primary methods I prefer when deciding
on position trades. The XLE declined from a bull market high of 34.90 to a 19.38
low. After forming almost a 10-month base, the XLE broke the two-year down
trendline in May of this year, drawn through the 29.52 swing point high. Since
then, it has formed a symmetrical triangle, as volatility has narrowed over the
past four months. This follows a .618 retracement to the 29.52 swing point high,
which was also a .382 retracement to the 34.90 bull market high and a sequence
that gets my attention because the triangle and price are both above the rising
5-, 15- and 40-week EMAs.
Now I don’t know whether the XLE will continue up
or whether it breaks the triangle to the downside, but I don’t care. I look at
it and say if it breaks above the .382 retracement level, it could run to a
triangle-measured price objective of about 28.10, or to the .618 retracement
zone to the 34.90 high, which would be 29. Entry would be above 25 with a tight
stop below the 24.50 apex line drawn through the middle of the triangle. I look
at it and say a chance to make 3 or 4 points risking a half, or 6-8:1. If
stopped out the first time, I would take the re-entry because the numbers would
still read make 3 or 4 and risk 1. The XLE closed at 24.70, so it is obviously
on the trading plan watch list. If I like the odds, I take the trades, provided
my sequences line up, all of which I explain in my seminar materials.
Today’s Action
Starting out today, the futures are green at 8:00
a.m., with the S&Ps +20, the Dow futures +18, and the Nasdaq +7. The better
early setups would be an opening down filling some of Friday’s gap and at that
point we’ll find out quickly if the Generals have some more money to put to work
today chasing some of these tech stocks that, from a valuation standpoint, need
a major boom recovery (which we don’t have) to justify. For the SMHs, that would
be from 36.30 – 35.35. For the SPY, it is 103.59 – 102.56, but the intraday low
after the Friday afternoon decline was 103.08 which does fill 50% of the gap,
therefore early attention will be on the SPY/futures.
Have a good trading day,
Kevin Haggerty
