If You Understand The Strategy, You Have The Confidence
What Monday’s Action Tells You
Monday was another day of rising prices for the
major indices on declining volume. This four-day bounce was off the 50-day EMA
for the Dow, which was 9036 on the recross to yesterday’s intraday high of 9252
has had higher lows, highs, and closes all above the midpoint. The Dow is now
above all of its rising EMAs, which are the 8 EMA at 9162; 20-day EMA, 9153;
50-day EMA, 9053; with the 200-day EMA down at 8756. This four-day bounce has
retraced to the .618 zone of 9222 between 9361 and last Wednesday’s low of 8997.
The SPX has lagged the Dow because technology was
weaker than the basic material and industrial stocks, and has rallied three days
off the 960.84 low with higher lows, highs and closes. The SPX closed at 980.59
yesterday, +0.3% as was the Dow, closing at 9217. The SPX 20-day EMA is 982.72
and the 50-day EMA just below at 976.37. The QQQs finished at 30.40, +1.1%, with
the Nasdaq at 1661, also +1.1%.
NYSE volume was only a touch over 1 billion
shares and has declined each day during this current reflex. Volume ratio
was 64 and breadth +639. In
the sectors, it was SMHs, +2%; BBHs +1.1%, XLB (basic industry SPDRs) +0.7%; XLK
(technology SPDRs) +0.5%, while the XLF (financial SPDR) was -0.2%. The OIH also
finished green at +0.6%.
Along with the declining NYSE volume the QQQs
traded 23% below its average volume and the SPY volume was 20% below average.
However that wasn’t the case with the SMHs, +2% on the day and traded +46% above
its average volume to 9.2 million from 6.3 million. This increase in volume
comes right at the 50-day EMA, which is 30.49. Yesterday’s intraday low on the
first full bar was 30.44, then the SMH traded up to an intraday high of 31.19,
closing at 31.10. The SMH has declined 9.1% in six days to the 50-day EMA, so
when there is an increase in volume at an inflection point like that, pay
attention, and it becomes front and center on your focus list. You don’t know
whether it was short covering or just hedging against some existing
semiconductor shorts, or maybe even some hedge funds taking a shot at the moving
average on the short-term oversold condition. The 5-day RSI had dropped to 21.89
on Friday as the SMHs closed at 30.50 after a 30.18 intraday low.
For Active Traders
In spite of the light NYSE volume yesterday,
there was enough intraday travel range to provide opportunities. The SPX ran up
early from Friday’s 977.59 close to a 985.46 intraday high on the 10:30 AM bar.
This run was just below the .618 retracement to the July 31, 1004.59 high, which
is 987.09. The SPX then reversed to the downside, recrossing the 20-day EMA at
982.94, trading down to a 974.21 intraday low by 11:40 AM. This provided the
second opportunity for E-mini/SPY traders.
From
yesterday’s commentary you know that the 6- offset 4 weekly moving average
of the low was 974.38 and that the 50-day EMA was 976.20. Also the 240-EMA at
the time was just above 976. Net-net, it was a key awareness zone which you were
ready for. It was an RST long setup above the 11:45 AM bar high of 975.91,and
certainly a trade on a recross of the 50-day EMA and the 240-EMA on your
5-minute chart. By understanding the RST strategy in addition to the confluence
at the 974-976 zone, you had the confidence to get involved. It wasn’t much of a
run – only trading up to 981 – but it was the high probability day trade to take
at the lowest common denominator because of the tight stop levels. I have
included a chart of the SPX today, which frames the levels between 1015.41 to
768.63 and 788.90. The left column is the retracement level for 768.63, and the
right column the retracement to 788.90. Also, I look at them together as a
common awareness zone. Remember, this tool comes into play in both directions,
not just on a retracement. The levels don’t change until the 1015.41 top is
taken out – just the moving averages do. You’ll also see that I include the
200-day SMA in addition to the 200-day EMA.
Because of the SMH volume increase and because it
is at an inflection point, it is a primary focus for today in addition to
scrolling the individual semi stocks. The SPX is also front and center because
it is bracketing both the 20- and 50-day EMAs. The BBHs are also interesting to
me, trading above 128.12 from the long side. They closed at 127.74. The 50-day
EMA is just below at 126.22, which is the downside pivot.
Have a good trading day,
Kevin Haggerty
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