If You’re Not Trading This Pattern, You’re Leaving A Lot On The Table
What Wednesday’s Action Tells You
The rising price and negative divergence in
momentum on the daily charts produced an air pocket day yesterday, as the major
indices and HOLDRs opened down and after a mini-Trap Door contra move, resumed
the direction of the down open for the remainder of the session. NYSE volume
expanded to 1.6 billion shares, as the SPX
(
$SPX.X |
Quote |
Chart |
News |
PowerRating) ended -1.5%, closing
at 1030.36. The volume ratio was just 23 and breadth -1238. The Dow
(
$INDU |
Quote |
Chart |
News |
PowerRating) at 9598 was also -1.5%, while the Nasdaq
(
$COMPQ |
Quote |
Chart |
News |
PowerRating) at 1898
was -2.2%, the
(
QQQ |
Quote |
Chart |
News |
PowerRating)s at 34.15 was -1.9%.
The
(
SMH |
Quote |
Chart |
News |
PowerRating)s ended -2.3%, as the
(
TXN |
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News |
PowerRating) news
obviously didn’t create the rush into the other semis. The SMH volume was only
6.9 million shares vs. its 11.6-million-share average. All of the other major
sectors were red, led by the
(
BBH |
Quote |
Chart |
News |
PowerRating) -3.9%,
(
PPH |
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PowerRating) -3.4% and the
(
OIH |
Quote |
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PowerRating)
and XBD, each -2.2%. The RTH was -1.3%, the CYC -1.6%, and BKX -0.9%.
For Active Traders
Yesterday’s market action saw the
(
SPY |
Quote |
Chart |
News |
PowerRating), QQQ
and
(
DIA |
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Chart |
News |
PowerRating) all close just below their 20-day EMAs, but not yet in a
short-term oversold condition that would dictate a quick position trade. I have
included two charts of the RTH today which give you an example of a defined
1,2,3 higher top pattern, triggered by a reversal of the 91.30 high, which was
swing point #1. After breaking the March rally trendline, it formed swing point
#2 at 84.03. Then swing point #3, a higher high at 93.50, formed as there was
also a negative divergence in the 20-period momentum indicator. The RST entry
was below 92.34, the low of the 93.50 high bar where your initial stop was
placed above 93.50, or less than 1.4%. The SPX, DIA and QQQs all had the same
pattern.
When you see the combination of a 1,2,3 higher
top and RST along with an obvious negative divergence in momentum, it
immediately puts you in a retracement mode, as opposed to being a breakout
chaser. The shorter-term RTH daily chart clarifies the pattern, and I have
labeled price on each RST swing point to point out the symmetry. By not learning
how to trade RSTs in all time frames, I can’t tell you what you’re leaving on
the table.
The Trap Door contra attempt was only from the
103.87 entry minimum to 104.19 before resuming the down direction of the
opening. Making a new intraday low below 103.76, the signal bar low, had the SPY
down to a 103.19 intraday low, closing at 103.55. After breaking the 1034.46
20-day EMA, the SPX traded down to a 1028.39 low, closing at 1030.36.
For Today
If the early futures hold, which are big red down
as I do this at 8:00 a.m. ET, with the Dow -71, S&Ps -7 and Nasdaq -17,
daytraders will have some good opportunities. The first zone I’d look to is 1020
– 1025. 1024 and 1025 are natural square and Cardinal numbers. 1023.40 is the
two-day 2.0 volatility band. 1022 is the .50 retracement to the Sept. 30 990.36
low, and 1020.37 is the 50-day EMA. Below that, you have 1015, which is the .618
retracement to 990.36. Mark them on your intraday chart so you can concentrate
on the price action at the levels this morning looking for any kind of
daytrading reversal pattern, which will come first, before any decision is made
to play the intraday short side after the initial reversal up. Also review your
one-day volatility bands for confluence.
Have a good trading day,
Kevin Haggerty
