Odds Are, These Levels Will Come Into Play
Specialists, market makers and some futures manipulation were all working for us
on Friday, with the gap down
opening overreaction that provided an excellent contra move. The
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opened down 1.3%, the
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21.90 opening, then kicked down to 21.80 and took off and rallied to an intraday
high of 22.55 for a +3.0% gain from opening to high. Some of you seminar
attendees that learned how to utilize the volatility band opening orders at a
certain percentage below the previous close did well. I won’t expand on that in
this commentary because it is better learned in a seminar and new traders should
not get involved without an education, just as with options.
The SPX
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$SPX.X |
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took out the 818.54 magnet low on the first bar, trading down to an intraday low
of 811.23, then reversing the 818.54 low by the 10:00 a.m. ET bar. The contra
move ran to 826.85 by the 10:15 a.m. bar. If you were a deer caught in the
headlights and did nothing on this contra move, you got the benefit of a second
chance and a second entry reversal of the 818.54 low. The SPX retraced to an
818.24 low on the 10:40 a.m. bar vs. the 817.20 .618 retracement to 811.23. This
reversal back above 818.54 carried to 828.94 before retracing again to an 819.24
low, then we got a 2:45 p.m. rally that carried it to the 829.55 intraday high,
closing at 828.89, or +0.8%. The Dow
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$INDU |
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+0.3%, while the SMHs lost 1.0% on another of the many INTC news reactions, as
INTC closed at 16.00, -4.0%.
Looking at a 20-day
30-minute chart, as I like to do, utilizing a median price line with 1.0, 2.0
and 3.0 standard deviation bands, I see that the SPY closed at 83.32 with the
20-day median price line at about 83.75, and then looking at the daily chart
with the same standard deviation bands, I see a median price line at 83.00, so
the SPY is in a pivot zone.
Friday’s low was below
the 2.0 20-day standard deviation band at 81.75, hitting 81.43, and giving good
entry as it reversed the 2.0 volatility band, trading up to 83.50. I will expand
on this type of volatility trading in the two-day seminar I am doing with
TradingMarkets this coming June 13 – 15, which will be live on the Internet.
I use this in conjunction
with my volatility bands calculated for each day, which utilizes implied
volatility. The combination is powerful. For example, do you know how many times
the SPX has closed below the 1.0 volatility band, or has penetrated and has
closed back above it? I am sure 99% of you don’t, but if you did, you would have
a much better feel of how to play these overreactions that produce such great
risk/reward trades. The SPX has closed below the 1.0 volatility band just three
times in the last 20 trading days, and on a fourth time which was Friday,
penetrated it, but closed above the 1.0 volatility band of 817.71 at 828.89. Use
your imagination as to how you can trade the various patterns you have learned
against something that gives you such an edge. Remember, volatility bands using
implied volatility for one day will be, by definition, different levels then the
20-day standard deviation bands.
Have a good trading day.
Five-minute chart of
Friday’s SPX with 8-, 20-,
60- and 260-period
EMAs
Five-minute chart of
Friday’s NYSE TICKS