One Of These Two Scenarios Will Play Out

July 3, 2003
Kevin Haggerty

What Wednesday’s Market Action Tells You

Some of the stocks that had set up on Wednesday and
were in yesterday’s commentary had excellent moves as the “game was
on” regarding price.
(
AVID |
Quote |
Chart |
News |
PowerRating) broke out of a 22-day box between 38 and
33 to new highs, gaining +8.9% and giving you trade-through entry above 36.90.
You can’t know when they will come, but if prepared in advance, you can be ready
to ride the train when they do, as in yesterday. The breakout was on about
double its average volume.
(
MERQ |
Quote |
Chart |
News |
PowerRating) made a good run, gaining +4.3% on a small
gap opening above the previous day’s high of 40.24. Yesterday’s low was 40.46.

The lows for the major indices yesterday
were on the opening bar, and it was trend-up from there with a late price move
bolstering the indices from 2:15 PM into the 4:00 PM close. The QQQ traded 82
million shares, which is right on its recent average volume number, but that was
not the case for the SPY, with 20% less than its normal volume and the Diamonds
which traded 45% less than its average volume. These numbers also highlight the
price and volume disconnect yesterday.

A look at the current rally from the last primary low, we see that the SPY has
advanced 29% from the March 12 low and has retraced just 5.6% of that move,
which is a Fib percentage retracement of only 19%. The QQQs have advanced +39%
from the February 10 primary low, then declined 10%, which is 25% of the entire
rally. The SMH — which has led the rally — has gained 59% since the February
13 last primary low and have retraced 15%, which is also 25% of the entire 59%
rally.

Here Are The Levels

The +3.3% bounce for the SPX was from our first
awareness level, which is the confluence of numbers from 960-963, which included
the longer-term head and shoulders neckline drawn from the 1998 low. The
retracement to 962 broke the trendline from the March 12 bottom with four closes
below the line, which is not significant to regular market investors, as price
is well above all rising longer-term moving averages, so they just continue to
ride. However, it is significant to aggressive market participants who play both
sides of the market or who want to protect some excellent gains, having gotten
in at lower prices when the media and empty suits they parade in front of you
daily wanted no part of it.Â

One of two things will happen: 1) The retracement to the 1015.33 rally high of
the SPX will be a 1,2,3 lower top or 2) the decline to 962 was the fourth leg of
the move of the March 12 789 low and any new highs above 1015.33 will be the
fifth leg, setting up an RST reversal sell pattern or else a 1,2,3 higher top if
price is not too far above 1015.33.

The .618 retracement of 1015.33 from 962.10 is
995. The .768 retracement is 1003.94, and the 1.27 Fib extension of the primary
leg down from 954.28 to the 788.90 March 12 low is 998.93. The SPX closed at
993.76, so price has entered the zone, which means traders are ready to play any
good short side intraday setups that get extended. That covers the potential
1,2,3 lower top. If the SPX makes new highs above 1015.33, then I look to the
1024 level first and then the 1.618 extension of that same primary leg is
1056.48.

This corner has initiated options strategies to
protect on the downside and also a delta neutral synthetic because there could
be some good two-way action in here because major indices are at the crossroads
of either a 1,2,3 lower top or a 1,2,3 higher top and new rally highs. These
kinds of trades are best put on when volatility is low, as it is now.

For Longer-Term Investors

The regular longer-term investor who is usually
either long the S&P 500 index funds or in money market funds can just watch the
rising 12-month EMA — which is now 945 — as your downside alert decision
level, which by the way, can be an add-to position or else a switch back to
money market funds, depending on how price reacts at that level, which is
obviously dynamic and changes daily according to price.

Today’s Plan

Today’s plan of action is simply to finish this,
watch the 9:30-10:30 time period for any no-brainers, then head to the beach and
let you play around with the half-day market which closes at 1:00 PM. There
will be just a quick column on Monday, but I will include some charts that will
frame what I discussed today, which will help you anticipate future decisions
and levels.

Have a great holiday.

Kevin Haggerty

One Of These Two Scenarios Will Play Out

BUY THE FEAR, SELL THE GREED

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