Possible Reactions Both Ways Today
What Wednesday’s Action Tells You
The most significant point from yesterday’s
market action was the record volume in the
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PowerRating)s, as they declined 5.4% and
are now -7.3% from Monday’s high of 38.85. They hit an intraday low of 36 vs.
the 20-day EMA of 36.05 and closed at 36.17. The record volume yesterday was
21.9 million shares vs. the 7.5 to 8 million share average daily volume
depending on which time period you use. The air pocket comes from the confluence
zone, in addition to the overbought condition, and not to mention they were
+124% from the October 17.32 low and +91% from the 20.36 Feb. 10 low. The
extension in price had put the SMHs +31% above its 200-day EMA of 29.68 and +42%
above its 200-day SMA at 27.38. All of this together is why, as I said in
previous commentaries, the SMHs were not an investment vehicle at these levels,
just a trading vehicle. I guess the Smith Barney analyst wishes he had waited
for a retracement before making his profound overweight announcement.
There was obviously a crowd at the exits
yesterday trying to ring the register, locking in some profits. Nothing goes
straight up without a few snaps of the rubber band, and that’s why I urged
people to play the retracements in uptrends when you put odds 2:1 in your favor
assuming its a retracement in a trend with higher lows and highs. NYSE volume
expanded yesterday to 1.5 billion, a volume ratio of 18 (1.2 billion down), and
breadth -1100. The
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PowerRating) traded +21% more than its average volume, while the
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PowerRating)s traded 111 million shares, or +56% more than the current 71 million
share average volume. Suffice to say some tech profits were taken off the board
yesterday, but the buyers will play another day from a retracement level that
has digested some of the recent gains. This action would strengthen the market.
The SPX
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$SPX.X |
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PowerRating) closed at 1010.93, -1.2%,
and back into the 1015 – 960 trading range box, while the Dow
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$INDU |
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PowerRating)
closed at 9420, -0.9%. The Nasdaq
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$COMPQ |
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PowerRating) was -2.6%, closing at 1824,
the QQQ -2.4% at 33.27. The major sectors all had downdrafts, led by the XBD
-3.5%, OIH -2.3%, BBH -2.2%, BKX -1.9% and CYC -1.7%. The RTH was only -0.8%,
but had been red the previous two days. The PPHs were +0.7% and that really
falls into the daytrading category of “Who cares?” until some institutional
aggressive sponsorship appears, which will in turn encourage the hedge funds to
get involved to play “the game.”
For Active Traders
I have included a five-minute chart of
yesterday’s SMH action which highlights two Trap Door entries, both stopped out
on small losses, and a third entry from the 2.0 volatility band of 36.66 which
only ran to 36.91 before heading south to a 36 low and 36.17 close. This third
trade was, at worst, breakeven because of the raised stop to the 36.65 – 36.70
level.
The first setup was on narrowing range and
increased volume on the signal bar with the 37.25 low, and the second entry
above 37 was vs. the 1.5 volatility band of 37.06. The second Trap Door had a
significant volume increase on the change-in-direction bar following the signal
bar’s 36.83 low, as you can see labeled in the volume section of the chart.
About 85% – 90% of all Trap Doors make a contra move, and 60% or more of these
will resume the direction of the open. Well, yesterday was the 10% that don’t.
There was no question that the early move down in
the SMHs was strong because by 10:30 a.m. ET, the volume was 7.3 million shares,
which is just under the 7.5 to 8 million average daily volume. But it was at the
1.5 volatility band and no contra move to that point, so the trade was taken.
Second failure in succession, which might affect your emotions, but the pocket
book hit was small. The emotional effects should be minimal if you look at your
business as a multiple of trades over the course of the year, and this was just
two small losing probes out of many hundreds of trades you will make during the
year.
The third trade from the 36.66 2.0 volatility
band was a good setup, but was from the lunch hour time frame. The sellers had
walked away, and the gain to 36.91 was the extent of the move from entry.
Remember, if it was so easy, it wouldn’t be called trading. The other side of
the coin is those traders that sold short the first continuation breakout to new
lows below 37.25. They had a good day, as did those who took the first Trap Door
setup and then doubled up and reversed to the short side below 37.25, quickly
recapturing the small stop loss, and then on the plus side from there.
All was not lost, however, on the SMHs, as the
OIH gave you a good short trade-through entry below the 58.50 lower boundary of
the 61 – 58.50 box mentioned in yesterday’s commentary that would be resolved
soon. The OIH traded down to a 57.80 low and closed there.
Also, the SPX trade that had to be taken was the
Flip Top breakout below 1018.46, which occurred on the 10:10 a.m. bar.
Yesterday’s commentary said that the eight-day EMA was 1019.85 and the 20-day
EMA at 1008.45, so that was the next SPX 10 point drop zone on any follow-up
red, which we got yesterday morning. Now the small loss in the SMH just reduces
your profits from the OIH and either the E-minis or SPY depending on which
derivative you trade the SPX with.
Today’s Action
For today, we’re back to the 20-day EMA levels of
1008.95 on the SPX, 36.05 on the SMH, 33 on the QQQ, which closed at 33.27, so
that means opportunity and maybe reaction in both directions during the day. The
SPX short-term cycle pointed down into the Sept. 10 – 15 time period (see the
Sept. 2 commentary), so any 5.0% or more reaction won’t be a surprise after the
recent gains. The immediate SPX upside inflection level is once again the 1015
upper boundary of the trading range.
Have a good trading day, and I won’t be doing
anything tomorrow, so the next commentary will be on Monday.
Kevin Haggerty
