Reversal Setups At Levels You Were Prepared For
What Friday’s Action Tells You
The early bounce on Friday up for the major
indices from the 10:00 a.m. – 10:15 a.m. ET time period ended just after 1:30
p.m., and the afternoon trend was down, similar to Thursday afternoon’s decline,
which followed some excellent daytrades from the awareness levels that you were
prepared for going into Thursday’s game. The SPX
(
$SPX.X |
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PowerRating) closed below
1000 for the first time since Aug. 29 at 996.85, -0.6%. The Dow
(
$INDU |
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PowerRating)
was 9313, -0.3%, Nasdaq
(
$COMPQ |
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PowerRating) 1792, -1.4%,
(
QQQ |
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PowerRating) 32.58, -0.6%, and
(
SMH |
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PowerRating) 34.60, -1.1%. NYSE volume was 1.4 billion, volume ratio 28, which
followed 18 and 26 from Wednesday and Thursday. The volume ratio for the past
five days is 32 and in the short-term oversold zone, so we will be playing off
this zone for any reflex coupled with the last two days of the third quarter.
Breadth was -811.
All of the major sectors finished red, led by the
(
OIH |
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PowerRating) -2.2%,
(
RTH |
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PowerRating) -1.5% and SMH -1-1%. From the SPX screen, you see an
increase in the price and volume Friday in the utility stocks and several
defense stocks like
(
NOC |
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PowerRating) and
(
GD |
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PowerRating) that have had four-day air pockets
after a downgrade. GD closed at 77.07 vs. its 200-day EMA of 75.49. Both are
short-term oversold. In the semis,
(
INTC |
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PowerRating) traded +124% of its 30-day
average volume, closing at 27.22 vs. its 50-day EMA 26.59 and is -7.2% from its
current high. The SMH is -11% and
(
KLAC |
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PowerRating) -13% from their highs on the
selloff from the confluence zone which you were able to anticipate (see the 8/25
commentary). The semis are now front and center on the focus list, so there’s
nothing new there. The other common thread from my screens on the TradingMarkets
site was in the biotechs where there was also a decline in price and an increase
in volume.
For Active Traders
Friday was a sideways choppy day that was unable
to reverse Thursday afternoon’s decline after the excellent reflex from the
50-day EMA Thursday morning. On Friday, the
(
SPY |
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PowerRating) ran from 100 on the 10:10
a.m. bar to 100.65, then back down to 99.88, setting up an RST long entry above
the 100.03 high of the 12:10 p.m. doji bar. That trade ran to 100.58 by the 1:35
p.m. bar, then declined to a new 99.85 intraday low, closing at 99.95.
I have included charts in today’s commentary from
Thursday’s retracement to the levels anticipated in the trading plan. The retracement
to the 50-day EMA from the rally high by, for example, the SPX is a much
stronger setup than, for example, the current RTH chart where there is a
retracement to the 50-day EMA from a 1,2,3 lower top. The RTH closed at 86.25
with the 50-day EMA at 86.42 and 1,2,3 continuation short entry below 85.60.
Refer to both the SPY and RTH daily charts to see the distinction which is all
part of your trade selection process.
Looking at the daily charts from Thursday, you
see the SPY had declined from the 104.70 rally high to the 50-day EMA level
which was 100.94 and the .50 retracement to the Aug. 5 swing point low of 96.34.
It was an inflection point you had anticipated, and therefore, tuned into the
price action as it approached the level. On the SPY five-minute chart, you see
the inside bar setup after a 100.72 low on the 10:25 a.m. bar. Entry was above
100.90, which also re-crossed the 50-day EMA of 100.94. The 8,3,3 slow
stochastic confirmed the trade.
Once you are in a trade, you have outlined the
next potential sequence. In this trade, you had the Fib extensions of the 101.53
– 100.72 leg down, and 101.75 and 102.04, which was also the 240 EMA at the
time. 102 was also the .50 retracement to 103.29 swing point high on Tuesday.
The SPY run ended at the 101.88 intraday high, then reversed at that confluence
zone, trading down to a new intraday low of 100.19, closing at 100.28. Some of
you might have caught both long and short trades, but for sure you had to take
the long entry from the 50-day EMA.
On the 20-day 30-minute standard deviation chart,
you can see how extended the SPY was in that zone of the initial trade from the
2.0 standard deviation band. Next you had an excellent SMH entry from the 2.0
standard deviation band with entry above 35.30. Prior to that trade, you were
made aware of the 34.50 – 35 confluence. You got a change-in-direction bar entry
above 35.30, which ran to 36.20 and the 240 EMA or a +2.5% move from entry. The
SMH, like the SPY, reversed down to a new intraday low of 35 and closed there.
The key point is these were reversal setups at levels you were prepared for in
advance, so you were better prepared to take entry.
Today’s Action
For today, the last five-day period is short-term
oversold coming into the last two days of the third quarter and maybe some new
money being put to work the first few days of October. Today is the seventh day
down from the current rally highs, so any upside reflex should more expected
than a surprise. The SMH closed at 34.60 vs. its 50-day EMA now at 34.78. The
.50 retracement to the last swing point low of 30.18 on Aug. 8 is 34.50 and also
the .236 retracement to the 20.36 February low from the 38.85 high. (See the
9/25 commentary for symmetry outline.) The SMHs are -11% from the 38.85 rally
high with KLAC -11%. The rally was stopped in the confluence zone highlighted in
the Aug. 25 commentary. Net net, before the fact anticipation of potential
action zones is far more profitable than after-the-fact commentary, and I am
sure you know what I mean.
The DIA closed at 93.30 below its 50-day EMA of
93.75 and a .50 retracement to the last swing point low of 93.50 with the .618
retracement at 92.50. The SPY closed at 99.95, below its 50-day EMA at 100.84
with the .618 retracement to the 96.34 Aug. 5 low at 99.50. The QQQ closed at
32.58 with the 50-day EMA 32.63 the .50 retracement to the last swing point low
of 29.93 on Aug. 8 at 32.30. When you combine the current levels and the
end-of-quarter action, in addition to the short-term oversold condition, it
means there will be travel range and opportunity for traders. The early futures
are now green, with the S&Ps +4.5 points, the Dow +30 points and the Nasdaq +11.
Have a good trading day,
Kevin Haggerty
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