Reward/Risk

November 9, 2001
Kevin Haggerty

The
major indexes came out of the gate up and
had a major downtrend into the close which I hope made some of you very happy if
you took the semiconductor and/or the SPX trades from the key alert zones. NYSE
volume was the most in five days at 1.5 billion shares, picking up significantly
in the afternoon downtrend. The SPX
(
$SPX.X |
Quote |
Chart |
News |
PowerRating) finished +0.2% on the day,
but declined 1.8% high to low in the afternoon. It closed at 1118.54.

The last two trading days
have had higher highs and lows for the SPX with bottom-of-the-range closes,
which is not what we prefer to see. It failed to close above the 89-day EMA of
1123 either day, so that becomes the upside pivot point in any rally today, and
of course, a downside pivot for short entry if it reverses. The next downside
pivot is simply yesterday’s low of 1115.12. For
the NDX
(
$NDX.X |
Quote |
Chart |
News |
PowerRating) use the 89-day EMA 1488.29 as your first downside pivot,
and the 100-day EMA of 1515 as your upside. The NDX closed at 1510.60.Â

In the November text
headed “Range
Resolution,” I said that if the SPX came out of the top of the range
above 1111 on the fourth try, it would mean a quick move to the 1130-1135
confluence of resistance. The .50 retracement to the May high is 1130. The .786
retracement to the August high is 1135. The 100-day EMA is also 1130.
Yesterday’s SPX high was 1135.75 on the 11:00 a.m. bar, which was a reversal
bar, or a tail, with both the open and close at the bottom of the range after it
had made a higher high.

There were two defined
entries if you didn’t enter below the tail bar. The first was below the low of
the inside bar, 1132.57, which was after a Fib retracement to the 1135.75 high.
The second was a 1 2 3 short entry below the two-point low of 1129.41, which was
also below the eight-period moving average of the low. High to low, the SPX
declined 20.3 points, so regardless of which entry you took, you caught much of
that move in either the
(
SPY |
Quote |
Chart |
News |
PowerRating)s or futures.

The
(
$SOX.X |
Quote |
Chart |
News |
PowerRating) was a
real bonus for those of you with the intestinal fortitude or preparation to take
it, provided you could block out all of the cheerleading in the semis. Well in
advance we knew the best reward-to-risk level was in the 530-541 zone. The .707
retracement to the August high is 534.5, the head-and-shoulder neck resistance
is 537, the 30-week declining EMA is 540, and the 144-day EMA is 541. The 11:00
a.m. bar was the high for the SOX at 545, with the same tail reversal bar as the
SPX. The first 1 2 3 entry below the eight-period moving average of the low was
below 541.86. The next larger 1 2 3 entry was below 538.71. The SOX then formed
a Slim Jim at the head-and-shoulder neck zone between 539 and 534. It traded in
a Slim Jim for two hours until a breakout to the downside on the 2:00 p.m. bar,
which should have been a lay-up for you. The SOX traded down to 504, or -7.6%,
from high to low.

Trading the
(
SMH |
Quote |
Chart |
News |
PowerRating)s,
the 144-day EMA is 43, the .786 retracement to the August high is 43.32, and the
.618 retracement to the May high is 44.36. Your first entry was a 1 2 3 below
43.14, the second below 42.95, and the third below 42.61. The SMHs traded down
to 40.45 from the intraday high of 43.58 See your five-minute charts for
examples. If you took first entry and got executed at, say, 43.10, with a stop
above the 43.58 high at 43.60, you risked 1.2% and are now ahead, or are now ahead +5.4% based on the 40.75 close, if you made it a position trade. The stop
would now be moved down to at least 41.51, and then adjusted based on early
trading. The luck part was the knife down, but you made your luck by being
prepared to take the trade. The key point is to take trades at key inflection
points with stops as close to entry points as is reasonable, and this will give
you high-probability trades with excellent reward to risk.Â

Stocks
Today

Also, the volume and
action yesterday on increase in price was in the utilities and also the
publishers and newspapers.Â Â

Have a good trading day.

Five-minute chart of
Thursday’s SPX with 8-, 20-,
60- and 260-period
EMAs

Five-minute chart of
Thursday’s NYSE TICKS

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Reward/Risk

BUY THE FEAR, SELL THE GREED

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