The Major Trading Edge In The Markets

July 11, 2003
Kevin Haggerty

What Thursday’s Action Tells
You

The first attempt
at an SPX bounce off the 1.0 volatility band of
993.26 failed, only gaining a point and change before reversing the 1.0
volatility band to the downside for a trend-down day, with the SPX closing at
988.67, -1.3% on the day, same as the Dow, which closed at 9036. The intraday
low for the SPX was 983.63 as it traded between 987 and 984 from 1:00 PM until
the last 20 minutes. The 2.0 volatility band was 984.32 and the monthly pivot is
984.47. This level stopped the bleeding, but no successful trading reflex from
the zone was in the cards.

NYSE volume was 1.43 billion, volume ratio of
just 17 and breadth -1277. The Nasdaq ended -1.8% at 1716, and the QQQs
were -2%, closing at 31.57.

The major sectors were red all day, with the OIHs
reversing the previous day’s gains, declining 3%; the SMH was -2.4; XBD -3%; CYC
-1.7%, and RTH -1.3%

The most significant thing about yesterday’s
market action was the absolute increase in volume in the SPY and QQQs. I said in
the July 9 commentary that I didn’t like rising prices and declining volume, a
scenario that precedes a change in direction. You can’t know the duration, but
you know it’s always a red alert for traders. The QQQs traded 20% more
than the average volume, as did the SPYs.

Certainly no surprise that they’re ringing the
register on Micron, which was up 30% low to high in six days; Intel is +20% in
nine days, while MXIM has gained 15% in four days. Stocks climb
staircases, not firepoles.

For Active Traders

Some traders played the Flip Top to the downside
yesterday in either the E-Minis, SPY or QQQs, but after that it was just
continuation shorts as there was no real profitable bounce until about 2:00 PM
when the S&P E-minis rallied from 982 to 989.25, closing at 987.50. The QQQ
trailed and reflexed up from an intaday low of 31.33 to 31.63, then
closing at 31.57.

Nothing has changed in my estimation that the SPX
could stay in sync with its cycle over the past year, which means a high
probability of a decline going into early to mid August. See my
May 30 and
June
17 commentaries. To prepare for this, options strategies were initiated and of
course the synthetic straddle adjustments have kicked in on both the upside run
to 1010.33 and then yesterday — which was excellent — with the SPX minus 17
points at one point. That two-way volatility was an excellent way to start the
trade. The strategy was put on against longer-term index proxy positions at
lower prices. It’s just the more aggressive approach, which takes advantage of
extended moves like the current one with the major indices once again bumping up
against those extended volatility band zones. The greater fools on the buy side
seem to run out of money at these zones on the upside, and the sellers out of
stock on the downside extended zones. To me, that is the major trading edge in
the markets, regardless of your time frame. (See the
July 3 commentary)

Today’s Plan

Coming into today, we see that the SPX closed at
988.70, just above 988.21, which is the 20-day EMA so that is the initial pivot
for today’s game. The Qs closed at 31.60, with the 20-day EMA at 30.73. The
SMH’s are the most extended, closing at 31 with the 20-day EMA down at 29.67,
with its 8-day EMA at 30.44. If there is a downside carry-through today, look to
the combination of the 20-day EMA and today’s volatility bands for possible
intraday reversals.

On the short side, yesterday’s late reflex up put
the index proxies and the SMHs close to their declining longer term intraday
EMAs, so depending on how the opening game plays out, these levels become the
retracement short zones.

I am referring to both the “820” and “523” Trend
Identification Methods, which are taught at the seminar and included in the

current CD-ROM.

Have a good weekend,

Kevin Haggerty

The Major Trading Edge In The Markets

BUY THE FEAR, SELL THE GREED

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