Trade The Overreactions
What Wednesday’s Action Tells
You
The SPX continues to trade
between 994 and 976 for the fifth day in succession. The highs have
been between 994 to 990, while the lows from 982 to 976. Yesterday’s SPX game
went from 989.62 down to 979.79, then back up to 989.86, closing at 988.60,
almost flat on the day
During this 5-day stretch the SPX has, on
alternate days, closed below its 1.0 volatility band, above it, below it, and
then closed above it on Tuesday. Yesterday was the first day in five it hasn’t
done that. Call it indecision, erratic trading, or whatever, but the bottom line
is that traders must trade the overreactions, and it also means that the trading
range since June will be resolved sooner rather than later.
NYSE volume was relatively light at 1.3 billion,
volume ratio was neutral at 49, as was breadth at just +179, highlighting the
trading range type action for the past 5 days. The Nasdaq was + 0.8%, QQQs
+1.0%, and Dow +0.4%. The afternoon trend-up turned all the major sectors green,
with the exception of the OIH, which ended -1.2%. The leading sector was again
the semis with the SMH +2.0%. Micron Technology
(
MU |
Quote |
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PowerRating) was the leading major
semiconductor, gaining +7.5% on 93% more than its average daily volume as it
came out of the top of its trading range. It was on our focus list yesterday.
KLAC carried through after making new highs on Tuesday, gaining +2.1%, AMAT
+2.9%, while Novellus was flat on the day. The SMHs are challenging to make new
highs. GENZ also made new highs, as did FRED, +9.1%, but gapped on an upgrade
hype by Merrill Lynch, so there was no trade-through entry.
For Active Traders
For traders, it was a two-trend day because of
the up/down travel range yesterday. There was a short entry trade on a recross
of the 20-day EMA pivot below 99.32 on the opening bar for the SPY, which was
covered on the Trap Door between 10:00-10:15 AM. The SPY made two attempts and
failed at the 240-EMA on the 5-minute chart, which is the same as the 20-period
EMA on your 60-minute chart. It made an intraday low of 98.28 on the 12:15 PM
bar, then the afternoon trend was up, as the SPY traded up to 99.35, closing at
99.23, then right back to a 20-day EMA pivot of 99.31.
The afternoon trend up for the SPY was on very
light volume. The corresponding low on the SPX was 979.79, which was right at
the 1.0 volatility band of 979.19, so it was a good entry level if you took the
afternoon long trade — it didn’t matter whether you traded the E-minis or the
SPYs.
Because of this 5-day trading range, the 20-day
EMA pivot is in play again today. The SPX 20-day EMA is 989.59Â vs. aÂ
988.61 close, so be ready to work either way around that pivot again today. The
50-day EMA is below at 972.89 and the low close of this trading range since June
3 is 974.50, with one aberrant intraday low of 962.10, which closed at 982.32
that day.
Today’s Plan
Until the 5-day range is broken, you’re looking
to fade price at the upper and lower boundaries of the range because your stops
are tight and you can cover and reverse your trade if there is is a breakout of
the range
Some stocks to focus on today because they are
above the lines and are either trading in a narrow range pattern near the highs
or have pulled back to either the 20- or 50-day EMAs are:
PCAR, MRVL, ZRAN, ZBRA, SNPS, JBL, EXPD, EASI,
TARO, PIXR, C, BAC, NAV, IVGN, ICOS, ERTS, and DISH.
Have a good trading day.
Kevin Haggerty
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