Traders Beat The Game

What Tuesday’s Action Tells

Once again, the major indices have come home to
the midpoint of the now two-month old trading range. The midpoint of the range
is 988.76, and it closed yesterday at 989.28. This is a pivot area today for
traders, as the 8-day EMA is 988.96 and the 20-day EMA is 990. The SPX, Dow and
QQQ all lost 0.7% yesterday, while the Nasdaq closed at 1731, -0.2% on the day.
NYSE volume expanded to 1.4 billion, volume ratio of just 32, and breadth -673.
All of the major sectors finished red yesterday, led by the Oil Service HOLDRs
Quote |
Chart |
News |

-2.9%, the Pharmaceutical HOLDRs
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Chart |
News |
, -1.5%, and the Semiconductor HOLDRs
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Chart |
News |
, -1.4%.

From a directional standpoint, yesterday’s market
action told us very little. The only common thread in the S&P 500 screen of
yesterday’s trading was the increase in price and volume for some of the
healthcare/medical stocks like SYK, 3.8%, on 175% more than its 30-day average
daily volume, HMA, +4.9% on +122% more volume, and a few others like HCA, THC,
UNH, BMET, and MDT. Most all of these were continuation moves to new highs and
some on expansion of volume, so after a minimum of three days retracement, we
would revisit these charts and look for any daily chart setups.

For Active Traders

Looking at the daily chart of the SPX after
yesterday’s trading, it just blends into the trading range, but that’s not the
case for daytraders, who had an excellent day due to the “game.” I have included
charts of the SPX and SPY which highlight yesterday’s trade, set up by the
Consumer Confidence economic fire drill at 10:00 AM, which resulted in a quick
drop on the 10:00 AM bar (1) from 994 to 986.86, as the game was on and the
futures and SPY got hit, forcing stocks down as specialists and market makers
just stepped aside and took the bare minimum stock that is required.

This, of course, always results in the air
pockets, which plays right into the daytrader’s hands, provided you understand
how it’s played. The Generals didn’t rush in and start selling stocks on that
economic report, but it was a chance for certain hedge funds to attack the
market for a quick trade, or for program traders to leg into a program trade by
initiating a sell side first in the futures, with a good probability they would
be able to buy stocks lower. That, in addition to the herd of retail traders who
hear “worse than expected” and the media hype, and start hitting the sell
buttons on announced news of dubious value, as was demonstrated yesterday.

As you can see, the big SPY volume was on the
10:00 AM bar (1), when they traded down from 99.75 to 98.91. The 10:05 bar (2)
was a narrow range bar on significant volume, which was right at yesterday’s 1.0
volatility band level of 987.78 on the SPX. If you had taken the SPY trade above
the 10:05 bar (2) high of 99.06, it only ran to 99.20 before reversing to a
98.68 low on the 10:30 AM bar.

The move down was on declining volume as the
“game” was essentially over on the 10:05 AM bar as professionals rushed in to
cover their futures and SPYs. If you took the first SPY trade, you should have
scratched or at least lost very little, because you had a chance to move stops
to breakeven or very close to it.

The SPX traded down to a 984.15 intraday low on
the 10:30 AM bar, and on declining volume for the SPY. As you can see on the SPX
chart, there was a confluence at that level of the 984 monthly pivot, the 1-day,
983.41 1.5 volatility band, and 983.95, which was the -2.0 standard deviation
5-day band.  Entry was above the inside bar high of 985.03, or above 98.86
on the SPY. The SPY ran up to 100.14, backed off some to 99.65, then made a
100.26 intraday high before fading to 99.09 and closing at 99.40.

If you were working with yesterday’s focus list,
there were similar setups that rallied almost two points, like PCAR, SNPS, GILD,
and CDWC, which dropped from 48.62 to 47.07 during the “game” and of course
rallied to 48.79. Check yesterday’s volume during that downside and you will see
how the market makers just opened the Trap Door. Net-net it was a good day at
the office for a daytrader.

Today’s Plan

For today, we start out with a 20-day EMA pivot
at 990 on the SPX and also key on the closing range of 990.63 – 987.63. Keep
yesterday’s focus list on you desk, with emphasis on PCAR, GILD, CDWC, DISH,
PIXR, APOL, and MERQ, which closed at 40.22, right at its 50-day EMA of 40.24.

Have a good trading day,

Kevin Haggerty