Trapdoors And Volatility Bands

The
S&P 500 finished off only 0.2%

after the last hour’s 16-point run up in the S&P futures. It’s getting down
to a two-and-a-half hour trading day — 9:30 a.m. to 11 a.m. and 3:00 p.m. to
4:00 p.m. You can add some early time if you trade the volatility bands in the
early Instinet fiasco.


The Nasdaq 100
(
NDX |
Quote |
Chart |
News |
PowerRating)

ended -1.9%, which tells me that Intel’s
(
INTC |
Quote |
Chart |
News |
PowerRating)
red flag after the close
was a total surprise. The Dow was up 0.7% on the day, but the relevance of that
average is certainly grey.


For the fourth straight
day, the market dynamics were negative.
For
the third day in succession, volume topped 1 billion. You had declines over
advances at -657 and a volume ratio of 41, which is a four-day moving average of
just 35.
The percentage of NYSE
stock exchange stocks above the 200-day moving average has dropped to 57%, down
from 64% last week.


The brokerage stocks have
caught the air pocket, e.g., a Goldman Sachs
(
GS |
Quote |
Chart |
News |
PowerRating)
down 17% in just seven
sessions. Bear Stearns
(
BSC |
Quote |
Chart |
News |
PowerRating)
is rapidly returning to the 50 level where it
started its run to 72 1/2 on deal fever. It closed at
58
1/4. 


The best short-term trading
opportunities have come from the chosen high-priced momentum stocks as they are
easily gamed. You do notice that when a stock splits down to below 60, most of
the gaming disappears. That should clearly point out to you what the rules are
and how the players pick their tents up and move on to the next desert. 


With this introduction
complete, what do we do today to make
money?        


Intel gave us a surprise
blast after the close, and the S&Ps immediately dropped 32 points to 1437 in
the non-existent Globex. As I look at them this morning at 7:45 a.m., I see they
have rallied back 17 points to 1454. When I left last night, Intel was offered
at 48 3/4, which is down 36% from the 75.81 recent high. Obviously that ends the
semiconductor rally for the near term and we will see new gap-down levels today.


If possible, the market
makers and specialists will take the sellers in all stocks down to extreme
levels and make the emotion pay a high price. The Generals will participate on
the listed openings for some portion of their sell orders, because they will be
embarrassed if there is a meltdown lower than the openings and they did
nothing.     


They will sell some stock,
walk away to see how the stock trades and if there is any lift. At this point
traders can find a window to trade the trap doors and fading the volatility
bands, which will probably stretch immediately to the 1 1/2 and 2 standard
deviation zones. 


You can ride the market
makers and specialists back up as they lighten their inventory, but don’t get
greedy because the Generals will return. Why? Simply because they sold stock at
lower prices on the opening and will look bad on their market-impact reports if
their average price for the day is too much below the volume-weighted price.

I will cover this in Vegas because it is
the main reason that the dynamics bring life to the pattern.














face=”arial, helvetica”>(December Futures)


Fair
Value


size=2>Buy


size=2>Sell


20.00


21.20


18.80


Pattern
Setups


There are no pattern setups today —
this is a reaction day, not a pattern entry day from the daily charts.
So
load up your five-minute-chart window with all the top stocks and make sure you
have them all on your market-minder screen with the previous day’s closing price
and today’s opening price,
so you
can take advantage of the extreme volatility bands. 


You are looking for the extremes and
also for which stocks act best on a relative basis on any early decline this
morning. There will be a good contra rally early on and that could make your
day. Also, do yourself a favor and turn off TV today while you trade. If things
get too emotional today, I’ll give you 2:1 odds the Greenspan gang will be
buying futures to avert it, premiums will expand and buy programs initiated to
save the day, but it will take a pretty good-sized meltdown for that to happen.


Have a good trading day and keep your
helmets on!


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