Two Things We Want To Do Right Here
What Friday’s Action Tells
Us
The Dow
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$INDU |
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closed above its 50-day EMA on Wednesday, hitting an intraday low of 8997,
closing at 9061.74. Thursday and Friday were both up days with higher lows,
highs and closes, but on declining Dow volume. The index closed Friday at
9191.09, +0.7% on the day and again outperforming the SPX
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$SPX.X |
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PowerRating) which
was +0.4%, closing at 977.59, as technology was soft. The Dow has been helped by
the basic material (smokestack) stocks, which we had picked up early from our
TradingMarkets screens, identifying volume increases several days before they
took off from consolidations and some of them from around the 200-day EMA. NYSE
volume was just 1.09 billion on Friday, down from 1.36 billion on Thursday and
1.46 billion on Wednesday. Rising price and declining volume are not what I like
to see coming off the 50-day EMA. The Nasdaq
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$COMPQ |
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-0.5%, and the
(
QQQ |
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SMH |
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right on its 50-day EMA of 30.47 and -2.8% on the day.
On the green side, the sectors were led by gold
(XAU) +4.6%, CRX +1.5% which is the Morgan Stanley Commodity-related index,
which by the way, bottomed in February 2000 as the major indices were topping,
ending the bubble market. The CRX advanced 57% from 182 in February 2000 to 286
in May of 2002. After a retracement to 202 in October, it has rallied back to
263, as the
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TLT |
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higher, as it should if in fact the economy is making a real recovery.
For Active Traders
If you trade the E-mini or the
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SPY |
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best opportunities Friday came on the initial Trap Door short, as the SPY
traded to up to an intraday high of 98.55 on the 9:55 a.m. ET bar. It was also
at the .786 retracement zone to Monday’s 99.00 high, in addition to being an RST
short pattern. Entry was below 98.36 on the 10:05 a.m. bar (time period sound
familiar?) and below 978 on the E-mini, also on the 10:05 a.m. bar. Derivatives
trade off the underlying cash index/stocks, regardless of what you are trading,
and the strategies I teach apply to all of them. If you trade just the E-mini,
just remember to trade opening reversals off the SPY 9:30 a.m. opening.
The E-mini traded down to 972.25, right on the
240 EMA, and the SPY to 97.76, also at its 240 EMA. The E-mini rallied to 978,
but went sideways from 11:45 a.m. to 4:00 p.m. in a narrow range between 978 and
973.50. That kind of action takes daytraders out of the game with nothing but
probes and quick stop outs.
If you trade individual stocks and scroll for
potential setups during the day, you probably caught some moves in the gold
stocks and basics.Â
Today’s Plan
Coming into today, the QQQs have been cycling
down since July 14, while the SPX made double 1015 tops on June 17 and July 14
and are cycling down with the most recent low at 960.84 last Wednesday. The
Nasdaq made a 1,2,3 lower top with a trend continuation down below 1675, closing
at 1644 on Friday, with the 50-day EMA at 1658. Continuation of this Nasdaq
cycle down has its first primary confluence around the 1525 level, which
includes the 200-day EMA of 1529. The next primary confluence is 1470 – 1440,
which includes the 200-day SMA of 1463 and both the .618 retracement to the
March low and .50 retracement to the October 2002 1108 low.
There are two things we want to do right here.
The first is to know the immediate inflection points to short-term trade off of,
and the second is to frame the levels which will provide the next decent
position opportunity as this down cycle plays out. I will frame the levels of
the major indices on Tuesday and Wednesday and cover the immediate inflection
points today.Â
The QQQs closed at 30.07 on Friday vs. the 50-day
EMA of 30.53. Using both the 6-period offset 4 (6-4) weekly moving averages of
the high and the low, as you AdvancedGET users do, you can see that the QQQs
have traded and closed above the 6-4 moving average of the high for 20 straight
weeks. Last week they closed just above the 6-4 moving average of the low, which
is 29.76, so that’s where there might be a quick reflex. The 6-4 moving average
of the high is 31.27, with the 50-day EMA at 30.53. The intraday low on Friday
was 29.93, which is a -8.6% decline from the 32.75 high. The 200-day EMA is down
at 28.47.Â
The SPX closed at 977.59 with the 50-day EMA at
976.20 and the 20-day EMA just above at 982.94, so it’s bracketed. The SPX has
closed below the 6-4 moving average of the high which is now 1004.40, the last
two weeks have traded below it, last week to 960.84, with the 6-4 moving average
of the low at 974.38.
The activity around these inflection points will
provide excellent trading opportunities this week. The SMHs, which are down 8.5%
in four days, closed at 30.50, right on the 50-day EMA of 30.47. The 6-4 moving
average of the high is 30.64. There is no real downside confluence until the
28.50 to 28 zone. I like to go through this drill prior to the start of each
week for the major indices and all of the major sectors, so the key levels where
a good trade might develop are known in advance, which takes the emotion of the
moment out of the equation.
This is not a level in the SPX where the cycle
down is extended enough or at a key inflection point giving you a significant
edge for a new position entry in the major indices. But that doesn’t mean the
fifth wave leg up off the March lows has to get started from such an extended
level, and in my mind, that would make it more of a trading decision on the
upside from here, rather than a good IRA-type long decision, which would come
from the extended level to the downside. Â
Have a good trading day,
Kevin Haggerty
