Volatility Coiled Like A Spring Precedes Explosions

December 13, 2002
Kevin Haggerty

Volatility has narrowed
and is coiled like a spring. This contraction of volatility usually precedes
very tradable moves in the direction of the breakout. The SPX is coiled in a
dynamite triangle right at the 50-day EMA, which is 900. The SPX closed at
901.58. The entire range of each of the last three days is within Monday’s
wide-range bar, which had an intraday low of 891.97. It’s not going to remain in
this triangle for long. The other major indices also closed around their 50-day
EMAs.

The SMH, which has
already retraced 50% to the 17.32 October low, traded yesterday at its lowest
volume in nine days. The QQQs have had six straight days of declining volume.
You can say that the market is standing still because of the Middle East news 24
hours a day and it has money managers unnerved and hesitant, which is all
probably true. However, capital doesn’t remain quiet for very long, especially
after three straight years of a bear market and the current anticipation of a
possible new bull market.

I have said there would
be weakness from the upper resistance zone which we got with the SPX trading to
954 and then a decline into the 12/17 to 12/20 cycle period where we would then
get a rally attempt from there into year end. I am happy that the SMHs corrected
50%, but the major indices haven’t retraced as much as I wanted, with the SPX still
not even hitting the 883 .38 retracement mark to the 769 low. Maybe that should
be telling me something.

The activity I have seen
recently in the options indicates the program traders are gearing up for this
big expiration on Dec. 20. For traders, it doesn’t matter which way they take
it, but just that they do. I expect to at least get a morning and afternoon
trend each day into expiration. Stay away from the noontime period unless we get
a morning with no move at all.

As I do this, I see the
early futures are red, pointing down to that 890 level which we have seen so
much of both ways in this rally. 890 is the .618 retracement between 965 and
769, with the .38 retracement down at 883.36, and then the .50 retracement at
861.45. The 860 – 865 zone also has a few other numbers that come into play. I
would love to have a good air pocket down today carried over into Monday because
I would buy the index proxies and/or some of the HOLDRs on any fast downside
emotion. The first magnet is Monday’s low at 891.67 on the SPX.

I see the futures still
big early red, which is a positive in a trader’s world, so it’s a Trap Door
Volatility Band morning, folks.

Have a good trading day
and a great weekend.

Five-minute chart of
Thursday’s SPX with 8-, 20-,
60- and 260-period
EMAs

Five-minute chart of
Thursday’s NYSE TICKS

Volatility Coiled Like A Spring Precedes Explosions

BUY THE FEAR, SELL THE GREED

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