Watch Price Action At This Level

October 8, 2003
Kevin Haggerty

What Tuesday’s Action Tells
You

Yesterday was the fifth trading day of the
month
and last quarter of the year. Generally, at the beginning of each month, new
money gets put to work, but to a greater extent in a new quarter, and that’s
what we’ve seen so far. The SPX closed September at 995.94, and through
yesterday’s close of 1039.25 is +4.3% in the first five days of this
quarter.
The volume ratios for this period have been 86, 66, 76, 68 and 65 yesterday
for
a five-day moving average of 72, which is indicative of the persistent
buying
from the Generals, but certainly short-term overbought.

In the other major sectors, the BKX, CYC and
XBD
were all +0.8% – +0.6%, while the RTH was +1.4% and has had a +8.3% run in
five
days and is now pushing the previous rally high of 91.30, having closed
yesterday at 91.

For Active
Traders

The early down opening in the major indices
set
the table for some excellent Trap Doors yesterday from the 1.0 volatility
band.
For the SPX, the 1.0 volatility band was 1025.16, and the SPX had traded
down to
a 1026.19 low on the 10:05 a.m. ET bar, followed by a narrow-range inside
bar.
There was a positive divergence in the Chande Momentum Oscillator (20).
Entry in
the E-mini was above the 1026 high of the 10:10 a.m. bar. The entry carried
up
to 1033.75.

The next good opportunity came after a .786
retracement to the 1024.25 E-mini low, hitting 1026.25. After a
change-in-direction bar, the E-mini ran to a 1038.25 intraday high and
closing
in the top of the range. The retracement trade was a larger 1,2,3 higher
bottom
entry from a .786 and 1.0 volatility band sequence. Because of the afternoon
trend up, the 1,2,3 higher bottom was the norm for the index proxies, HOLDRs
and
many of the big cap correlated stocks. It was a three-trend day, which we
haven’t been getting recently, and for example, the QQQs went: 1) Trap Door
reversal up; 2) RST reversal sell down; 3) 1,2,3 higher bottom up from 2:00
p.m.
into the close. The 1,2,3 higher bottom was a second attempt setup, having
been
scratched or taken a small loss on the first one. (See Monday’s five-minute
QQQ
chart.)

Today’s
Action

We start today very short-term overbought
with
the five-day volume ratio moving average at 72 and the 60-day 20-period
Chande
Momentum Oscillator for the SPX close of 1039.25 at an overbought level of
+62.42. On the daily chart, there’s a negative divergence in this oscillator
as
the SPX challenges new highs again, so that always puts me on red alert
status
when combined with the short-term overbought condition. Long-term overbought
can, as you should know, stay overbought for a long period, but the very
short-term overbought usually gets resolved with a sharp air pocket day or
two
which could easily follow a breakout to new highs.

New highs in the SPX above 1040.29 sets up a
1,2,3 higher top pattern, so you are on price action alert. Also, for those
of
you that have learned the RST strategy, you see that is also developing, but
remember the primary filter. The longer-term 200-day EMA is still
rising
and price is not far enough above it, so if there is a reversal
entry based on the RST, make sure you take it intraday and only keep it
overnight if there is a sufficient profit cushion at day’s end. This corner
has
no interest in taking additional index proxy long positions into new highs,
but
will instead continue with options strategies to protect the existing
positions
taken at much lower lows, just as was done with the semis. Short-term two-
to
five-day long positions are only taken on retracements and not on
breakouts.

Have a good trading day,

Kevin Haggerty

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Watch Price Action At This Level

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