Why You Should Trade Overreactions, Not Announcements

September 10, 2003
Kevin Haggerty

What Tuesday’s Action Tells You

Yesterday’s early market action reversed Monday’s
rally in the first hour for the SPX
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PowerRating). The
SPX closed at 1023.16, -0.8%, as did the Dow, closing at 9507. We start today
back at go, as the SPX has gone from a 1021.39 close on Friday to Monday’s
1031.64, then back to yesterday’s 1023.16. The Dow did essentially the same
round trip from 9503 back to 9507 yesterday. In fact, for the past five days,
the Dow has been churning at its highs right at the initial 9600 trendline
resistance (see the Aug. 29 commentary for the chart). After thrust comes
consolidation, and that’s what the SPX has done for the past five days after the
breakout from the 1015 to 960 trading range box on excellent volume. The last
five days’ high range from 1029.17 to 1032.41 and yesterday’s closing price of
1023.16 remains above all of its rising 8-, 20-, 50- and 200-day EMAs. The
eight-day EMA is 1019.85 and the 20-day EMA 1008.45, so that’s the next SPX 10
point drop zone of there’s any follow-up red.

The retail sector was the downside leader, with
the RTH -3.0%, as Goldman Sachs made some negative noise with some downgrades.
Being that the retail sector was the only sector down on Monday, being red from
wire to wire, I would say that the pre-downgrade information flow to selected
institutional accounts was excellent. It is just another example of where you
are in the ladder of information (which is not high) and why individual traders
are best when trading price and volume along with any news-generated
overreactions, not announcements.

The
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interest now because they are trading in a 61 to 58.50 box, closing yesterday at
59.17. 61 is the .50 retracement to the June 12 67.50 high from the July 53.97
low. The 200-day EMA is just below at 58.48. This box will be resolved soon
providing short-term opportunity.

For Active Traders

The travel range for daytraders was better
yesterday in the major indices and their correlated individual stocks. I have
included the SPX five-minute chart from yesterday which highlights the Trap Door
low signal bar 1021.72 on the 10:20 a.m. ET bar. The 1.0 volatility band was
1023.08 and the 1.28 volatility band was 1020.68. Entry was above 1023.10, the
signal bar high. Some of you might have also played from the short side to new
intraday lows and below the 240 EMA on the 10:10 a.m. bar. This Trap Door contra
move only ran to 1028.48 before reversing in the direction of the open and
forming a 1,2,3 lower top. Trend entry was below 1026.20, which was also below
all of its EMAs. As those of you that have the seminar information know, Trap
Door contra moves will reverse in the same direction as the open about 60% of
the time. You manage Trap Doors differently than you do 1,2,3s or RSTs, two
major reversal patterns.

Today’s Action