Win-Win Trading Decision
What Wednesday’s Action Tells You
The generals started the last quarter and very
important month of October very aggressively with across-the-board gains in all
the major indices, HOLDRs, and sectors. The SPX
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1018.22, +2.2%, and the Dow
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35.11, all advanced +2.1%. The Nasdaq closed at 1832, +2.5%. The major sectors
kept pace, led by the XBD, +3% and the BKX and RTH each +2.8%, with the CYC
+2.4% while the OIH was +1.8% and the BBH +1.1%.
The new money put to work during the first few
days of the month and quarter coming from a short-term oversold condition after
an eight-day retracement to the 50-day EMA has obviously benefited daytraders.
More importantly, you were able to convert the day trade to a position trade
because of the extent of the move (see the
Oct. 1 commentary).
NYSE volume expanded to 1.5 billion, with 1.3
billion up, and only 209 million down. The volume ratio was 86, which is
significant coming off a 5-day volume ratio oversold condition of 35. The last
five days’ volume ratio went 18, 26, 28, 69 on Monday’s setup day, and 32. More
significant was the breadth yesterday at +2095. I only checked back through
September ’01, but it is the most since a +2005 on July 29 coming off the 776
initial SPX bottom. After the 9/11 attack, the biggest up-day was +1813 and then
+1843 on Oct. 11 following the Oct. 10 769 SPX bottom. I should also note that
the biggest breadth days usually come during the first few days of the month
when new money is put to work, and not during the end-of-month markup by the
Generals. That is because they only push their largest holdings and because many
of the big mutual funds have become quasi index funds, so they are primarily
marking up the big cap stocks as opposed to investing across the board.
The other most significant point about
yesterday’s market action was that both the SPX and Dow not only re-crossed and
closed above their 50-day EMAs, but also their 20-day EMAs, which gives
daytraders a higher pivot point to play with both ways. The SMHs closed at
35.11, above the 50-day EMA of 34.80, but below its 20-day EMA of 35.91. The
QQQs closed at 33.11, above its 32.66 50-day EMA and below its 33.34 20-day EMA.
The moving averages are just numbers, and I only
want to know if they are rising or declining and if price action gets
accelerated around them which has been the case in a significant way during this
March rally and retracements. If the game is on around these averages, then you
have to play. It’s not always the case.
For Active Traders
Traders had an easy decision to make yesterday,
but it was a win-win decision. In the Oct. 1 commentary I said any short-term
setups should have a close above the high of the low day and early intraday
entry could be taken prior to that and only held in position if it did close
above that high. Using the SPY
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the same trade in the E-minis — there was an early move up to 100.93 on our
favorite 10 AM bar, after opening at 100.24, which was a gap above the previous
99.88 close. It then retraced to the 240-EMA and a 100.41 low in the 11 AM bar,
which was a .38 retracement to Tuesday’s 99.72 swing point low on the 3:45 PM
bar. It was also a .786 retracement to yesterday’s opening bar low. The SPY gave
you a Kings and Queens reversal pattern entry above 100.59, which was also above
the 8, 20, 60, and 240 EMAs. The key breakout entry was a trade through of
Tuesday’s 100.76 high of the low day and the 8th retracement day (described in
the Oct 1 commentary). You didn’t take first the entry above 100.76 because it
had closed at 99.88 on Tuesday, then gapped open to 100.24, trading up to 100.93
on that 10 AM bar. Taking that first entry is not good trade logic because it
was too extended. You should play for a retracement entry, then the second
entry above 100.76, which you got. This trade carried up to 102.18 and closed at
102.08. As a daytrader, you made a nice chop and went out flat. If you also
short-term trade, the you went out long with a nice cushion and your stop is
moved to breakeven. If you are running a good business, then you took 1/2 of
your position off into the 102 zone, ringing the register and now it is
emotionally easier to trade the other half of your position.
Keep in mind that yesterday’s 102.18 intraday
high is also the June 17 high of the trading range that the SPY broke out from
on Sept 2, which, by coincidence, was also the first few days of that new month.
It is also the .50 retracement level to the 104.70 rally high, not to mention
that the 3.0 standard deviation band (5-day, 5-minute chart) is 102.35 and the
2.0 band is 101.80. This reflex started from the 99.25 Tuesday low, which
was just below the 2.0 standard deviation band and right at the 89-day EMA of
99.20. When you manage a trade those are thing you must always be aware of
because you can quantify them and not rely on some wishy-washy b–s—
subjective commentary.
Today’s Action
Today, as always, the score card starts at zero
and there are new decisions to make. Yesterday’s move was excellent, but you
must keep in mind it also comes on the first day of the new quarter as some new
money gets put to work. It was a wide-range bar thrust day for the major
indices, so a first breakout entry above yesterday’s high in the SPX/futures
early in today’s session is not good trade logic.
The futures at 8:20 AM as I complete this are
quiet, with the S&Ps flat, the Dow -15, and Nasdaq +6. Just a lot of
noise. The SMHs, which closed at 35.11 after another bounce off the 34.50 level
(fourth time) to an intraday high of 35.30, would be a more interesting early
setup as they are right on the 240-EMA (5-min chart) having pulled back from the
35.30 high. Yesterday’s bounce off 34.50 also recrossed the 50-day EMA of 34.80.
Have a good trading day,
Kevin Haggerty
