You Tell Me, Where Is The Risk In Taking This Trade?

• January 26, 2004
• Kevin Haggerty

What Friday’s Action Tells
You

The SPX
(
$SPX.X |
Quote |
Chart |
News |
PowerRating) had a narrow-range doji
week with an 1150.51 high and 1134.62 low, closing below the midpoint of the
week’s range. The NYSE weekly average volume at 1.66 billion was the highest
since your table started Oct. 31. Narrow range and increased volume and higher
price are always a red alert, especially since the SPX has hit the 1150 – 1160
retracement zone to the 1553 and 1530 all-time tops. There are also longer-term
momentum lines at 1148 and 1147.

size=2>Â	Monday 1/19	Tuesday 1/20	Wednesday 1/21	Thursday 1/22	Friday 1/23	Net
color=#0000ff>Index	Â	Â	Â	Â	Â	Â
color=#0000ff>SPX	Â	Â	Â	Â	Â	Â
color=#0000ff>High	H	1142.93	1149.21	1150.51	1150.31	1150.51
color=#0000ff>Low		1135.40	1134.62	1143.01	1136.85	1134.62
color=#0000ff>Close	O	1138.76	1147.62	1143.94	1141.55	1141.55
color=#0000ff>%		-.09	+0.8	-0.3	-0.2	-0.6
color=#0000ff>Range	L	7.5	14.6	7.5	13.5	15.9
color=#0000ff>% Range		45	89	12	35	43
color=#0000ff>INDU	I	10529	10624	10623	10568	Â
color=#0000ff>%		-0.7	+0.9	-0.4	-0.5	-0.7
color=#0000ff>Nasdaq	D	2148	2142	2119	2124	Â
color=#0000ff>%		+0.3	-0.3	-1.1	+0.2	-0.9
color=#0000ff>QQQ	A	38.55	38.39	38.11	38.04	Â
color=#0000ff>%		-.05	-0.4	-0.7	-0.3	-1.9
color=#0000ff>NYSE	Y	Â	Â	Â	Â	Â
color=#0000ff>T. VOL	Â	1.7	1.76	1.69	1.51	1.66
color=#0000ff>U. VOL	Â	1.09	1.03	691	690	875
color=#0000ff>D. VOL	Â	594	721	990	763	875
color=#0000ff>VR	Â	65	59	41	47	767
color=#0000ff>4 MA	Â	66	62	60	53	Â
color=#0000ff>5 RSI	Â	73	82	70	63	Â
color=#0000ff>ADV	Â	2062	2071	1717	1706	1855
color=#0000ff>DEC	Â	1257	1218	1580	+1600	1414
color=#0000ff>A-D	Â	+805	+853	+137	+106	+1901
color=#0000ff>4 MA	Â	+618	+534	+574	 +475	Â
color=#0000ff>SECTORS	Â	Â	Â	Â	Â	 Â
color=#0000ff>SMH	Â	-0.2	-2.5	-1.6	-1.3	-5.6
color=#0000ff>BKX	Â	+.01	+1.5	-.07	-0.4	+1.1
color=#0000ff>XBD	Â	+1.6	+1.6	-1.9	+.04	+1.3
color=#0000ff>RTH	Â	-1.0	+1.2	+.09	+0.8	+1.9
color=#0000ff>CYC	Â	-0.3	+2.0	-0.3	-1.0	+0.4
color=#0000ff>PPH	Â	+0.1	+1.7	-0.1	-0.6	+1.1
color=#0000ff>OIH	Â	+4.3	+0.3	-1.4	-0.3	+2.9
color=#0000ff>BBH	Â	-0.3	+1.5	-0.5	+1.4	+2.1
color=#0000ff>TLT	Â	-.07	+0.2	+0.7	-1.2	-1.0
color=#0000ff>XAU	Â	+2.4	+0.3	-1.9	-1.5	-0.7

table
legend

^next^

For Active Traders

When price hits a significant zone, it will
either reverse the trend in force or trade sideways, and then the highest
probability is that if it breaks out to the upside, it will reach the next
zone,
which in the case of the SPX, is 1253.  The NYSE weekly up volume/down
volume ratio for the year starting with the week ending Jan. 2 has gone 1.7,
1.4, 1.5 and then 1.1 last week. On Friday, the SPX and Dow
(
$INDU |
Quote |
Chart |
News |
PowerRating)
were
-0.6% and -0.7%, with the Nasdaq
(
$COMPQ |
Quote |
Chart |
News |
PowerRating) -0.9% and the
(
QQQ |
Quote |
Chart |
News |
PowerRating)s
were
-1.9% as some of those funny money stocks backed off.

The Dow, which had the same narrow-range weekly
doji bar, had a low of 10,491 and has been trading between the two retracement
zones mentioned last week of 10,410 – 10,775. The initial short stops on the

(
DIA |
Quote |
Chart |
News |
PowerRating)s are above the 106.75 high.

In the primary sectors, the semiconductors
led
the downside, with the
(
SMH |
Quote |
Chart |
News |
PowerRating) -5.6% on the week. From the 45.78 high to
Friday’s 42.58 low, they have declined -7.0% in eight days, diverging from
both
the SPX and Dow. The 50-day EMA is 42.27, the 89-day EMA is
40.61.

The XLBs are also on the down staircase,
having
declined -6.2% over the past 13 days from the 27.10 high. The weekly close
on
Friday was 25.42, which reversed the previous five weeks’ lows. This corner
is
happy with that. The 50-day EMA is 25.55 and the 89-day EMA is 24.72. The
25.42
close is the first one below the 50-day EMA since Sept. 30. This retracement
puts them in a short-term oversold position in the overall up trend. Any
significant top in any vehicle will have a lower, double or higher top, as
opposed to a “V” top more than 95% of the time, so the first
retracements from
rally highs, like the XLB, will have more upside reflex from this
retracement.

I was out Friday, but I see that there was a decent
short trade in the futures/SPY on Thursday, as the SPX hit the 1150.51 high,
then reversed down to the 1143 low. That was the 1,2,3 higher top for those
of you who have the 1,2,3
module or seminar
manual. There was another retracement on Friday to 1150.31, which reversed
down to an 1137.42 low, closing at 1141.55 on Friday. It’s not like you were
not prepared for the level, but many daytraders just won’t pull the trigger
because they are listening to the herd in the chat rooms, etc., who say, “Here
they go again.” They might have done just that, but the least amount of
risk was to take the trade at the key level as it failed to take out Thursday’s
1150.51 high. Price reversed five lows below 1149.48 (on your five-minute chart),
and your initial stop would be above Thursday’s 1150.51 rally high. So, you
tell me, where is the risk in taking that trade at a key level when the risk/reward
is obviously extremely positive? The professional takes the short knowing it
can be covered and reversed to the upside with minimum capital exposure if the
dynamics were to turn really positive.

Today’s
Action

I missed Friday’s trading, but because of the
recent declines in the semis and basics, they remain the focus for any
reflex up
intraday. SPX short setups on rallies to the 1150 zone will be taken, and
the
weekly lows of last week’s SPX and Dow narrow-range bars is another red
light.

Have a good trading day,

Kevin Haggerty