Contracted volatility precedes Slim Jim breakouts

Kevin Haggerty is the former head of trading for Fidelity Capital Markets. His column is intended for more advanced traders. Kevin has trained thousands of traders over the past decade. If you would like to be trained by him, click here. or call 888-484-8220 ext. 1.

After last week's big price move, the market was obviously very short-term overbought, with the 4 MA of the volume ratio on Friday at 70 and the 4 MA of breadth at +1295.

The SPX treaded water the past two days at the 1291 level, closing at 1289.69, down less than a point from Monday's 1290.15 close. The Dow was flat yesterday at 11,012, with the QQQQ +0.07% to 42.88. The market action was in the energy sector once again with the OIH +2.0% and it is now +10.3% in the past six days, with the CLH6 (futures) -0.4% to 64.10. The XLE was +1.1%. On the interest rate side, the TLTs were soft, closing on intraday low at 91.04, -0.8%, with the US dollar index essentially flat at 89.31.On the other side of the TLT was a +1.7% advance in the GSCI (precious metals index-$GPX).  The $TYX (long term T-bond yield) closed at 46.07, +0.9%, and is right back to its 200-day EMA at 46.13, so this is a test level, as is the US dollar 200-day EMA at 88.82.

Most all of the daily charts in the strongest trading sectors are all extended so daytraders get no help there until some retracement action. That narrows the opportunities and you must be nimble in your intraday long positions. Yesterday many of the energy plays were closing-range Slim Jim breakouts that gave entry on the first few bars, so you had to be prepared with a trading plan in order to capture the trade. The energy stocks are in the "above the line" trading zone, so they are in play every day for the daytraders but not so for the short term traders, where buying the retracemenets is a better way to play the high volatility. Daytraders who concentrate on contracted volatility give themselves an edge, especially when trading in the strongest sectors. Contracted volatility precedes significant moves.

The major indices are all short-term overbought so daytraders should only play them from the long side on extended intraday weakness--if at all--and take the short side setups as it is a time week following a strong upside price move.

Have a good trading day,

Kevin Haggerty