Pay Attention When We Hit These Levels

The bet on volatility regardless of direction has paid off handsomely, as the SPX ($SPX.X | Quote | Chart | News | PowerRating) has declined 63 points since the initiation of the position, and then this Iraq emotion has carried 77 points to the upside so far. That is a total of 140 points, or about 18% in just 12 days. Imagine that, and all without being cerebral. Certainly the covered combo on the (QQQ | Quote | Chart | News | PowerRating)s put on at lower levels with a -15% discount, worst case breakeven scenario, is doing just fine.

This four-day upside Iraq burst has taken out the 850ish resistance, which is now minor support. Also, today's 1.0 volatility band is 853, so we have a point of reference on a daytrading basis. The major resistance is the 870 head-and-shoulder neckline. Just below that is the 861 .50 retracement from 769 to 954. 863 is the .618 retracement to the 1994 low from the 1553 all-time high. So far, the SPX has a 776 bottom, 769 bottom, and the current 789 bottom if it holds.

If it does, it sets up the major inverse head-and-shoulders pattern again, where the neckline is at about 920 - 925 now. A breakout above this pretty much forces everyone off the sidelines. The 200-day EMA is just below at 913, while the 12-month EMA is about the same as the 920 -925 neckline. This would be a classic breakout and widely broadcast by all of those in the middle of the bell curve and the mutual fund market timers. To me it just means that the breakout move could run to 1068, or +15%, which is the .38 retracement to the 1553 high. The head-and-shoulder breakout measurement is about 1100.

Any move taking out the 870 major resistance into the above-mentioned zone will enable me to put on another excellent risk/reward position for a move with volatility regardless of direction because it would be at the very high end of resistance and probably at an extended standard deviation band. That, of course, means there would be ample downside air pocket room, in addition to the potential for a good move from the head-and-shoulder pattern.

Yesterday was sideways for the major indices, with the closing range 867 - 858, as it bumps up against the 870 resistance for the first time since the breakdown since Jan. 24. NYSE volume was 1.5 billion yesterday, a volume ratio of 67 and now has a four-day moving average of 74, and breadth +270.

The semis continued an excellent move, with the (SMH | Quote | Chart | News | PowerRating)s advancing +3.7% yesterday vs. the +0.4% for the SPX. This move off the 20.36 low on Feb. 10 vs. the 20.25 .786 retracement level to the October low is now +26% and also +17% from the 1,2,3 higher bottom in the past five days. Yesterday's 25.67 intraday high was the .50 retracement to the 31 high, with the .618 retracement at just below the 27 level. Let the buyer beware.

On the top of this premature victory emotion, there's a Triple Witch this Friday, so daytraders must remain very nimble, to say the least. I think emotion has certainly gotten well ahead of reality, and the reality will be some severe terrorist attacks on United States soil, which I, for one, think is a very high probability. Net net, I have no interest in buying a naked longer-term position into this current five-day move. I will keep the longer-term positions on and daytrade only

Have a good trading day.

Five-minute chart of Tuesday's SPX with 8-, 20-, 60- and 260-period EMAs

Five-minute chart of Tuesday's NYSE TICKS