Ideal Conditions For The Short-Term Trader

What Wednesday's Action Tells You

Market action yesterday was dominated again by the same primary thread we have seen for the last three days. Price and volume was primarily in the banks, brokers, other related financials and utilities as they continued their sell-off on the after-the-fact news. The major indices were off slightly from the previous day, with the SPX closing at 1128.17,  -1 1/4 points and the Dow 10,378, -3 points. The Nasdaq finished at 2025, -0.3%, while the QQQ had a positive divergence at +0.5%, closing at 36.81. NYSE volume expanded to 1.55 billion, which included some option expiration activity along with the continued selling in the  financials.

The SPY, DIA, and QQQs all traded above their average volume while the SMH, -0.8%, traded below its average volume. Some more money found its way to defensive stocks like ABT, +4.2%,  JNJ +2.4%, BMY +1.7%, LLY +1.5%, MRK, +1.9%, CL, +2.4%, in addition to some basics like PH, +3.8%, DD, +3%, and MIL, +2.6%. The XLB closed green at +0.4%. The allocation adjustment like we are seeing now creates many good trading opportunities, especially after it gets too extended or overdone.
 

For Active Traders

The gap down in the major indices and HOLDRs gave traders their opportunity. The SPY opened at 112.61 versus the previous 113.21 close. The initial low was 112.57on the 9:35 AM bar, then you got the 1,2,3 Close entry above 112.75 on the 9:50 AM bar, which was preceded by the RST entry above 112.72 on the 9:40 AM bar. The SPY made a nice contra move up to 113.63 by 11:05 AM. This set up the Slim Jim short pattern which caught the afternoon trend down. The Slim Jim breakout was below 113.40 and this was also below all of  the 8, 20, 60 and 240 EMAs. The SPY traded down to 112.56 before trading up to the 113.39 close. (FYI, this was another RST long setup with entry above 112.74). Net net, it was an RST long and 1,2,3 Close entry for the contra move, Slim Jim short as price resumed the direction of the open, so the 90-60 Rule was in play again as it is most of the time. Next was an RST long that caught the last half hour markup into the close. They are all defined setups from your Sequence Course or seminar material --didn't matter whether you traded the SPY or the E-minis. The QQQs gave you the RST long entry on the 9:35 AM bar above 36.49, which traded up to 36.94 on that 11:05 AM bar.

For Today

The 4 MA of the volume ratio is now 35 and -1302 for breadth (bloated by the financials) while the 5-day RSI is still a bit high at 38. There are more economic reports in addition to the earnings releases on top of this week's options expiration so that means more emotional price action, which is ideal for the short-term trader. The SPX and Dow are all around the levels mentioned in yesterday's commentary, so that will carry over today. The QQQs closed at 36.81, right at the 240 EMA (on the 5-minute chart) and 480 EMA (equivalent to the 20 EMA on a 120-minute chart) so that is an early guideline both ways.

Have a good trading day,

Kevin Haggerty