Follow The Lead

Friday was an early up, with Trap Doors in the (SMH | Quote | Chart | News | PowerRating)s, ($NDX.X | Quote | Chart | News | PowerRating), a Flip Top in the ($DJX.X | Quote | Chart | News | PowerRating), but then an afternoon down, as news rhetoric continues to make the indices just beachballs blowing in the wind. The morning long entry patterns were defined, but not so with the afternoon decline, as it was a knife down reaction initiated by futures selling and short-term trader's weak hands.

The Dow ($INDU | Quote | Chart | News | PowerRating) still managed a +0.1% gain, the SPX ($SPX.X | Quote | Chart | News | PowerRating) +0.2%, with the Nasdaq ($COMPX | Quote | Chart | News | PowerRating) -1.0%. NYSE volume was 1.239 billion shares, a volume ratio of 61, and breadth +696, which points out the futures-induced quick sell-off in the afternoon, not the Generals selling. The Nasdaq volume ratio was 26, which tells me there was end-of-month positioning with selling in some of the tech disasters. 

The media is fueling the fires on nuclear war, terrorists on every corner of the United States, all foreigners selling stocks due to the dollar decline, along with the projected summer slump in tech/computer discounting. That side of the news equation is dominating any economic or corporate bright spots, of which there are a few. Comparisons will usually get better when you have a zero starting point.

As very fallible traders, we have no control of the news, or its outcome. But we can be ready for potential overreaction zones of reversal if the negative equation plays out. Those levels for me on the tech side would be 27.75 - 27 for the (QQQ | Quote | Chart | News | PowerRating)s, 35 - 34 on the SMHs, 1540 - 1500 on the Nasdaq Composite, and 1100 - 1080 for the NDX. For the (DIA | Quote | Chart | News | PowerRating)s, it would be 95 - 94, and on the SPX cash, it would be 1033. These are some of my downside awareness levels, and I would also look for confluence of deviation percentage bands, average implied volatility bands, and some overbought/oversold indicators I use.

The final decision to take a position will be made by using a trigger entry for any reversal entry pattern which might be started on the intraday chart and then carried overnight if it closed positive on the day. As always, you won't have any positive bells going off when it's time to take the trade. When you get a high-probability reversal zone pattern with entry just above your stop, the greater risk is not taking it, as you saw with the +20% recent reversal in the SMHs from the .618 retracement zone.

Your choice to take these kinds of trades depends on whether or not you play both continuation and Change in Direction, or just continuation. The talent and rewards come from playing both, not just the obvious continuation patterns with the entire world all looking at the same obvious entries, and everyone thinking they're the only ones that see them. Not to mention the Program Gang, Market Makers and Specialists ready to make the technical analysis clones pay a premium for obvious entries.

Based on the current world events and potential short-term meltdown, I suggest staying with the daytrade equation which has been very rewarding with the recent travel range on an intraday basis, rather than interday. The Generals most often put some new money to work the first few days of the month, but that doesn't mean they won't get the chance to scale down due to market weakness from overt news. Friday's action told us nothing other than end-of-month positioning, so we start June with an open mind, and we'll have to wait until we see buying/selling pressure show up in any specific sectors, group and stocks.

Have a good trading day and take your lead from the Generals.

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

Five-minute chart of Friday's NYSE TICKS