Stop Following The Herd

The market action ranged out from 11:00 a.m. - 4:00 p.m. ET, with the SPX ($SPX.X | Quote | Chart | News | PowerRating) trading from 1085 - 1079, the (QQQ | Quote | Chart | News | PowerRating) 34.07 - 33.78, and the (SMH | Quote | Chart | News | PowerRating) 31.60 - 31.20. These ranges are the opening focus on Tuesday. The SPX closed at 1084.07, -0.2%, and the Dow ($INDU | Quote | Chart | News | PowerRating) was unchanged, with the QQQ 34.06, -0.4%.

NYSE volume was 1.41 billion shares, but the key numbers were the volume ratio at 29 with the 4 MA finally short-term oversold at 27. Breadth was -1135 and that makes the 4 MA also short-term oversold at -1200. There has been a positive divergence over the past five days, in several indicators I use, including my composite, vs. the lower prices in the major indices and SMH. Because of this action, the long delta neutral straddles were adjusted yesterday to a delta long bias and will be increased if the price action is favorable on Tuesday. This decline has been very positive for these positions, including the increase in implied volatility, especially for the QQQs and SMH. Remember, at the time they were put on, everything looked rosy and implied volatility was at or close to 52-week lows and the crowd was all bullish.

However, the "Core Framework" that you learned at the seminar came into play, as it always does, because that is how markets move. The QQQs have taken out the 34 magnet low with a 33.70 low yesterday, and that is a good thing as the RST comes into play for those of you that understand the entry criteria. The (SPY | Quote | Chart | News | PowerRating) has to take out the 106.06 low and it hit a 108.21 low yesterday. For the (IWM | Quote | Chart | News | PowerRating), it is the 105.51 low vs. 105.71 yesterday. For the DIA, it is at 98.81 with Monday's low at 99.31. The Nasdaq ($COMPQ | Quote | Chart | News | PowerRating) had already taken out the 1865 low, but has not had a close above the high of the low day yet, but you RST players are aware of intraday entry tactics on any of these RSTs.

The XLB (basic industry SPDR) is now playing catch up to the SPX and closed at 25.22 after an intraday low yesterday 25.07 vs. the 200-day EMA at 25.04. Of the major XLB components, (PX | Quote | Chart | News | PowerRating), (IP | Quote | Chart | News | PowerRating) and (APD | Quote | Chart | News | PowerRating) have the better chart positions, in addition to the XLB. Defense stocks like (NOC | Quote | Chart | News | PowerRating), (LMT | Quote | Chart | News | PowerRating), (BA | Quote | Chart | News | PowerRating) and (GD | Quote | Chart | News | PowerRating) should be on the focus list also having pulled back to their 20- and 50-day EMAs, in addition to (RTN | Quote | Chart | News | PowerRating) at the 200-day EMA.

The energy stocks remain on the focus list in the current environment, in spite of the toppy action as evidenced by the composite numbers I gave you last week, as they have pulled back to their daily chart 20- and 50-day EMAs. Currently in that position are (WFT | Quote | Chart | News | PowerRating), (SII | Quote | Chart | News | PowerRating), (SLB | Quote | Chart | News | PowerRating), (CAM | Quote | Chart | News | PowerRating), (NE | Quote | Chart | News | PowerRating) and (RDC | Quote | Chart | News | PowerRating), in addition to (DO | Quote | Chart | News | PowerRating). Other energy stocks for your list are (AHC | Quote | Chart | News | PowerRating), (APC | Quote | Chart | News | PowerRating) and (APA | Quote | Chart | News | PowerRating).

(INTC | Quote | Chart | News | PowerRating) traded 81.2 million shares yesterday vs. the 64.3-million-share average and closed at 22.97, +1.3%, in a dynamite triangle. That was the most volume in the last six days, so maybe the Generals will get it going for a couple of days and give short-term traders a ride along with the SMH.

The initial focus for daytraders today is the resolution of the previously mentioned ranges from 11:00 a.m. - 4:00 p.m. yesterday. Also, this is the first time since the October 2002 lows that the weekly 5 RSI is below 20 and prior to October 2002, it was July 2002. The SPY 108.06 low needs to be taken out for the completion of a five mini-leg move down from 116.95. In fact, the .236 retracement to 77.07 (October 2002 low) is 107.54 and it hasn't even declined that far yet. The .382 retracement is 101.72, and for the SPX, that is 1012 (13% decline from 1163) high-to-low. The SPX .236 retracement to 789 is 1075 vs. the previous 1076 low, and the .382 retracement is 1020.

Net net, the SPY has only retraced -6.5% on a closing basis from 116.38 to 108.75.

Have a good trading day, and stop following the herd.

Kevin Haggerty