Two High-Probability Strategies That Give You A Major Edge

The SPX ($SPX.X | Quote | Chart | News | PowerRating) closed at 967.08, +0.2%. It was the second close below the triangle pattern that had formed since the 1015.33 June 17 high, which was followed by a 1015.43 high on July 14. It is also the second close below the 50-day EMA of 976.22. NYSE volume expanded to 1.45 billion, so there were some Generals that put some money to work, as the indices did not have a continuation air pocket. The volume ratio was neutral at 56 and breadth just +40, which doesn't tell us the sellers went to sleep. The Dow ($INDU | Quote | Chart | News | PowerRating) closed at 9062, +0.3%, with the 50-day EMA right below at 9036.46, which is the immediate downside pivot today. The (QQQ | Quote | Chart | News | PowerRating)s finished flat, while the Nasdaq ($COMPQ | Quote | Chart | News | PowerRating) closed at 1653, -1.2%. There was a common thread in yesterday's market action, as technology was soft, with the (SMH | Quote | Chart | News | PowerRating)s -1.0%, along with the QQQs which closed flat and in the bottom of its daily range, along with the Nasdaq at -1.2%. 

Yesterday's theme was evident, as the long bond proxy, the (TLT | Quote | Chart | News | PowerRating), was +2.0% and the (CYC | Quote | Chart | News | PowerRating) was down +0.3%. Also, the XAU, which is the gold index, was +2.2%, along with the (OIH | Quote | Chart | News | PowerRating)s +2.5%, while some defensive stocks were among the leaders of the top 100 big cap stocks, such as (PG | Quote | Chart | News | PowerRating), (MRK | Quote | Chart | News | PowerRating), (JNJ | Quote | Chart | News | PowerRating) and (SLE | Quote | Chart | News | PowerRating), along with (HD | Quote | Chart | News | PowerRating). This thread indicates a pause in the aggressive recovery posture, if in fact it carries through for a few days. The banks were +0.9% and brokers +2.3%, along with the RTH +0.7%, as they all outperformed the SPX. 

For Active Traders

Yesterday's market action gave us the early down scenario that I thought would have the best setup potential. That's exactly what happened, as the major indices made their intraday lows on the 10:15 a.m. ET bar. As you have seen and read in previous commentary, the 10:00 a.m. to 10:15 a.m. time period is when there is most often a change in direction after the initial contra move off of gap openings. I have included charts of the SMH, QQQ and (SPY | Quote | Chart | News | PowerRating) today which outline the strategies from yesterday, which are explained in detail in the seminar video and also the 1,2,3 trading module. 

The SMH made an intraday low of 31.16 right at the 31.17 1.0 volatility band and then rallied. It was an RST long entry above 31.37, then a 1,2,3 higher bottom long entry above 31.53. The SMHs ran to 32.10, just under the 240 EMA and failed, forming a 1,2,3 lower top sell pattern, giving you a three-bar reversal entry below 31.91. The trend entry was below 31.79, as it also re-crossed the 20-day EMA of 31.74 to the downside, hitting 31.45 and closing at 31.50.

The QQQ gave you a 1,2,3 lower bottom with entry above 30.21, then a 1,2,3 higher bottom entry above 30.27, the high of the signal bar with the 30.19 low.

The SPY initial setup was an RST long entry above 96.62. This was formed after the SPY traded to the 96.34 low, which took out Monday's 97.02 low, setting up a larger RST pattern with symmetry. If you only have the 1,2,3 module, you got a 1,2,3 higher bottom entry above 96.70. The SPY traded up to 98.05.

The rally didn't hold into the close, but the daytrader doesn't care because you caught the reversal move after the early down. Isn't that what we were looking for going into yesterday's trading? Net net, the SMHs finished the day -1.0%, but for the astute trader, there was a +3.0% move from the 31.17 1.0 volatility band, a +2.3% run from the 31.37 RST entry level and a +1.8% move from the 1,2,3 higher bottom at 31.53. You can't duplicate those entry prices due to execution slippage, but if prepared in advance knowing the strategies, you can always get a good portion of it depending on how you manage the trade.

Yesterday's reflex up for the SPX was off a 960.84 intraday low, but I don't expect another move short-term like the bounce off the 962.10 low on July 1 to the 1015.43 high on July 14. You have been made aware of the confluence of several things in the 960 zone, but if the cycle down into August continues, 960 will probably get taken out on the next attempt, which would bring the 948 12-month EMA and 200-day EMA of 940 into play, which is the higher probability, as there hasn't been more than a -5.2% retracement since the current leg of the 10-month rally started at 789 on March 12.

Have a good trading day,

Kevin Haggerty