Plan

After the early up, the SPX ($SPX.X | Quote | Chart | News | PowerRating) reversed the initial wide-range bar and also the previous close, trading down to the .618 retracement zone of Monday's 930.42 low. It then rallied to the .618 retracement level of the initial morning high. This is what I teach at the seminar as a Net Minus setup, which is at least a .50 retracement to the previous high and at/or below the previous close and also the same-day open. It doesn't have to be exact to the penny, so please, no e-mails. From that .618 retracement, it was trend down all day, hitting an intraday low of 930.36 and closing around 935.

I am doing this on Tuesday night as I will be traveling early A.M. in time to make the open. Preparing the levels in play is something I do every day, so I thought I would take you along as I get ready for Wednesday's trading.

Yesterday's intraday low of 930.36 for the SPX is at a key inflection point. Looking at the daily chart, I see that the SPX closed in the bottom of the range, below the open, and below the previous six closes at 934.82. Certainly not a positive. The 50-day EMA is just above at 937; The 20-period EMA on the five-minute chart is 935; On the 60-minute chart, the 20-period EMA is 938, and on the 260, it is 942, so that takes care of the immediate overhead.

On the downside, 930 is the immediate downside inflection point, which can go either way. Looking at my 20-day 120-minute chart, I see a big 1,2,3 with entry below 930 and it is also a very defined head-and-shoulder pattern. You can also see the same pattern on the 60-minute, 30-minute or 15-minute charts, but I use the 120 for more definition of levels. The 50-period EMA on the 120-minute chart is also right on 930, so it is a magnet for sure. On the 120-minute, I use the 8-, 20-, 50- and 200-period EMAs. 

If the SPX breaks below 930 and doesn't reverse up to trap the shorts, remember your second-entry rules. Then I see that the 20-day EMA on the daily chart is 923, and the .236 retracement from the 965 high to 776 is 920. The top of the ascending triangle breakout support is just below at 915, so we have some confluence. The head-and-shoulders pattern measures down to 895, which is also the .382 retracement level from 965 to 776.

I do the same drill for the Dow ($INDU | Quote | Chart | News | PowerRating), (QQQ | Quote | Chart | News | PowerRating)s and (SMH | Quote | Chart | News | PowerRating)s each day. With the plan in front of me as I start the day, I can react quickly to intraday setups at any of these awareness levels instead of debating the issue and doing nothing or else executing a poorly thought out trade just to do something, and that just isn't what it's all about. That is trading emotionally, and that doesn't get you anywhere.

With all that's going on, it's smart to do most of your trading in the index proxies and sector HOLDRs. We have earnings news, end-of-month saber rattling, and the ever-looming September/October period that will continue to gather more negative hype as we go. Whether the indices go to new lows we can't know, but you can be sure it will be a volatile period full of opportunity for traders. There are many money managers that didn't put enough cash to work on this current move, and they have cash ready to work on any significant drop. The expectation is a September/October meltdown, but the surprise would be a retracement to the 776 low rather than new lows. 

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