Fading Herd Mentality With The Volatility Bands

With the election results in, except for the denial of the major networks and CNN, the herd mentality surfaced as the major indices all gapped up big on the opening, and the intraday highs were made by the 9:35 a.m. ET bar.

NYSE volume expanded to 1.77 billion with up volume of 1.43 billion shares for a volume ratio of 82 and breadth +1733.

The SPX ($SPX.X | Quote | Chart | News | PowerRating) made a new rally high and close (since the 08/13 lows) with the intraday high of 1147.60 and 1143.19 close, +1.1% on the day. The Dow ($INDU | Quote | Chart | News | PowerRating) was also +1.0% to 10,137. The Nasdaq ($COMPQ | Quote | Chart | News | PowerRating) was also +1.0% to 2004 having closed above its down trendline from the 01/26 2154 high three days ago. 2000 is a key retracement level to the 2154 January high from 1751. With the (SMH | Quote | Chart | News | PowerRating) declining -1.0% yesterday, the (QQQ | Quote | Chart | News | PowerRating)s lagged both the SPX and Dow at +0.7% to 37.41. Yesterday's 37.90 intraday high equaled its 06/30 high.

With the Bush election, the sector leaders were the PPH, +3.2%, (OIH | Quote | Chart | News | PowerRating), +3.0% and also the defense stocks, such as (NOC | Quote | Chart | News | PowerRating), +4.1%, (GD | Quote | Chart | News | PowerRating), +3.8%, and (LMT | Quote | Chart | News | PowerRating), +3.3%. This reversed the previous day where the faulty polls spooked the market and these same sectors.

For Active Traders

Both the SPX and SMH hit their +2.0 volatility band levels on the opening two bars yesterday, then made an immediate contra move, so if you utilize my volatility bands, you faded that zone. The initial reversal on the (SPY | Quote | Chart | News | PowerRating) was from 115.36 (intraday high) to 114.78. A narrow-range triangle formed after that until breaking to the downside below 114.85 to 114.24, but closing up at 114.98 on a reflex during the last half-hour. The SPX also hit 1147.51 on the 9:35 a.m. bar, which was the exact +2.0 volatility band.

The (DIA | Quote | Chart | News | PowerRating) opened up +1.4% to 101.93, hitting 102.37 on the 9:35 a.m. bar vs. its +2.0 volatility band at 102.10. After reversing the band, it traded down to 101.62 and then formed the same pattern as the SPX, eventually hitting  a 101.14 low before closing at 101.71.

The SMH, because of its volatility and how the Specialists will always maximize these gap openings, opened up at +3.4% to 33.57, which was also its intraday high. The +2.0 volatility band was 33.64. Price declined straight down into the close of 32.15 without going sideways like the SPX and Dow. It was a -4.6% move down from the gap-up opening to the +2.0 volatility band. (Thanking you, herd mentality and Specialists.)

Today's Action

Today is the eighth day of the SPX rally off the sequence price zone after the retracement to the rising 200-/233-day EMAs. That was the lowest-common-denominator entry, as most of you know that have my strategies, but buying strength after seven up days is not a high probability short term.

If the event risk does not kick in, the Generals now have an opportunity to make it a decent 2004. If they can break the .50 retracement zone of 1161, it would force many to get on the train. The .618 retracement is up at 1254. All of the SPX EMAs are rising and is now an "Above the Line" situation, which is positive. Retracement levels are now the 20-day EMA at 1120.55, which is also the 200-day SMA zone, and then the 50-day EMA at 1116.09.

With today being the eighth day up, intraday short setups on rallies in the major indices should be considered by daytraders.

The delta neutral long synthetic straddle that was put on 09/17 with the SPX close at 1128.55 has been excellent with subsequent moves to 1101.29 on 09/28, 1142.05 on 10/06, 1090.18 on 10/25 and 1147.60 on Friday where the trade was closed out. The initial trade was put on because volatility was expected with the election hype and the event risk, while at the same time implied volatility was at lows which provided an excellent opportunity to put on the trade. That is 179 points of travel range in just 33 days. The next one will be put on some time after, and if, the SPX takes out the 1161 .50 retracement zone.

Have a good trading day,

Kevin Haggerty

P.S. Trade with me for a year. Click here.