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Watch For Rollover

By Kevin Haggerty | TradingMarkets.com
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The S&P 500 index made new highs early yesterday before going sideways and forming a four-hour head-and-shoulders pattern on the five-minute chart. It broke the neckline below 1418 to drop 8 quick points to 1410. It was a simple pattern, easily defined on your five-minute chart, with clean entry. Figure 1.   S&P 500 index (SPX), daily.   Source: Quote.com. The S&P had a narrow-range day on big volume of 960 million, and closed at the bottom of its range. Breadth was negative, as was the up-down volume ratio. Institutional blocks of 10,000 or more shares were active at 20,227. The unchanged volume rose to 49 million, which is higher than usual and generally means a rollover day with some downside follow-through can be expected. (But around 8:30 AM ET, the S&P futures are up around 5 points.) We have yet to close below the low of the high day On three occasions during this rally risen on a wide-range bar or two, consolidated for three days, and then did it again. We have yet to close below the low of the high day, as the high days have kept rising. It has been a good example of why you let price and volume, not your opinion, indicate possible change of direction. When you see it you can act on it, the same way you should trade your stocks. Yesterday was a narrow-range reversal bar--a new high and a close below the open in the bottom 25% of the day's range on increased volume. This is a red flag. You saw the first day of air yesterday: AXP down 5 5/8, TXN down 6 15/16, QCOM down 45 1/2 (from their highs to their lows). Pay special attention to second entries after the early posturing by market makers, specialists and traders who persist in buying on the open, or just after it. These professionals are all very conscious of these highs and lows and will run you in, just like the S&P futures gang runs the stops every day (except for the strongest trending days). The second entry will be better because the weakest hands will have been stopped out. For some reason, probably psychological, they won't come back in the same stock at the time the trend asserts itself after they have been stopped out. This is a very common mistake, and often occurs because the initial loss was larger than it should have been. You must keep your hand on the eject button if the market proves your trade wrong. Remember, you must balance the Trader's Equation (see my Five-week Day Trading Course). Pattern Setups  Expect choppy action with option expiration tomorrow, so don't overstay your welcome on any trade. Expect a rollover day unless the futures can carry through. Stocks to watch: Merck [MRK>MRK]; Schering-Plough [SGP>SGP]; Johnson & Johnson [JNJ>JNJ], which was a second entry yesterday--look to enter above Tuesday's high; Proctor & Gamble [PG>PG | Quote | Chart | News | PowerRating], which broke to new highs on a wide-range bar, and Cisco [CSCO>CSCO] going above 85. Three Internet or Internet related stocks: Citrix Systems [CTXS>CTXS], Intuit [INTU>INTU] and ISS Group [ISSX>ISSX]. On the short side, keep it simple: the Spiders [SPY>SPY] and the QQQs [QQQ>QQQ] below yesterday's low. Don't do it early; second entry on these are usually always best. Program Trading NumbersBuySellFair Value6.103.755.00One note: I hope some of you took Clorox (CLX) as a position trade, as it hit 50 5/16 yesterday, just six days after our 44 entry level. The Generals can't hide. If you want to learn more about Kevin Haggerty's trading strategies, click on the link below to go to his series of tutorial articles.
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