Reaction Day. Here's How To Play It

The market action was certainly concentrated by the Generals in a smaller universe of stocks yesterday. This was evident by the SPX ($SPX.X | Quote | Chart | News | PowerRating) and Dow ($INDU | Quote | Chart | News | PowerRating) on the plus side until just before 1:00 p.m. ET with TRIN remaining below .70. The up volume/down volume ratio was only slightly better than 1.1:1, yet breadth was negative right from the opening bell and finished at -807. NYSE volume matched Wednesday at 1.77 billion shares, but this time the volume ratio was 41, not 79. It was a fairly narrow-range day for the SPX, 8.1 points, and no real selling as the intraday low was 1186.66 and high at 1194.81. The SPX closed down about a point to 1190.33, the Dow closed down just 5 points to 10,585, with both the Nasdaq ($COMPQ | Quote | Chart | News | PowerRating), 2144, +0.2%, and (QQQQ | Quote | Chart | News | PowerRating) +0.4% to 40.07.

The only sectors green were the PPH, +1.3%, and BBH, +2.4%. Oil declined again, and the (OIH | Quote | Chart | News | PowerRating) was -2.4%, but some volume did come in below 80. The OIH volume increased to 6.6 million shares vs. 4.4 million shares on Wednesday's -4.0% decline as the herd gets frothy. That was the most volume since the 8.8 million shares on 10/24 as the OIH was declining to the 89-day EMA on another lower-oil-price flap. This drop is certainly more overt which will set up a better upside reflex for traders. I have a Brooklyn Bridge you can buy if you think we are going to Neverland with $25 oil anytime soon. The 200-/233-day EMAs are 74.25/73.20 with the 89-day EMA at 78.92 and minor support at 76 - 76.50. Price must trade below 76.67 to set up any RST.

The rest of the primary sectors were all off small, while the short bond position from the (TLT | Quote | Chart | News | PowerRating)'s artificial rally above 88.50 on 11/23 remains in the money with the TLT closing yesterday at 86.10. This was the second day closing below its 200-day EMA, and the head-and-shoulder price objective measures down to about 83.75. Yesterday's TLT volume of 2.9 million shares was the most since the 4.0 million and 3.2 million shares as a bottom was being made last May at 80.51. The .618 retracement to that low is 84.17. You had ample pre-warning on this trade setup into the right shoulder high of 89.20. (See your daily chart.)

For Active Traders

The day was very profitable with the trading plan prescribed. The (SMH | Quote | Chart | News | PowerRating) broke out of a First Consolidation pattern to New Intraday Highs above 33.82, which was also a re-cross of the 200-day EMA at 33.81 and above the previous day's high of 33.76. Price ran to 34.33 before the first reversal-bar exit below 34.27. 34.33 was 3.9 times risk of .13. The SMH declined along with the major indices in the afternoon to 33.50 and closed there.

The other anticipated trade was the SPX 1191 - 1195 minor resistance zone. For the (SPY | Quote | Chart | News | PowerRating), there was daily chart sequence at 119.64, 119.68 and 120. On yesterday's five-minute chart, 119.64 was also the extension of the previous leg down from 119.50 to yesterday's 119 low. The 1.618 extension of that same leg was 119.81. The first entry was after the SPY hit 119.74 and traded below its 119.65 low. This went to 119.56 and reversed, making new intraday highs to 119.87. The loss was small on that first entry, less than .10. The low of the 119.87 doji bar high was 119.76, and that was the next entry, which was excellent, trading down to 119.11. Net net, you had daily chart and five-minute chart confluence, so it was an anticipated level of entry. Also, price was better during the morning than the dynamics, and all the more reason to take the short entries.

In the focus stocks, (YHOO | Quote | Chart | News | PowerRating) broke out of a contracted volatility pattern to new closing highs, +3.0% on the day.

Today's Action

There is nothing cerebral to say other than it is a reaction day. The pre-market futures are green as of 7:45 a.m., as I record this. The S&Ps are +5.40, Dow +36 and Nasdaq +13.50. Oil is down, while (INTC | Quote | Chart | News | PowerRating) traded up sharply after the close yesterday following their guidance call. Needless to say, the CNBC media is all over the hype, as usual. At 8:30 a.m. today we have the first-Friday-of-the-month "jobs dance,'" but that is often good for an acceleration and then a contra move. Let the emotion play out a bit before you enter any contra move.

Have a good trading day,

Kevin Haggerty