The week started with a gap up opening on Monday
preceded by earnings and economic hype. The SPX ( $SPX.X | Quote | Chart | News | PowerRating) closed last
Friday at 998.32 and by 11:00 a.m. ET Monday morning hit a 1015.41 intraday
high, just ticking above the 1015.33 previous rally high. Funny how that just
seems to happen...like, most of the time. The major indices have gone south
since 11:00 a.m. Monday, hitting an intraday low of 989.30 yesterday, closing at
994.09, or -0.6%. 

Major banks were all up on Monday based on
earnings news, but as of yesterday's close, ( C | Quote | Chart | News | PowerRating), ( BAC | Quote | Chart | News | PowerRating), ( WFC | Quote | Chart | News | PowerRating),
( FBF | Quote | Chart | News | PowerRating) and ( FITB | Quote | Chart | News | PowerRating), all reporting this week, were net minus for the
three-day period. On the positive side, ( INTC | Quote | Chart | News | PowerRating) was +8.1%, while the semi
equipment stocks also had a good three days, with ( AMAT | Quote | Chart | News | PowerRating) +10.5%,
( KLAC | Quote | Chart | News | PowerRating) +8.0%, with ( NVLS | Quote | Chart | News | PowerRating) bringing up the rear at +3.8%, while the
( SMH | Quote | Chart | News | PowerRating)s were +4.2%, closing yesterday at 32.50, +0.8% on the day. ( MER | Quote | Chart | News | PowerRating)
is +8.5% for the three days based on its earnings. 

Going into this week, I said that trading would
be erratic and that news would overshadow technicals, and the best trading
opportunities would be on overreactions due to the earnings and economic hype,
and that's exactly what we have gotten so far. NYSE volume picked up yesterday
to 1.65 billion with declining prices, as opposed to the rising prices and
declining volume mentioned last week, which is always the red alert. The volume
ratio was 30, and breadth was negative at -1226. All of the major sectors
finished red. 

Yesterday's SPX close of 994.09 once again held
the 20-day EMA which is now 991.74, and this is the fifth time since July 2 it
has done that, but it is also the current downside pivot level for daytraders.
The ( QQQ | Quote | Chart | News | PowerRating) and SMH both closed and are trading above their rising 8-, 20-,
50- and 200-day EMAs, as is the Nasdaq Composite ( $COMPQ | Quote | Chart | News | PowerRating), so certainly
there is nothing to do there until that changes and they reverse a few previous
closes and lows. The Nasdaq Composite's 20-day EMA is down at 1691, just above
the recent breakout level of 1687. It closed at 1748, -0.3% on the day.

For Active Traders



From a trading standpoint, you have had to pull the trigger during that
opening-hour period on gap opening Trap Doors and then the move back in the
direction of the open. The semiconductors, which I said would be a primary focus
this week, have provided excellent daytrading opportunities, but there are lots
of games being played, as hedge funds are very aggressive because the Generals
are also involved in a big way with the order flow. For example, KLAC yesterday
gapped open, trading up to 52, just taking the previous day's high of 51.90, but
quickly reversed, then traded down to an intraday low of 50.45, just taking out
the previous day's low of 50.48 before reversing that low to the upside, closing
at 51.76. Reversals of previous day's highs and lows often provide excellent
risk/reward trades for the daytrader. 

Today's Plan

Starting out today, it looks like Trap Doors and
volatility bands will be the initial trading opportunities, and then maybe some
gap pullback setups that resume the direction of the open if it is to be a trend
down day. As I do this, the Dow futures are -87, S&Ps -10, and Nasdaq
futures -24, so If that holds, the market makers and specialists will take full
advantage of it, and those discounts in price they influence are most often
assets for the good daytrader.

In spite of all the daily noise in the market,
the SPX has essentially traded sideways for the past month in a 5.5% trading
range, with the 962.10 low a one-day event and two trips to 1015. It is easy for
the investor that is in either money market or mutual funds to get influenced by
the pure unadulterated garbage put out daily by the TV media and the price noise
it creates, so you have to be in tune with the longer-term moving averages and
trend. A good way to do this is to use the 12-month moving average as a
scorecard. I have included two charts today,
which show the bull market run after the breakout in 1995, and the bear market
decline, which hit a low of 769, but is now rising.

If you are a passive investor and don't play
intermediate moves after retracements to the longer-term moving average or
contra plays from extended levels beyond the longer-term moving average, which
also coincide with extended volatility bands, then you have to establish some
criteria where you exit or put more money to work in the case of a retracement
to a longer-term moving average. As you see on both charts, the 12-month EMA is
an excellent tool to assist in this decision. (You can use either an EMA or an
SMA. It doesn't really matter.) 

Right now, the 12-month EMA has turned under and
is rising for the first time since the bear market began and is currently 945,
which happens to also be the September 2001 low. As long as price remains above
that level and the moving average is rising, you're in your mutual fund and not
the money market. 

Have a good trading day.

Kevin Haggerty