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TradingMarkets.com
Trade The Overreactions
Thursday July 24, 9:32 am ET
By Kevin Haggerty


What Wednesday's Action Tells You
The SPX (CBOE^SPXNews) continues to trade between 994 and 976 for the fifth day in succession. The highs have been between 994 to 990, while the lows from 982 to 976. Yesterday's SPX game went from 989.62 down to 979.79, then back up to 989.86, closing at 988.60, almost flat on the day

During this 5-day stretch the SPX has, on alternate days, closed below its 1.0 volatility band, above it, below it, and then closed above it on Tuesday. Yesterday was the first day in five it hasn't done that. Call it indecision, erratic trading, or whatever, but the bottom line is that traders must trade the overreactions, and it also means that the trading range since June will be resolved sooner rather than later.

NYSE volume was relatively light at 1.3 billion, volume ratio was neutral at 49, as was breadth at just +179, highlighting the trading range type action for the past 5 days. The Nasdaq (NasdaqSC^IXICNews) was + 0.8%, QQQs (AMEXQQQNews) +1.0%, and Dow (CBOT^DJINews) +0.4%. The afternoon trend-up turned all the major sectors green, with the exception of the OIH, which ended -1.2%. The leading sector was again the semis with the SMH +2.0%. Micron Technology (NYSEMUNews) was the leading major semiconductor, gaining +7.5% on 93% more than its average daily volume as it came out of the top of its trading range. It was on our focus list yesterday. KLA-Tencor (NasdaqNMKLACNews) carried through after making new highs on Tuesday, gaining +2.1%, Applied Materials (NasdaqNMAMATNews) +2.9%, while Novellus was flat on the day. The SMHs (AMEXSMHNews) are challenging to make new highs. Genzyme (NasdaqNMGENZNews) also made new highs, as did Fred's Inc. (NasdaqNMFREDNews), +9.1%, but gapped on an upgrade hype by Merrill Lynch, so there was no trade-through entry.

For Active Traders

For traders, it was a two-trend day because of the up/down travel range yesterday. There was a short entry trade on a recross of the 20-day EMA pivot below 99.32 on the opening bar for the SPDRs (AMEXSPYNews), which was covered on the Trap Door between 10:00-10:15 AM. The SPY made two attempts and failed at the 240-EMA on the 5-minute chart, which is the same as the 20-period EMA on your 60-minute chart. It made an intraday low of 98.28 on the 12:15 PM bar, then the afternoon trend was up, as the SPY traded up to 99.35, closing at 99.23, then right back to a 20-day EMA pivot of 99.31.

The afternoon trend up for the SPY was on very light volume. The corresponding low on the SPX was 979.79, which was right at the 1.0 volatility band of 979.19, so it was a good entry level if you took the afternoon long trade -- it didn't matter whether you traded the E-minis or the SPYs.

Because of this 5-day trading range, the 20-day EMA pivot is in play again today. The SPX 20-day EMA is 989.59 vs. a 988.61 close, so be ready to work either way around that pivot again today. The 50-day EMA is below at 972.89 and the low close of this trading range since June 3 is 974.50, with one aberrant intraday low of 962.10, which closed at 982.32 that day.

Today's Plan

Until the 5-day range is broken, you're looking to fade price at the upper and lower boundaries of the range because your stops are tight and you can cover and reverse your trade if there is is a breakout of the range

Some stocks to focus on today because they are above the lines and are either trading in a narrow range pattern near the highs or have pulled back to either the 20- or 50-day EMAs are:

PCAR, MRVL, ZRAN, ZBRA, SNPS, JBL, EXPD, EASI, TARO, PIXR, C, BAC, NAV, IVGN, ICOS, ERTS, and DISH.

Have a good trading day.

Kevin Haggerty