Anyone Sensing a Theme?

Aug 6, 2007: 6:36 PM CST

There’s a clear theme emerging in the market action regarding intraday price movement. The majority of the price activity of the day takes place within the last hour of the trading day as traders either nervously take off positions or confidently put on large positions. The activity of the larger funds combined with panic (of missing out or of losing money) of many retail traders helps contribute to this unique phenomenon that has repeated itself far too many times in the last two weeks to be due to mere random chance.

For example, today, the Dow Jones moved 200 points within the last two hours, with each hour contributing to 100 points of that move. Many stocks showed similar strength into the close of the market day.

View the intraday chart of the Dow Jones Index:

With the exception of the morning consolidation which led to a clear Apex Buy trade and a break above resistance (via the moving average), the retail trader could have thrown a dart and gone long with good results today. Traders looking for a bit more precise entry could have taken the Apex Buy trade out of consolidation (and off yesterday’s close support), or either of the two bull flag patterns. The next buy zone would have been the retest of the 50 period moving average or the break above resistance via the 200 period moving average. Today clearly goes to the bulls.

 

I find it interesting that the resulting price action from the day is about as close to a mirror image of Fridays action as you can get… only in reverse.

I zoomed the chart in to show this condition – notice the size of the candles we have been experiencing recently. Volatility is returning in force to the market, confusing many traders and providing opportunity for profit and loss for all. With increased price action, profits and losses arise much faster than expected, creating frustration for many. Do be careful out there.

 

The Nasdaq tested support at the rising 200 period moving average and reversed positively. Odds favor a swing up to test at minimum the flattening 50 period moving average. If price remains below these averages for too much longer, we may set up a condition where the consolidation of two moving averages from above will provide significant resistance, setting up a new short-sell entry. The upwards retest appears to be 75 points away.

 

Maybe the price action and trading action of this week will be much more calm than that of last week – time (and price) will tell.

Remember that the Federal Reserve meets Tuesday to determine/announce policy regarding interest rates. Jim Cramer has been clamoring on his show about how important he feels that the Fed should cut rates, but the consensus from most analysts is that they will leave the Rate unchanged at 5.25%. Should the Fed announce any hint that inflation is out of control or that they may need to raise rates in the future, expect the market to fall quite precipitously, but I doubt this will happen.

Be careful tomorrow and don’t enter long-term swing trades blindly tomorrow – wait just a bit to see what the Fed announces and any volatility dissipates. Enter positions after seeing how the market reacts following this decision.

As always, be careful – especially now.

3 Comments

3 Responses to “Anyone Sensing a Theme?”

  1. hrgreen Says:

    Thanks for the posts. I have found your insight helpful.
    HR

  2. Active Trader Says:

    Corey,

    What a very uncommon state of the market right now. You’re right about the common trend over the past couple days but lately just when I think I have a hunch as to what to expect next, the market throws out a huge curve ball. I’m pretty sure things will be quiet tomorrow morning until afternoon after 2:15 and then who knows. I’m sure the VIX can’t wait to get fired up again. We’ll see soon enough. Keep up all the great articles…I read several times each week.

    Rich

  3. Corey Says:

    Thank you both for the kind words and comments.

    You’re right on, Rich. I’ve noticed even on the blog when I make a straight-out call and I’m 100% confident, that things don’t always work out as I expect. I’ll expect volatility the next day but when the day comes, we’ll be flat! I think you’re right on in this case – I’ve traded many days when the Fed releases a major report and the pattern surprisingly is the same: Flat morning, volatility dies by lunch, and when the report is released, there is usually a very sudden three-wave move, just enough to nail stops in both directions violently before trending unyieldingly in the eventual direction for some time. Wait for the three snap waves and then trade in the “victor’s” direction.

    We hit a new 4-year high on the $VIX at over 26 last week as you pointed out on your site – that was a bit surprising. We didn’t even get that high in February. One thing that’s for certain – it’s paying to be a seller of certain option volatility strategies right now in the market! Volatility should contract before long… one assumes.

    Thank you for reading and commenting!