Friday saw a huge trading range in stocks in a knee jerk reaction to the Dubai World news. The initial reaction was the selloff to 1067.00 Thursday night; this occurred before there were many US traders participating. In the December eMini S&P, the first selloff tested and recovered the 1069 level – a 50% retracement of the November rally. By the end of Friday’s session they had regained support in the 1083.50 to 1082.50 area. It’s interesting to note that they closed at the midpoint of Friday’s bar at 1089.13. I view this level as a pivot point for today; bullish above, bearish below that area.
A day to fade the moves
After a wide range day like Friday we often see a consolidation day. Linda Raschke refers to these consolidation days as “Z days” for the pattern the market often makes. Z days will see rallies and selloffs, but they will generally end the day near the open, reflecting the consolidation. On Z days the plays are often to fade moves; to buy breaks and sell rallies.
This session has followed the script of a Z day so far. A higher open saw a selloff which in turn saw a rally. I think that’s the likely course for the rest of the session, with the following caveat: There’s a chance that they could see a directional move if they could move beyond a couple of important chart points.
Watching 1099 and 1082
On the upside, I’m watching Friday’s day session high at 1098.25. That’s the highest point of the recovery rally and was tested early last night. Taking out that area could mean that traders have decided that traders have decided that it’s worth the risk to pay up to be long. Taking out this area could lead to a test of important resistance around 1112.
On the downside I’m watching the 1082.50 area. In addition to being a double bottom support area, 1082.63 is the midpoint of Friday’s recovery rally. A break below here would mean that fear is winning out in the old fear vs. greed tug of war, and could lead to a test of Fib retracement support at 1069.13 to Friday’s spike low at 1067.
Z days are the type of consolidation days I look for in the “Fade” side of my Trade or Fade advisory. Recognizing the setups that precede these types of days help you to anticipate how to trade them.
This is a sample of the analysis from my Swing Trader’s Insight advisory service. For information on STI, and to sign up for a free two week trial, visit here.
The information contained here includes information from sources believed to be reliable and accurate, but no guarantee is made as to accuracy, nor do they purport to be complete. Opinions are subject to change without notice. Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.
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