Trade the Reaction, Not the News

Yesterday daytraders took advantage of the the SPX continuation short move below the previous 1451.54 low, and 200-day ema (1450.21). It carried down to 1431.76, which was the -1.28 Volatility Band zone (1430.41). The SPY hit 143.31 with the -1.28 Volatility Band at 143.26, so it was on the money. The SPX made a +13.9 point contra move, so traders who used the extended volatility reversal strategies were able to capture significant gains in both directions. The SPX futures are -9 points as I finish this commentary at 8 AM, but the "funny money" CPI number is due at 8:30 AM, so that can obviously change. However, the usually bogus CPI number is obviously not what the market is focusing on, relative to the credit and subprime problems, in addition to hedge fund and mutual fund redemptions going into the September-October weak seasonal period. The CNBC "Midnight Madness" hype on $INDU 14000 was the beginning of the decline 18 days ago. The $INDU closed above 14000 just 1 day, at 14000.41 on 7/19/07, and went out yesterday at 13028. If the premarket red futures hold, it will trade below 13000, with initial support at 12850-12730. 12795 is the previous 2/20/07 high, with the 200-day ema at 12852 and 233-day ema at 12732. SPX initial resistance is now the 233-200 day ema zone, from 1438-1450.

It will be business as usual for daytraders this morning, on a discount major index opening, and there will be contra moves from the extended Volatility Band levels to take advantage of this morning. The rallies will be sharp from the short-term oversold conditions like we're in now, but the market will then work lower as the bear cycle unfolds.

Have a good trading day.