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Day-trader's can use retracement too

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The very short-term day trader that seeks out levels with which to trade can also use many of the techniques we teach on a daily basis with retracement on the daily interval charts.

OptionInvestor.com isn't really a day-trader's resource despite many of the comments we make in the market monitor. But traders that are watching things rather closely on a daily basis sometimes are looking to make some cash on short-term moves with a lesser portion of their capital by scalping some points here and there in the indexes.

A 60-minute chart of the S&P 100 (OEX.X) with conventional retracement overlaid looks quite similar to what a trader/investor will find with some of the daily bar charts that look at a much longer time-frame.

S&P 100 Index Chart - 60-minute interval

Trading levels can be fun and profitable, even for the short-term day trader. If you trade levels, you trade like an on/off switch. Shorting a breakdown, then follow with a stop just above a retracement level. Then if the next lower level is violated you short there, then follow with a stop just above the next higher retracement. Then if a lower level is violate, you do the same. Very systematic. This morning's "rally" to the 50% retracement level at $569.75 may indeed had a bear that had shorted at 1,2 and 3 stopping out. It may also have had him/her placing some bids at 61.8% retracement as that trade at 50% was the first time in the downward trend that the OEX.X has actually been able to hit a higher level of retracement, after a previous level had been broken.

Do you see how the decline in the OEX.X actually may have some bears that shorted up at $584 looking to do some covering as they lock in short-term gains.

This is "hard to imagine" for us smaller retail investors. Now imagine you're an institutional trader and putting about $1 million at risk in each trade.

A bull in the OEX that considers him/herself a short-term trader is not at all interested in "playing" the OEX at this point. The trend is down. Good traders try to avoid trading against a trend as it pertains to the time frame they are trading.

Now, I've also had retracement on the daily chart interval from $600 to $491. See the "commonality" of the $545 level at 50% retracement on the daily interval with that found at 0% in the 60-minute interval? Remember, the 50% level is a RESULT of the range. It may not necessarily be something that was "made up".

This has a trader thinking firmer support most likely found at/near the 546 level, but we'll monitor the $559 level as well.

S&P 100 Index Chart - Daily Interval

Day traders will "dissect" larger ranges found within the daily interval charts. First sign of strength from the 60-minute chart would be a sustained move above $570, but that then leaves just $9 points to gain if compared to the daily interval chart. I'd expect the OEX.X to try and "seek out" the $550 level for better bullish trades to begin to exist.

We can then monitor the levels of retracement to see if that holds true.

Jeff Bailey
Senior Market Technician
Option Investor

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