Option Investor
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What you can do, if it trades S2

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Stocks continue to trade weak and after a bit of a rebound after the open, the major indexes have sunk back to their session lows after the University of Michigan consumer index was reported at 83.7 for early January, down from the 86.7 reading in December and below consensus of 87.0.

The slight reversal up that had been seen in recent months hasn't had economists thinking the sky is falling for consumer confidence and many feel is consistent with indications that the labor market remains sluggish. However, many economists believe that that any type of significant uptick in confidence is unlikely until job growth begins to pick up, and so far, there has been little sign that this is happening.

The Dow Industrials (INDU) 8,604 -92.83 has seen its session low of 8,695 in the last 10-minutes, but the low has come just above today's S2 level of 8,593. The more tech-heavy NASDAQ-100 Index (NDX.X) 1,029.55 -31.8 points, which is seeing greater impact from recent earnings announcements out of Intel (NASDAQ:INTC) $16.44 -4.36%, IBM (NYSE:IBM) $82.17 -4.53% and Microsoft (NASDAQ:MSFT) $52.60 -4.97% violated its intra-day S2 level and continues to slide to a session low.

This has my e-mail full of questions regarding "what do we do now?" This is hopefully where traders turn to our Index Trader Wraps and use the "matrix" we put together with the weekly and monthly pivot analysis levels.

I've also developed a technique using retracement that we've discussed in the past. Whey it seems to "work" I'm not certain, other than it is right along the lines of how a market maker would use his/her retracement bracket, and how YOU as a trader and investor can do the same. I'm calling it my "5-minute fitted" retracement technique.

All I'm doing here is anchoring the top of retracement at the top of the first 5-minute bar of a bar chart, and then "fitting" the 80.9% retracement just at the low of the first 5-minute bar.

Since I've been discussing KLA-Tencor (NASDAQ:KLAC) $36.19 -4.3% since yesterday in the market monitor, I'll show a chart of KLAC and how I've been using retracement. The BLUE retracement levels are from the daily pivot analysis with anchor points at today's S2 and R2 level to help me define a daily range and levels within the range. Then I'm using the "5-minute fitted" technique to determine additional levels below today's pivot analysis levels.

KLA Tencor (KLAC) - 5-minute chart.

I've been using the "fitted" technique, not only for bearish trading, but also for bullish trading. Since I have a more "bearish" view on semi-equipment stocks after Intel's comment regarding its cutting of capex budget for 2003, I've been placing some bearish focus in my trading account toward the semi- equipments stocks.

We can perhaps see from the "fitted" retracement (red) how the 50% retracement level has perhaps come into play today, and is rather close to today's S2 of $36.42.

One observation I've been making in the market monitor in recent sessions after making multiple observations in stocks and indexes is the apparent "need" for traders to see a 5-minute bar interval "close" BELOW a or ABOVE a level to truly signal that a level has been traded.

In today's market monitor, I was looking at closing out a shorter-term trading 10 Feb. $35 KLAC puts I bought yesterday afternoon near the $38.00 level, but have since "changed" my mind a bit and looking to close out just 1/2 position at the S2 level. The "reason" for this thought process, is how I see my "fitted" retracement and 61.8% serving up some intra-day resistance in the last 15-minutes. Do you see it? This has me thinking that KLAC may indeed violate today's S2 on a more meaningful basis.

Traders can begin applying this technique IMMEDIATELY to help guide them with trades they have on. I will also discuss the bullish aspects of how this technique can be used.

Jeff Bailey

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