It's been another seesaw type of session with the major indexes back in the mode of some intra-day gyrations, with more technical damage being done to the downside than upside.
I've seen more "trading of levels" today than anything to have me really think that today's trade, while rather bearish, is anything more than some modestly "defensive" action based on some saber rattling out of North Korea, saying if the U.S. were to target its recently brought on line nuclear power plants, that a "full-scale war" on the Korean Peninsula could result.
The major indexes have been able to shrug off the bulk of weakness seen near the opening of trading, with the NASDAQ-100 Index (NDX.X) 975.27 +0.65% bucking the major indexes declines, with some sector strength in the CBOE Internet Index (INX.X) 92.88 +1.05% being bolstered by an upside earnings report from Expedia (NASDAQ:EXPE) $63.02 +6.68% and morning upgrade to "buy" based on valuation from Legg Mason.
Some of the things we talk about each night in the Index Trader's wraps regarding daily, weekly and monthly pivot analysis and use of retracement, currently has the look that this morning's rebound, or stability from the lows was computer generated. Here's three charts that I think do a pretty good job in helping traders understand how the various pivot analysis levels and retracement levels, which are derived from the S2 and R2 ranges can come into play.
Dow Industrials Chart - 5-minute interval (11:45 AM EST)
In today's market monitor at OptionInvestor.com, I made note that "bears needed to defend" bearish positions in the Dow at the 7,985 level. The 7,985 level was derived from a retracement bracket, where the upper and lower ends (0% and 100%) were simply anchored at the WEEKLY R2 and WEEKLY S2 levels. By "default" the 50% retracement is the pivot, or mid-point of the range. It's my thought that institutional computers will use the various pivot ranges to then take retracement "math" and determine some levels by which the computer will trade the institutional firms capital and manage its inventory. If inventory becomes to large due to selling by market participants, then the computers should tend to sell resistance levels as buyers show up, and look to buy a level of support when sellers need liquidity. Today's action certainly has the look that computers were at work in the Dow Industrials at 7,893. However, the ability for the Dow to trade its WEEKLY S1 and below it is a sign of weakness, which should have the PIVOT become more formidable resistance. At the time, it was my thought that we might expect some selling at the 7,985 level as computers looked to sell some of what was bought near 7,893 and WEEKLY S1.
Dow Jones Chart - 5-minute interval (12:15 PM EST)
The above chart was then captured at 12:15. Interesting how the Dow did find some selling at that level. For you and I as traders, we can then draw a very short-term upward trend from the morning low, and begin to see perhaps how a bearish trader that has been "swung around" in recent sessions, would want to see the Dow back below 727 and not get much above 8,000. Should the Dow get back above 8,000, then "risk" to a bear is assessed back to the WEEKLY pivot of 8,042.
S&P 100 Index - 5-minute interval (12:45 PM EST)
Here's a look at the OEX, which I captured a chart of at 12:45 PM EST. Traders can make a "tie" in with the OEX at its WEEKLY S1 of 425 as resistance, when the Dow had achieved the 7,985 level as it saw selling. This gives a bit of a "staggered" look to things doesn't it? Not all of the WEEKLY S1 levels are being traded at the same time.
Analysis is described in the chart, but for traders trading levels, you can perhaps begin setting parameters for yourself, just like a computer might do. It would be my opinion that the OEX should NOT trade above the 426 level, otherwise it has rally potential back to 428. I could probably "match" that by saying the Dow should NOT trade above the 8,000 level, otherwise upside potential to 8,042.
A trader that is short/put and has been pulling his/her hair out from the price swings in a rather range-bound 8-sessions can then formulate a trading plan to then capture some profit, by simply trading the levels like a computer.