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Daily Newsletter, Wednesday, 05/04/2005

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews
  4. Trader's Corner

Market Wrap

Dow Powered by 18-Wheeler

Dow Powered by 18-Wheeler

Stocks surged on Wednesday with the Dow Industrials (INDU) 10,384.64 +1.29% jumping triple-digits after billionaire Kirk Kerkorian wanted to "substantially" add to his General Motors (NYSE:GM) stake. Shares of General Motors (GM), which have fallen more than 30% the past year, surged $5.03 per share to close the regular session at $32.80. A spectacular 18% gain.

Mr. Kerkorian's Tracinda Corp. offered to pay about $870 million for an additional 5% stake in the world's No. 1 automaker. If consumated, Kerkorian would own nearly 9% of GM.

The news rocked Wall Street and helped inflate some tires as investors wondered just what this savvy value investor saw in the beleaguered company.

The dollar fell in Wednesday's trade, but the decline took place late Tuesday evening when Hong Kong's central bank followed the Federal Reserve's lead and raised rates 25 basis points to 4.5%.

When I first noted the dollar's weakness in Tuesday's evening's Market Monitor, I thought we might be seeing a "global reaction" to yesterday's FOMC decision to raise rates 25 basis points to 3.0%. I might have been partially correct, but only because Hong Kong followed with a 25 basis point hike of their own.

In essence, I think we witnessed some "fast money" rotating back to Hong Kong to play some interest-rate games.


Gold prices rose more than $1.00 with the StreetTracks Gold Trust (NYSE:GLD) $42.90 +0.32% gaining 14-cents, equivalent to $1.40 per ounce for the precious metal.

Today's economic calendar had the April ISM Services coming in at 61.7, which was above the consensus for 61.0. While expansionary, April's reading slipped from May's 63.1.

Retailers participated in today's broader-market gains with the S&P Retail Index (RLX.X) 410.82 +1.38%.

A dynamic session was found in the long end of the Treasury bond market. Investor's dumped the longer-dated 30-year sending its YIELD higher by 8.2 basis points to 4.585% on news that the Treasury is considering bringing back the 30-year, where auctions had been discontinued in 2001.

I view this possible move a good fiscal policy. In fact, two years ago I commented that the Treasury should switch from their funding of the deficit with longer-term debt at historically low rates, not short-term debt as had been the policy when the U.S. was at a surplus.

A decision from the Treasury is expected in August.

Take note of this and don't misconstrue that today's selling in the longer-dated 30-year was a "hyper inflation" market reaction to anything the Fed said, or didn't say, in yesterday's brief statement.

The knee-jerk reaction in the longer-dated bond comes as investors and very short-term traders contemplate a new form of supply coming to market.

Brokers were strong today with Legg Mason (NYSE:LM) $79.47 +12.64% striding higher after reporting quarterly earnings of $0.98 per share versus consensus estimates for $0.97. Mason's results helped alleviate fears that after a rough first-quarter for stock prices, investors hadn't thrown in the towel. The firm's assets under management rose by $12 billion in the quarter.

Insurers also got a boost with MetLife (NYSE:MET) $43.55 +12.12% saying first-quarter profits surged 65% over the same period last year, with all business lines coming in with a strong performance.

Internets lead today's tech rally. Online service provider United Online (NASDAQ:UNTD) $11.94 +34.76% reported upbeat quarterly results and was today's No. 3 percentage gainer on the NASDAQ. Google, Inc. (NASDAQ:GOOG) $228.50 +1.02% traded another all-time high and closed just above its point and figure chart's bullish vertical count of $228.

U.S. Market Watch - 05/04/05 Close


There was a long of green on the screen today. Please note the action in the shorter-dated 5-year Treasury YIELD ($FVX.X), the benchmark 10-year YIELD ($TNX.X), which was unchanged, and then the knee-jerk in the 30-year.

Despite weekly energy data showing continued builds, June Crude Oil futures (cl05m) settled up 63 cents at $50.13 in a choppy $48.80-$50.60 intra-day range.

Closing Internals - 05/04/05


Advancers clearly outnumbered decliners and there was never a question if the majors would finish higher, but how high. Bullish leadership at the NYSE is building both short and intermediate-term from very oversold ratios, and NASDAQ tags along for the ride, but struggles.

Dow Industrials Components - Sorted by price


One stock in a narrow index that jumps 18%, or falls 18% will drive that day's action as institutions have to get "re-weighted." We've seen the downside action in the Dow when Merck (MRK), Pfizer (PFE) and IBM (IBM) have had a sharp decline. GM jumps from the 25th slot in price-weighting to 22. If you're modeled to mirror the Dow, you've got to do a lot of buying to compensate for GM's gains. Add to that a 78.3 million share short position in GM, and there was some buying that "had to be done."

Dow Industrials (INDU) - 50-point box


Yesterday's double top buy signal at 10,300 and today's spark from GM had every bear and his/her brother/sister assessing risk to previously broken 10,400 support. I expect the INDU to work sideways through the summer, most likely between 9,800-10,600.

While deadlines prevent me from updating a pivot matrix, some historical analysis with the MONTHLY Pivot levels would show that after the major indices all test their MONTHLY S2 (like they did in April), we have not witnessed a test of MONTHLY R1 the following month, and usually flounder around in order for some base-building to resume.

Don't be short/put much above 10,600 as there is no wrath like a short squeeze.

What? A short squeeze in a major index?

S&P 500 Index (SPX) - 10-point chart


There's been some nice squeeze-like moves in the SPX the past couple of years. You can't believe the amount of e-mail I get when I mention a pending squeeze coming. Like that in early November when the bullish % charts were reversing up from midfield. While I don't expect a euphoric bull run from the 1,140 reversal, just understand that there are undoubtedly some "old bears" that saw 1,220 and have offered up some support on the SPX's recent pullback into that massive base created last year.

Add in a little "if there's value in GM, there's got to be value elsewhere," and we get a powerful rally today.

Now, let's take a look at RISK as depicted by the broader S&P 500 Bullish % ($BPSPX).

S&P 500 Bullish % ($BPSPX) - 2% box size


If this were a football field, then bears still have the ball and they're nearing the 50-yard line. Point here is that the SPX Bullish % ($BPSPX) is nearing a VERY SIMILAR level of RISK that it did in August (8) and September (9) of last year.

I've tried to circle some of the same "inflection" points on the above bullish % chart as that found in the SPX's point and figure chart where hopefully we recognize a SIMILAR LEVEL OF RISK and internal strength/weakness as the SPX pulls into a MASSIVE BASE OF SUPPORT.

I would be looking to short/put bounces, but don't put on trades as if it is all or nothing, get yourself over leveraged and crush the account.

I'm trying to get back into the swing of things and begin writing one Market Wrap per week, which will be found each Wednesday. I'd like to compliment some of the other writer's analysis, but from a purely supply/demand and pivot analysis point of view.

What I hope a Wednesday Market Wrap on a weekly basis will allow, is a week-to-week benchmarking, where we really try and get a "broader" perspective on what is happening on a week to week basis, when then gives even greater meaning to the Monday, Tuesday, Thursday and Friday wraps.

When I read Jim's comments on the SPX last night and remember his comments on how well those 100-exp and 130-exp moving averages had been shorted and shorted and shorted and shorted, now they're being bought and bought and bought at a similar level of RISK found in August as the SPX pulls into a massive base of support.

Even with the U.S Fed and Hong Kong raising interest rates.

 
 




New Plays

New Option Plays

Call Options Plays
Put Options Plays
RAI None

New Calls

Reynolds American - RAI - cls: 80.24 chg: +0.66 stop: 77.95

Company Description:
R.J. Reynolds Tobacco Company (R.J. Reynolds) is an indirect wholly owned subsidiary of Reynolds American Inc.. R.J. Reynolds is the second-largest tobacco company in the United States, manufacturing about one of every three cigarettes sold in the United States. R.J. Reynolds' product line includes five of the nation's 10 best-selling cigarette brands: Camel, Winston, Kool, Salem and Doral. (source: company press release)

Why We Like It:
We like RAI as a bullish candidate because it looks the stock has built a short-term base between the $80 level and its exponential 200-dma near the $77.00 level. Technical oscillators are positive and shares just closed over the $80 mark and its 50-dma. We also like RAI because if the market does continue lower tobacco stocks have been seen as safe havens in the past. If the market continues higher then RAI should climb with it. Plus, RAI had a bit of positive news recently. Here's an excerpt from its May 3rd press release: "Today a Miami jury found that R.J. Reynolds Tobacco Company and other cigarette manufacturers were not liable in the case of a flight attendant seeking compensation for a form of chronic sinusitis she claimed was caused by exposure to secondhand smoke on airplanes. The suit was filed by Lorraine Swaty, a flight attendant for US Airways." We are tempted to consider bullish positions at current levels. However, the Point & Figure chart is still bearish but on the verge of a new buy signal. If RAI can trade above the $81 level it should produce a new buy signal. Therefore we suggest a trigger above the early April highs. Our entry point will be $81.31. Our short-term target will be the $85-86 range. Once triggered our time frame is only six weeks.

Suggested Options:
We are suggesting the June calls.

BUY CALL JUN 80.00 RAI-FP OI=2947 current ask $2.60
BUY CALL JUN 85.00 RAI-FQ OI= 376 current ask $0.70

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/27/05 (confirmed)
Average Daily Volume = 866 thousand
 

New Puts

None today.


Play Updates

In Play Updates and Reviews

Call Updates

Avalonbay - AVB - close: 72.35 change: +0.53 stop: 68.49 *new*

A big bounce in the Dow helped boost shares of AVB above the $72.00 level. AVB continues to show strength with a slow and steady climb higher. We see no changes in our strategy although we are raising the stop loss from 67.49 to 68.49.

Picked on April 24 at $ 70.05
Change since picked: + 2.30
Earnings Date 04/21/05 (confirmed)
Average Daily Volume = 345 thousand

---

Chubb Corp - CB - close: 84.80 chg: +2.23 stop: 79.49 *new*

Wow! CB soared to a 2.7 percent gain on strong volume today. A big day for the Dow and strong earnings news from insurer Cigna (CI) attributed to the positive session. We are raising the stop loss to $79.49. Short-term or conservative players might want to consider taking a little money off the table here. CB is a little overbought and we should expect a dip toward the $83 region before further gains. Then again CB closed near its highs for the day which is normally a bullish sign for tomorrow. Our target remains the $88-90 range.

Picked on May 01 at $ 81.78
Change since picked: + 3.02
Earnings Date 04/25/05 (confirmed)
Average Daily Volume = 1.2 million

---

Golden West Fincl - GDW - close: 64.46 chg: +0.61 stop: 59.95

The four-day winning streak for the Dow Industrials has been very beneficial for the banking stocks. Today's session could be very important as well. Both the BIX and BKX bank indices broke through technical resistance at their 200-dma's. Both also appear to be on the verge of breaking through the tops of their descending channels. This all bodes well for GDW, which closed at a new relative high. Our target remains at the $66.50 level.

Picked on April 26 at $ 62.55
Change since picked: + 1.91
Earnings Date 04/20/05 (confirmed)
Average Daily Volume = 1.3 million

---

Invitrogen - IVGN - close: 75.74 change: +0.54 stop: 71.49

IVGN continues to look positive and closed above round-number, psychological resistance at the $75.00 level for the second day in a row. We see no change from our previous update on 05/03/05.

Picked on May 03 at $ 75.51
Change since picked: + 0.23
Earnings Date 04/28/05 (confirmed)
Average Daily Volume = 888 thousand

---

Eli Lilly - LLY - close: 60.26 change: +0.51 stop: 57.49

LLY's gain today has triggered the play. Our entry point to buy calls was at $60.15. This is a new six-month high for LLY as it breaks out over resistance at the $60.00 mark. There are no changes in strategy from our previous update on 05/03/05.

Picked on May 04 at $ 60.15
Change since picked: + 0.11
Earnings Date 04/18/05 (confirmed)
Average Daily Volume = 4.7 million

---

Nucor - NUE - close: 52.70 chg: +1.55 stop: 49.95

We are rally tempted to go long here. NUE's three-percent rally pushed the stock above its 10-dma and above its six-week trendline of resistance. Yet in spite of the bounce we're going to sit on the sidelines and wait for the breakout over stronger resistance at the $55.00 level. Our entry point is $55.05. More aggressive players might want to consider bullish positions now after today's move and its new MACD buy signal.

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/21/05 (confirmed)
Average Daily Volume = 3.3 million
 

Put Updates

Adobe Systems - ADBE - close: 57.55 chg: +0.26 stop: 60.01 *new*

The good news here is that for the most part ADBE did not participate in today's market rally. Instead we can see a small double-top if we look at the intraday chart. ADBE failed to breakout over the $58.20 level twice during Wednesday's session. Of course this only matters for very short-term intraday traders but it's still a bearish signal for the rest of us. We are lowering the stop loss to $60.01.

Picked on April 26 at $ 59.12
Change since picked: - 1.57
Earnings Date 06/16/05 (unconfirmed)
Average Daily Volume = 3.3 million

---

CDW Corp - CDWC - close: 55.50 chg: +0.71 stop: 58.01

CDWC did manage to bounce with today's market rally but we see no change in strategy or from our previous update on 05/01/05.

Picked on April 24 at $ 55.68
Change since picked: - 0.18
Earnings Date 04/19/05 (confirmed)
Average Daily Volume = 920 thousand

---

Infosys Tech. - INFY - close: 59.55 chg: +1.54 stop: 60.26*new*

Buckle your seat belt and double-check your stop loss. Yesterday we said today was an important session because both the NASDAQ and the GSO software index were testing short-term resistance levels. The bounce in the software index wasn't that impressive but the NASDAQ rallied right to its resistance level and looks poised to breakout. Likewise shares of INFY rallied right to resistance near the $60.00 mark and also looks poised to breakout. The new buy signal in INFY's MACD indicator doesn't help matters if you're bearish. More conservative traders may want to exit early to avoid further losses. We're going to adjust our stop loss to $60.26. If INFY continues to rally we want to be taken out quickly. Traders can always reconsider new plays if the stock reverses at its 200-dma.

Picked on April 26 at $ 58.24
Change since picked: + 1.31
Earnings Date 04/14/05 (confirmed)
Average Daily Volume = 504 thousand

---

Lehman Brothers - LEH - close: 90.50 chg: +2.60 stop: 94.05

No surprises here. A big day for the Dow and the banking stocks helped push the XBD broker-dealer index to an even bigger bounce of +3.6 percent. LEH added almost three percent but failed to close above its 100-dma. Shares remain in its new three-week down trend and we're not going to worry until LEH trades above the $92 level.

Picked on April 29 at $ 89.45
Change since picked: + 1.05
Earnings Date 03/15/05 (confirmed)
Average Daily Volume = 2.3 million

---

Marriot - MAR - close: 62.10 chg: +1.23 stop: 65.01

We warned readers yesterday that MAR was oversold and due for a bounce. With the major averages strongly in the green MAR was still slow to follow and didn't really rally until the late afternoon. We expect the $63.00 region to act as short-term resistance.

Picked on April 28 at $ 63.37
Change since picked: - 1.27
Earnings Date 04/21/05 (confirmed)
Average Daily Volume = 1.2 million

---

PACCAR Inc - PCAR - close: 67.12 change: +1.39 stop: 70.01

No change from our previous update on 05/03/05. However, if PCAR trades above the $68.00 level we might consider exiting early.

Picked on April 27 at $ 66.45
Change since picked: + 0.67
Earnings Date 04/26/05 (confirmed)
Average Daily Volume = 1.0 million

---

Parker Hannifin - PH - close: 61.61 change: +1.52 stop: 62.01

PH outpaced the market bounce today with a 2.5 percent bounce of its own. Yet the stock remains under strong resistance at the $62.00 level. This is another important test of this six-week old resistance level. We would expect that if the major averages produce any kind of follow through on today's rally that PH will be able to breakout and thus we'll be stopped out. If you squint your eyes a bit when you look at the chart is almost looks like an inverse or bullish head-and-shoulders pattern. A breakout over $62 would be the neckline and thus project a $65-66 price target. We're not suggesting new bearish plays at this time.

Picked on April 28 at $ 59.08
Change since picked: + 2.53
Earnings Date 04/18/05 (confirmed)
Average Daily Volume = 1.2 million
 

Dropped Calls

Websense - WBSN - close: 52.64 chg: +0.53 stop: 49.49

WBSN's lack of participation in today's very broad market rally has our spider-sense tingling. We're going to exit early since there are other stocks that are on the move we could play.

Picked on April 27 at $ 52.85
Change since picked: - 0.21
Earnings Date 04/26/05 (confirmed)
Average Daily Volume = 751 thousand
 

Dropped Puts

Strayer Education - STRA - cls: 84.61 chg: -18.80 stop: 107.25

Wow! When we labeled this play as "exciting" last night we didn't know how exciting. Unfortunately, we never got to open any positions. We suspected there was some concern over STRA's earnings report but we certainly didn't expect an 18 percent drop! The company reported earnings this morning before the bell and beat estimates by a penny. Yet management issued an earnings warning for the second quarter. STRA gapped down to open at $85.50 and then sold off to hit $77.24 before bouncing back in the afternoon. Our strategy was to buy puts if STRA traded below $101.95 but to not open positions if STRA gapped open below the $100 level. Now just imagine if you had been holding a bullish position over STRA's earnings. This is a great example of why we do not hold over an earnings report. We are closing this play unopened.

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/04/05 (confirmed)
Average Daily Volume = 111 thousand
 


Trader's Corner

More on retracements as a guide for trade entry

OIN SUBSCRIBER QUESTION:
It looks like today's rally is the break out above trendlines that you indicated as confirming a recent market bottom. That the indexes had fallen some significant amount already and unlikely to drop more. I'd like to understand more about retracements and what makes them significant. What else might have been bullish at the last low, enough to give a good reason to buy index calls?

RESPONSE:
I wasn't convinced that a rally would pierce technical resistance until, as you say, today's rally broke out about some key down trendlines. If I think there's a bottom in place, I prefer buying index calls BEFORE there is a "confirming" breakout, making calls cheaper of course. Hey, wouldn't we all!? Not necessarily. Not everyone has the confidence in technical analysis, preferring to wait until a new trend emerges. Nothing wrong with this way to trade, but its not what I prefer.

The recent market low was characterized by these technical considerations:

1. A key retracement of a prior move, up or down.
In the recent case, it was that a "maximum" downside retracement had been reached for a decline IF the market was still in an uptrend. My assumption was that the market was still in an uptrend. Its helpful if there is then a period where there is not a lower low or not by much, and that prices rebound from those lows. This is building a support "base".

2. High bearish sentiment suggests a bottom, high bullish sentiment, a top. I look for at least ONE day where my call to put indicator is at an extreme; this is a "leading" indicator and such extremes most often occur 1-5 days before a bottom or top. The S&P low to date (for the current move) occurred on the 3rd trading day after heavy equities put volume, relative to calls, giving a contrary suggestion that a bottom was close at had.

3. Look for an oversold or overbought extreme to also suggest that the trend could reverse.

4. A low or high touches an extreme suggested by a 21-day moving average envelope line. One set at a percentage (e.g., 3%) that tends to "contain" most trading in the indexes.

5. If average (10-day) volume is rising, while prices are bottoming or going sideways for a time, this is a plus, showing accumulation of stock.

A sixth factor so to speak is a CONVERGENCE of patterns or indicators. Having made a key retracement by itself is not usually enough to suggest the market is set to reverse. Traders showing a very bearish outlook on some particular day is not enough in isolation. However, these elements coupled with an oversold reading in an indicator like the RSI or Stochastics and coupled with a retreat to my lower envelope line can be quite significant.

In the S&P 100 (OEX) chart below, the most recent up trend is measured from a beginning at the blue up arrow and ends at the blue down arrow. Here, only the "maximum" (for an uptrend) 62 and 66% retracements are seen at the blue dashed level lines.

The last low has a yellow circle and is where both the 2/3rds retracement is completed, but also where my lower envelope line is touched. What determined that this lower line was 2.5% under the 21-day moving average. The envelope lines that contain most of the trading in the S&P indexes ranges from 2.5 to 3% usually. The low prior to the most recent bottom was 2.5% and I assumed that the next low would be the same and it was. Simple in this case.

The second indicator, shown above, that of the 13 (a Fibonacci number as will be discussed below) day RSI or Relative Strength Index, shows that an oversold extreme here occurred in the same time frame as OEX reaching its 66% retracement; AND, just after the bearish "sentiment" extreme seen at the bottom of the chart above.

If you had trusted (not always to do!) these confluences of technical aspects pointing to a possible bottom, buying calls at the 66% retracement has turned out to be a quite profitable trade.

RETRACEMENTS
Dow, Charles Dow, (as in "Bond, James Bond") made some early, observations about the tendency for a stock or stock index to retrace or give back anywhere from around 1/3 to 2/3rds of the distance covered by a prior advance or decline, before the major trend resumes again. The most common such retracements that were against the direction of the main trend, were about half (50%)of the prior price swing.

The origins of a useful "retracement" theory came from someone who lived in the middle ages and was studying the population growth of rabbits. Yep, rabbits! Leonardo Fibonacci was an Italian mathematician who was doing such work in the early 1200s.

The number sequence that is named after Fibonacci is where each successive number is the sum of the two previous numbers; i.e., 1, 2, 3, 5, 8, 13, 21, 34, 55, 144, etc. Any given number is 1.618 times the preceding number (approximately) and .618 times
the following number.

A principle use that "fibonacci retracements" are put to is to measure countertrend retracements of prior price swings; of .382 or 38% (sometimes also 33%), .50 or 50%, and .618 or 62% (sometimes also 66%). The number 5 is in the Fibonacci sequence, and the others are ratios; .618 comes from the percent that each number is of the next higher number and .382 is the inverse of .618 (100 61.8 = 38.2). Well stick to the shorthand and round off to 38 and 62% as the important Fibonacci retracements, beside 50%. Use of these retracements is a very common practice and a popular point of reference among traders.

There is a simple pragmatic reason for this popularity and that is that buying or selling in these retracement areas often results in coming close to buying at the low and selling at the top. "Buy low, sell high" may owe something to the common retracements where "low" refers to buying after a retracement of a third to half of a prior move.

The most recent low in the S&P 500 (SPX) was an exact 66%,
2/3rds, retracement.

The added indicator for SPX in this next chart and briefly described above, is the 10-day moving average of NYSE advancing volume. When it's rising, stock in general tends to be under accumulation and there is buying going on even on upticks which is what advancing volume represents; stock bought on a price tick higher than the preceding trade.

If the correction of an uptrend falls below a 66% retracement, I start to assume that the correction will be 100% or a "round trip" back to the origin or starting point for the rally. It also can be useful to also look at a close-only line chart as well as a bar or candlestick chart.

Such a deep retracement would be more commonly seen in a high beta or more volatile stock than would be seen in an index typically, at least on a daily chart. Retracements of this much are more common in the indices on hourly or other intraday
charts.

Just so you know that I am not just talking about downside retracements only, in a countertrend rally within a dominant downtrend (once a minor downside correction begins) look to see if a recent high represents or is CLOSE to a 38, 50, or 62% retracement as shown in the past chart of the Semiconductor Index (SOC) below.

If the (up) swing high also failed at or under a key down trendline or was a double top, etc. and was accompanied by an overbought condition, its a sure tip off to short the stock or play puts in the case of the indices.

To use retracements - what you need is some evidence that a price swing has run its course and that a counter-trend or move in the opposite is developing.

In a downtrend, the 38, 50 and 62 percentage figures are added to the most recent low, when it becomes likely or your hunch is that a minor counter-trend rally is underway; e.g., prices and volume surge. The expectation is that in a normal or typical market, prices will rebound an amount that is equal to about half of the last decline or, a little bit more, which would be 62% or a bit less than 50%; i.e., 38%.

SOME RULES OF THUMB ON RETRACEMENTS -

These guidelines mostly are related to the most common retracements, that of the fibonacci 38, 50 and 62% retracements. 1.) A strong trend will usually see only a "minimum" price retracement -- around 1/3 to 38% (sometimes only 25%). If prices start to hold around this minimal retracement area, this action may be suggesting trade entry as there may NOT be a deeper correction.

2.) A "normal" trend in stocks, indices, commodities, currencies or bonds that is one not powered by something way out of the ordinary (e.g., terrorism), will often see a retracement develop of about half or 50% of the prior move. The most common level to buy or sell is this retracement amount, with an exit if it continues on much beyond 50%; e.g., 5% more.

3.) Within the range of normal trend, there is SOMETIMES a retracement of 62% or even 2/3rds (66%). If prices hold this area, its also a good target for initiating positions in calls or puts with an exit if the retracement exceeds 66% -

4.) If a retracement exceeds one level, look for it to go to the next; e.g., if a retracement goes beyond 38%, look for it to go on and approach 50%. If it exceeds 50%, look for 62%. If a retracement exceeds 62%, or a maximum of 66%, then I begin to look for a "round trip" or a return all the way back to the prior low or high this type action suggests a retest of the low or high and is the "ultimate" retracement so to speak, of 100%.

5.) Retracements are most commonly done from the low to high, high to low and not based on the highest close to the lowest close, etc. However you can also experiment with retracements based on closing levels as they also are worth exploring as already noted above.

6.) The common retracement levels work on all time frames or chart types; e.g., hourly (or less), daily, weekly and monthly charts.

LAST BUT NOT LEAST -
In a strong trend, either up or down, the typical retracement will be shallow. From 2004 ...

In the retracement chart above, once the double bottom low was made in April-May, I went back to the original high to use in measuring retracement levels.

HOW TO APPLY RETRACEMENTS WITH A CHARTING APPLICATION
You can set most, if not all, charting applications to calculate retracements ranging from 25% to 38% (.38), 50%, 62% (.62), or a little beyond at 66% (2/3rds) or even 75%; usually this done by by pointing first at the low, then the high (pullback retracements) or first at the high, then the low for retracement rallies in what you perceive to be an overall downtrend.

I used to chart by hand and then use my calculator, adding or subtracting the 3-5 percentage figures, once it appeared that a high and a low was in place for the trend in question. Ah, the good old days NOT!

Good Trading Success!

NOTE -
Please send any technical and Index-related questions for possible use in my next Trader's Corner article to support@optioninvestor.com with 'Leigh Stevens' in the Subject line.
 

Today's Newsletter Notes: Market Wrap by Jeff Bailey, Trader's Corner by Leigh Stevens, and all other plays and content by the Option Investor staff.

DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

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