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Dear Fast Break Plus Subscriber, Welcome to this week's issue of FutureSource's service, Fast Break Plus. Today's author of Fast Break Plus is Jim Raker. Jim Raker has been trading for nearly 20 years and shares his trading advice every night at his website www.smartdayrader.com.

His in-depth Nightly Report provides extensive technical analysis of the day's action and precise pivot points and trade plans for each trading day. The Nightly Report is on-line by 10:00 PM EST so traders can be fully prepared.

SmartDayTrader focuses mainly on day trading the SP E-mini, but also includes information for trading the Treasury Bonds, QQQ, SPY and OEX.

SmartDayTrader provides a wealth of information and advice for the novice as well as the seasoned trader. Jim can be reached at www.smartdayrader.com or you can reach him personally at jim@smartdaytrader.com.

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Are We Oversold Yet?
By Jim Raker

Once in awhile the stock market is held hostage to some news which it uses as an "excuse" to move out of tight range. Whether this is real or just a self-fulfilling phenomenon is irrelevant. What is important is to be aware of the pending news, note the market's reaction to that news, and resume more aggressive trading once that news has been digested. By the time you read this, the "Employment Situation" will have been announced at 8:30 AM EST and the markets will have already begun to react. I'm going to use this week's FutureSource Fast Break Plus to give a very broad overview of where we are in the markets ahead of this anticipated announcement.

At SmartDayTrader we follow a simple approach to understanding the stock market for the primary purpose of day trading the S&P futures. Our bread and butter comes from our daily interpretation of our indicators, but we always step back first and examine the big picture. We begin by asking where we are in the monthly chart.

The first chart shown is a monthly chart of the Dow Jones Industrial Average. Superimposed is the big Fibonacci Fan off the 1994 bear market low, along with the intermediate Fan off the all time highs. First, you can see how we broke above the lower fan line almost a year ago, rescuing the stock market from a potentially very dangerous collapse. As the year went on, more bulls were recruited as we moved up above the down sloping middle and then upper Fans off the all time highs. Since then, we've stalled. Support is now readily apparent at the 9285 level, as this represents a confluence of the lower long term fan and the intermediate upper fan. A pullback to this level is a high probability right now and although scary, would keep hope alive for the bulls.

Monthly Chart of the DJIA

The second chart shows our favorite breadth indicator, which is broken down into short, intermediate and long term breadth components. Please note that the long term component went above zero following the extreme lows of last March and has stayed well above zero since. This has been providing the support for the Bull Run we've been having. The short term component works best when it reaches an extreme reading of plus or minus 1200. Note that we only briefly hit minus 1200 last July, and have spent most of the time since making several stabs at the plus 1200 level. At SmartDayTrader, we issued a sell signal the last time this indicator hit plus 1200 because of a chart I'm going to show you soon.

Breadth Indicator

But first, the third chart I want to you to look at is the DJIA again, only this time we're looking at a weekly bar chart. I've broken the DOW into its trading Quadrants and you can see we've just banged up against major resistance but so far, on multiple attempts, we've been unable to move higher.

The bottom half of the chart shows our weekly rate of change indicator and it is revealing on two fronts. First, note the low volatility in the rate of change over the past year. It is my belief that this explains why so many bears were caught off guard. This was a "stealth" rally and before most people realized it, we were up double digit gains for the year. Second, and more important, you can see that the weekly rate of change has been diverging significantly from price for some time now and appears to be heading lower still. If we drop below 100, the selling could really accelerate and next Quad Support is way down around 9500.

Weekly DJIA with weekly rate of change

Now here's the chart I promised you, which will help you see why we issued our recent sell signal. The top half of this chart is a measure of cumulative breadth which we consider the most important measure of a market's health. While we use this data several ways, I've shown here how buying or selling the peaks in cumulative breadth is a lucrative concept.

Note the flat results from the June "sell" signal. This is typical of a bull market where breadth unwinds but price goes sideways. However by the time this latest breadth peak evolved, we issued a sell as it came in lower than the peak in June and the stock market was bouncing off of major resistance while "failing" below that big long term middle Fan. The odds are good that we could fall back to trend line which is now around the EMA 55. Obviously a break of the EMA 55 with cumulative breadth negative and heading south would lead to much more selling.

Cumulative Breadth issues new sell signal

The next chart shows the SPH with its Demand indicator. Note how dramatically demand has dropped since hitting a peak in early January. As of Thursday night, Demand now stands at MINUS 6 for the SPH. In addition, in spite of this dramatic drop in Demand, Price has only made a round turn and we're back to where we were when Demand was peaking. If we assume that the peak in Demand represented fresh buying of stock, there are a lot of stock holders who are now either at break even or already under water. Any further erosion in price could send these "Johnny come latelys" running for cover and this could exacerbate the selling.

SPH with falling Demand

Let's take a quick look at the QQQ, which has seen both a dramatic rise all year but is also in the throes of a mighty pull back. This chart shows that we made a last push to the upper trend channel line before commencing with this latest sell off. As of Thursday night, we've had two closing days below the EMA 10. In addition, the EMA 10 is closing in on the EMA 55. We have not had a negative crossover since last winter.

If the bulls are lucky, the QQQ will be able to find its footing at lower trend channel support before this crossover occurs. If not, and the 10 does close below the 55, the lower trend line would give way, the selling could get fierce and we would be looking at a pullback to the 32.50 area.

QQQ in its trend channel

After stepping back and examining the big picture, we're ready to hone in our plan for tomorrow. There is major support in the short term at 1120-1123 in the SPH. If the market breaks to the downside following the release of the employment numbers and takes out 1120, the correction will continue towards the EMA 55, now at 1103 and rising. If the market instead views the data as "friendly", we could rally as our shortest term indicators are a bit oversold. We expect any rally to fail, unless we were to see day after day of strongly positive breadth. The upside hurdles for the SPH are the EMA 10 at 1132 and the upper resistance bands at 1143-46. If a snap back rally is going to fail, it will be at either of these zones.

While we are technicians, we do like to stay aware of the "fundamental" picture. January is normally a bullish month, and it was. The first few days of a new month "should" be bullish as new, automated pension-type money is invested, but the market's been struggling. The January effect is over as is the first week of the new month of February. With those influences gone and our major indicators already in a "sell" mode, this could be the time for the one-two punch and the first major correction of the year-long Bull Run.

One of the beauties of intra-day trading the S&P includes being able to toss away all of these fancy ideas we've just laid out and use our day trading skills to grab 4-6 or more points of the market every day. We enter neutral, assess our trading parameters, use our pivots and other key numbers and wait for the high probability trade to set up. We've been profitable nearly every day this year and we intend to keep it that way! At SmartDayTrader we provide a detailed, yet concise analysis of the markets every night with a clear trading plan for the following day. Please feel free to visit our site at www.smartdaytrader.com and look around. If you like what you see, consider a 6-month subscription and see what it feels like to make money every day. If you have any questions, I'm always here to answer them at jim@smartdaytrader.com

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Statement of Disclaimer: This report includes information from sources believed to be reliable but no independent verification has been made and we do not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. This report cannot be construed as a request to engage in any transaction involving the purchase or sale of a futures contract and/or commodity option thereon. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

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