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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.smartdaytrader.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.smartdaytrader.com or you can reach him personally at jim@smartdaytrader.com.

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Out on a limb
By Jim Raker
www.smartdaytrader.com
For Thursday March 4, 2004

At SmartDayTrader, we focus on intra day trading. Our primary market is the S&P 500 and we mainly use the e-mini due to the speed and convenience of order entry. Our system utilizes a series of strict trading rules. If the markets line up according to our rules, we enter the trade. If not, we wait. Ideally, the ability to remain true to your trading rules should be at the heart of any method one chooses to follow, assuming that method is sound. If you don't follow your own trading rules you are lying to yourself. The reason our method works so well for us is that in spite of our perception of what the market may or "should" do, the truth is always what the market presents to us at any given moment. Once you learn to dissociate yourself from your preconceived notions and trade the facts, your trading income as well as your sense of pride will increase.

I say this because I want to completely disclaim anything else that I am about to say in this article! What? That's right. By the time you read this the much-anticipated release of the jobs data will have occurred and the markets will be reacting accordingly. One of the greatest day traders I ever met was fond of saying, "There is no good or bad economic news. There is only ‘better than or worse than' expected economic news." The point is that what trading comes down to is that markets react to the sum total of all the information available to all of the traders in that market with the result that price moves. It is our job as day traders to react to that reaction - as it is occurring. If we have become too attached to a fixed set of ideas about what the market "should do", the odds are good that we'll be poorer. Maybe much poorer.

So why am I telling you this? Because I am going out on a limb to go through my analysis of the markets on the eve of this big report. By the time the markets react and you read this, I will have either been right or wrong, but it won't matter, as I have the tools to go with the flow. This is one of the joys of day trading.

The stock market has been in yet another one of its "boring" sideways consolidation phases since January. At SmartDayTrader, we begin by examining breadth, particularly the NYSE up to down data. The first chart shows our cumulative breadth indicator. You can see how it peaked and gave a "sell signal" in mid January. You can also see that the persistent strong breadth of the last 4 days has turned this indicator upwards. Any follow through positive breadth should put the bulls fully back in control. Cumulative breadth has not crossed up across its "filter". Until it does, we have to remain prepared for the "downside surprise".

(Cumulative Breadth is negative, but could be turning positive)

The next chart shows short, intermediate and long-term breadth from a different vantage point. The important point to note here is that markets become overbought when short-term breadth hits +1200 and short term oversold at minus 1200. Note that since August, we've hit OVERBOUGHT 4 times (including last week) and we've not come even close to oversold. We can interpret this as a very powerful bull market or one that is sorely in need of a more complete correction. In a typical bull market, such a decline would be called "healthy". (Could this be an "unhealthy" bull market?)

(Will this market ever get oversold again?)

Let's take a look at the big picture. Here we see the weekly chart of the SPX divided into trading quadrants. Since December 2003, we've been held back at major QUAD resistance. Clearly, a break of this level would lead to much higher prices. When looking at the big picture its important to keep in mind valuation and sentiment. Stocks are not cheap by any measure, although they may be cheaper than they were back in 2000. Sentiment is "too" bullish. We have had months of Investor Advisory sentiment showing an excess of bulls compared to bears. Complacency, as measured by the CBOE volatility indicators is at extreme low levels and the CBOE put call ratios are "too bullish". This has been the pattern for a while now, so obviously the "crowd" can get it right from time to time. However, it does make you wonder where the fuel is going to come from to propel this market safely into the next trading quadrant?

(Weekly SPX divided into its trading quadrants)

Let's look at the weekly chart up close. Here you can see the two recent rectangular consolidation patterns, also commonly known as "bullish rectangles". Notice the long rectangular consolidation last summer and how that resolved. Now take a look at the current consolidation. While this pattern tends to have a bullish resolution, we are fully prepared to trade the break in whatever direction it occurs. In an earlier Fast Break Plus article, I discussed in detail how to trade this pattern. Briefly, the move out of this rectangle should travel at least the distance of the rectangle. The best trade should be entered on a closing basis only. Any drop back into the rectangle should be considered a "failure" and will usually travel not only back through the range of the rectangle but out the other side for the measured distance of the rectangle. In other words, watch 1160- 1163 closely.

(Weekly SPX showing rectangular consolidation patterns)

The daily chart of the SPH (March SP futures contract) is shown with the 14-day relative strength indicator. Note first the extreme readings registered in early January followed quickly by the divergence and drop in price. The market had simply gotten too far ahead of itself. Next, note the second divergence at the February highs, which led to another nice short trade. Finally notice that the correction so far has held the "50" line. This has to be construed as bullish. However, any break out to new highs must rapidly pull the RSI back up with it or it would have to be considered suspect.

(Daily SPH with RSI 14)

The daily chart of the SPH is next shown with the MACD histogram. Note how the positive crossover in late November led to a significant rally. We appear to be on the cusp of another positive crossover tonight. If this fails to turn up from here Friday, we would expect a resumption of the selling.

(Daily SPH with MACD Histogram)

The next daily chart of the SPH shows the widely watched EMA 10 and EMA 55. By early February, many of us were expecting a visit to the EMA 55, but so far, this has not happened. Watch 1150 tomorrow. If this holds, the bulls are firmly in control. If 1150 gives way with gusto, perhaps that delayed visit to 1125 could be in the cards.

(Daily SPH with the EMA 10 and EMA 55)

The daily chart of the SPH is now shown with a very slow stochastic. You can see a definite downward bias in this indicator. This indicator is very useful for "cycle" information. If there is to be further selling it suggests an early to mid-April time period for the next major bottom.

(Daily SPH with slow stochastic)

Finally, we'll take a look at the bonds, as they will be our first indication Friday of what we can expect from the employment report. They are shown here with their slowed stochastic indicator and you can see that a bottom does not appear to be in the cards any time soon. The circles correspond to recent stochastic tops.

(June Treasury Bond with slow stochastic)

Bottom line? If the market perceives the employment data as friendly, we should see a rally in the bonds, followed by a rally in the stock index futures. The March SPH should be able to easily break out above 1158 and safely close well above the 1160 level. Anything short of that should be viewed with suspicion. If the data is perceived as unfriendly, bonds will fall, followed by a drop in the SPH. 1150 should melt away and we should easily take out recent major support at 1142. If this occurs, we should be well on our way towards 1125 - at least. Finally, I want to direct your attention the NASDAQ 100 which has fallen sharply. The EMA 10 for this index is sitting right on the EMA 55 - the lowest it's been in almost a year. If the selling resumes here, it will drag the rest of the stock market down. If the buying we saw on Thursday carries over to Friday with conviction, the bulls are back in control and we can expect much higher stock prices.

Want to see how we traded the day? Come to www.smartdaytrader.com and read our in-depth Nightly Reports. All of our back issues are available on the web site. Interested in learning how to trade? We are now offering training seminars for new and advanced traders. Go to SEMINARS (www.smartdaytrader.com/ws/seminar.html) for more information. Please trade wisely, use caution and resist the urge to overtrade. One Smart Trade a day is all you need! Have a great weekend.

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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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