Key Time Period Volatility this Week

In the May commentary, it was anticipated that a break below the TLT head and shoulders neck line (86.60) would put pressure on the equity market, and it had an initial price objective of 81.40. It made an 82.30 intraday low on Tuesday, and closed yesterday at 83.12. The TLT was -1.8% last Wednesday (6/7), and the SPX had a 1487.41 intraday low on Friday. Since then, the TLT is -0.9% through yesterday, and the SPX closed at 1522.98 (+0.5%), followed by the +1.5% day on Wednesday, and is now +1.1% on the week so far. In last Friday's commentary (6/8), I said there was some significant time symmetry for this week, which is week 377 (Fib) from the 3/24/00 bull market top ($SPX). We anticipated a sharp equity bounce if the bond market quieted down, or at a minimum, significant two-way volatility, which would increase the trading opportunities, which it has.

As of yesterday, the SPX is +2.4% off the 1487.41 low (6/8), and today is "triple witch" options expiration, but the anticipation that the SPX would close higher than last week's 1507.67 looks good. There was also a time milestone reached yesterday, as 6/14/07 is calendar day 1708 from the 10/10/02 SPX bear market low (769), making this current market the second-longest time period between 4-year cycle lows since the 1707 day 1962 cycle low. The longest 4-year cycle since the 1949 low starting point is 1898 days from 8/9/82-10/20/87. This current bull cycle is already the longest period between market tops during the same period, and of course we can't know whether the top is in yet.

The leadership for this current SPX rally off the 1487.41 low is the energy sector, which is also the leader year-to-date. My special stock selection system for daytraders and swing traders has had the energy sector as the primary focus for the entire time, and obviously, the market performance is superior. On the Trading Service, there is a screen that gives you the strong momentum up-trend stocks, ATL (Above The Line), and the reverse for BTL (Below The Line). From these screens, I select the best daily chart setups, which are posted each night on a focus list on the service, and traders the next day can narrow down their search for the best intraday setups and stocks to trade. The emphasis is on pullbacks in a rising/declining trend, and contracted volatility patterns (see Free Trial of Trading Service for screen glossary definitions of ATL and BTL).

NYSE volume dropped off yesterday to 1.45 billion shares, with the volume ratio 71 versus 87 the previous day, and breadth +1042, versus +2080. Breadth was skewed somewhat by the TLT, which finished -0.3%. Over 35% of NYSE listings are financial, and that is the reason why this indicator gets skewed. Energy led the day with the OIH +2.1% and XLE +1.7%, while on the week so far, the OIH is +4.8% and XLE +2.9%. Both of them made new cycle highs. The CL0707 was +2.1%, and the USO +2%. The $WTIC [light crude continuous contract (EOD)] broke out of a 9-month trading range to close at 68.14. All other sectors were green, except for the BKX -0.2%.

The bond market will continue to be the primary influence on the equity market, despite the jawboning by the Fed Beige Book the other day, which indicated moderate expansion without inflation (right, and the Brooklyn Bridge is for sale at a "dollar three eighty"). That was even evident yesterday, as the SPX and TLT each topped out on the 10:40 AM bar. The 10-year Treasury yield has gone from 4.6% to 5.32% on Wednesday, and closed yesterday at 5.22%. The $US Dollar went from 81.25 to 83.27 on Wednesday, and closed yesterday at 83.11. The Fed has to avoid, if possible, a $US Dollar selloff, even if that means raising rates, which are still quite low historically and hoping for a soft landing because the current M3 growth rate is at a 30-year high (shadowstats.com). It looks like the Fed is true to form, "when in doubt, inflate it."

Have a good trading day,
Kevin Haggerty

Check out Kevin's strategies and more in the 1st Hour Reversals Module, Sequence Trading Module, Trading With The Generals 2004 and the 1-2-3 Trading Module.