The Reversal Symmetry In Play for Oversold Bounce

Kevin Haggerty is a full-time professional trader who was head of trading for Fidelity Capital Markets for seven years. Would you like Kevin to alert you of opportunities in stocks, the SPYs, QQQQs (and more) for the next day's trading? Click here for a free one-week trial to Kevin Haggerty's Professional Trading Service or call 888-484-8220 ext. 1.

The SPX -1.0% knife-down in the market on close session (MOC) to 1458.95, closed the week at -4.9%, which is the worst since the "China Decline" week 3/2/07 when it was -4.4%. There are a number of catalysts, but the primary ones are the LBO Bubble rolling over with the subsequent credit problems, expanding sub-prime loses, a weak U.S. dollar with rising crude oil prices, declining housing market and soft economy, and last but not least the subpar SPX earnings despite the media spin. The SPX earnings were marked down to +4.4% for this quarter and many companies and estimates lowered several times so the "better than expected" hype by CNBC means bumpkus. The sector leadership on the downside was the $HUI -9.4%, XLB -9.1%, XLE -7.6%, $XBD -6.8%, $BKX -6.6%, and SMH -5.4%. The TLT was +1.5% last week and has advanced +7.2% to 87.28 from the 81.88 low (6/12/ 07) as "they" seek quality and unload other junk debt for treasuries and the realization the economy has slowed down. It doesn't have to be a recession to have a bear market with only 7 of the 14 last bear markets back to 1949 had recessions (TheChartStore.com). It is also significant to note that 95% of the economists surveyed missed the last recession following the 2000 market bubble and yet CNBC keeps shoving them in front of the camera as market experts and the loser is always the retail public that listens to the hype. The biggest risk to the current market cycle is the flight from the U.S. Dollar and Dollar denominated assets into stronger currencies and Gold. Washington and the PPT (Plunge Protection Team) might be able to stall it but the world currency market are too big to prevent it.

On a short-term basis the market is extremely oversold with the 4 MA of the volume ratio just 18 and the breadth -1867. The 5 RSI is 15.35. The SPX 1458.95 close is right on the -3.0 Standard Deviation Band for this specific time period which is outlined in the trading service today and is also available to free trial subscribers. There is some key price symmetry in play as 1460 is the .50 retracement to1364.00 from the 1555.90 cycle high and 1461.57 is the 02/22/07 top. Also, 1458.95 is the 225 degree angle level from the 1555.90 SPX cycle high. The SPX had significant short-term trading reversals from the 2.0 - 3.0 Standard Deviation Zones that we measure in the trading service. The most recent reversals are: 1) 1538.71 high (6/15) to 1484.18 (-3.5%) 2) 1484.18 to 1555.10 (7/15) with the 1555.90 cycle high the next trading day (Monday) 3) 1555.90 to 1458.95 (-6.2% in 9 days) which is similar to the 1987 market when the initial downside move from the 8/25/87 337.88 top 308.56 was -8.7% in 9 days followed by a +6.6% advance the next 18 days to 328.93 and then 4 days later hit the 216.46 1987 crash low. The administration which put out those bogus 3.4% annualized GDP numbers yesterday with the PPT (Plunge Protection Team) will pull out all the stops to prevent a similar occurrence before the 2008 election.

We start today with the SPX at the 1458.95 level and 3.0 standard deviation zone with only 2 trading days left in the month and also a couple of significant time days on this Wednesday and Thursday so that the market is in position for the oversold bounce sometime in the next 4 days. But long-term the market is going lower than the current decline.

Have a good trading day,

Kevin

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.