Trade the Reaction, Not the News

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 took out the 1427.39 low (8/6) yesterday, closing at 1426.54 -1.8%, while the $INDU was -1.6% to 13029, and the QQQQ -1.7% to 46.79. NYSE volume was 1.79 billion shares, with the volume ratio just 9 (1.62 billion shares down) and breadth -2478. Yesterday was the first time the SPX has closed both below the 200 day ema (1450.22) and 233-day ema (1438.72) since 8/3. Financials, brokers and consumer retail continue to be the downside leaders, as expected with the current credit/subprime panic. The 4 MA of the volume ratio and breadth are very short-term oversold at 30 and -1296. Crude oil has declined from 78.77 to 70.10 in 7 trading days, and bounced the past 2 days to 72.02. The decline in crude is consistent with its seasonal tendency, and there is more room for weakness into the fall. There is range support at the 67 zone. The $US Dollar has bounced off a double bottom at 80.02/79.96 and closed yesterday at 81.49, taking out the initial bounce to 81.09. It is essential the $US Dollar holds the 80-78 zone.

Yesterday daytraders took advantage of the the SPX continuation short move below the previous 1451.54 low, and 200-day ema (1450.21). It carried down to 1431.76, which was the -1.28 Volatility Band zone (1430.41). The SPY hit 143.31 with the -1.28 Volatility Band at 143.26, so it was on the money. The SPX made a +13.9 point contra move, so traders who used the extended volatility reversal strategies were able to capture significant gains in both directions. The SPX futures are -9 points as I finish this commentary at 8 AM, but the "funny money" CPI number is due at 8:30 AM, so that can obviously change. However, the usually bogus CPI number is obviously not what the market is focusing on, relative to the credit and subprime problems, in addition to hedge fund and mutual fund redemptions going into the September-October weak seasonal period. The CNBC "Midnight Madness" hype on $INDU 14000 was the beginning of the decline 18 days ago. The $INDU closed above 14000 just 1 day, at 14000.41 on 7/19/07, and went out yesterday at 13028. If the premarket red futures hold, it will trade below 13000, with initial support at 12850-12730. 12795 is the previous 2/20/07 high, with the 200-day ema at 12852 and 233-day ema at 12732. SPX initial resistance is now the 233-200 day ema zone, from 1438-1450.

It will be business as usual for daytraders this morning, on a discount major index opening, and there will be contra moves from the extended Volatility Band levels to take advantage of this morning. The rallies will be sharp from the short-term oversold conditions like we're in now, but the market will then work lower as the bear cycle unfolds.

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.

Have a good trading day,
Kevin Haggerty