High Probability Zone and Correlation Trades

From 1990 to 1997, Kevin Haggerty served as Senior Vice President for Equity Trading at Fidelity Capital Markets, Boston, a division of Fidelity Investments. He was responsible for all U.S. institutional Listed, OTC and Option trading in addition to all major Exchange Floor Executions. For a free trial to Kevin's Daily Trading Report, please click here.

In the previous commentary I finished with the following statement:

"With the major indexes at key RT zones relative to their bull market highs, it is obviously a significant short term market juncture, especially because the market is so extended in price relative to time since the 869 low, and also because of the negative 5RSI momentum divergences in the major indexes. I still think that the higher probability is for the SPX to pull back and test what is now support at the 956 zone, and that the next 5.0% move or more is down, not up."

The SPX hit the anticipated 1010-1015 key price zone with a 1018 intraday high, and 1010.48 close on the 8/7 key time date, which is the 2.618 Fib ratio in time of the 1/6-3/6 leg down from 944 to the 667 low. The leg down was 41 days, so 2.618 x 41 is 107 days, which is 8/7. There were also 2 other time dates last week before 8/7.

The SPX hit the key price and time zone in an extended short term condition of price relative to time, seeing that it was +17.1% in 22 days from the 869 low, in addition to a significant negative 5RSI momentum divergence. The highest probability was a reversal, but the SPX only declined -2.5% in two days to the 992.40 low on Tues, from the 1018 high, and then reversed the last two days to yesterday's 1012.73 close, versus the 1014 .382RT from 667 to 1576.

The probability still favors the reversal, but with the quick snap back due to the declining $US Dollar yesterday, the SPX remains captive to the inverse relationship, and the same is true for commodities which gain strength from a declining $US Dollar.

In a previous commentary, "Day Trader's Goldmine", I pointed out some of the daily trading opportunities we continue to get from the inverse intermarket game, and yesterday was no exception. The USD was trading down in the pre-market, so the SPX, USO, and OIH had gap up openings, but quickly reversed as the USD changed, and they all made significant pullbacks, which set up the 10:00 a.m. period Trap Door reversal strategy. They are outlined on the charts for the SPX, and OIH, from the Trading Service actual trades yesterday.

The USD reversed again after the early jiggle, and the SPX had traded down to a 1000.82 low at the 480 EMA, so this set up the Trap Door entry above the narrow signal bar high of 1001.97. The trade was exited on a 3-bar reversal below 1010.59, so the day-trader once again said, 'thank you' to the USD "game".

The OIH was the commodity ETF of choice, so the Doji signal bar entry was taken above 103.72, and it ran +2.6% from entry before the exit below 105.98 for a nice chop. One of the keys to the strategies is a low common denominator entry, and that was the case for both the OIH and SPX trades, so it was a nice day at the office, thank you very much.

Have a good trading day!

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