Reversal From Short Term O/S Condition

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.

The SPX has declined -8.4% in 4 days from the 944 (1/7/08) key price and time zone, in addition to the ST-O/B condition. It hit an 864.32 intraday low yesterday versus the 866.36, 0.382RT to 741 from 944 and closed at 870.26. In this market you would expect more than a 0.382RT, especially with the constant barrage of depression like news from the media, pundits, and the new Socialists taking office on January 20th. Of course, it only takes one down day for CNBC to forget that the SPX is correcting from a +27.3% gain in 29 days.

The bottom of the 919-851 trading range is still intact, and the 0.50RT to 741 is 842.38. The market entered the ST-O/S zone yesterday with the 4DMA's of the volume ratio (VR) and breadth at 25, and -1000. Today is day 34 from the 11/21 low of 741, while Thursday also has minor Fib and Natural Square symmetry, while next Monday is a Holiday and the market is closed, so the odds favor a reversal this week.

Despite the SPX correction, there was some significant market action in the credit market last week, which is obviously a positive. The TED spread hit 1.2%, down from 4.65% on 10/10/08 when the SPX hit that 839.80 low and finished the week at -18.2%, which was the eye of the "Panic of 2008". Also, the LIBOR-OIS spread that you see on CNBC every morning declined to 1.07%, down from 3.63% on 10/10/08. It was the most positive week in the credit markets since the "Panic" started.

The other significant development has been the decline in the 30 Year mortgage rate which was quoted below 5.0 last week by Chase and Wells Fargo. However, if the tax and spend group losses their minds with the new proposal, things are only going to get worse, and the equity market would head south without stopping at go.

The correction last week was on declining NYSE volume of 1.23, 1.20, and 1.16 so it was lack of buyers into the ST-O/B condition, and not aggressive selling by the institutions. Yesterday, the volume picked some to 1.3 bill shs, with the VR 25 and breadth -1570. The leadership last week was in the junk bonds at +5.5%, and investment grade corporate at +2.3 while the SPX was -4.4%. Big cap is expected to outperform small cap in early 2009 and the Russell 2000 was -4.9% last week so that is how the year started.

The day trading has been slower the last 5 days as the volatility has declined, and the best opportunities continue to be in the 1st hour, and the last 2 hours, while we have seen quite a bit of sideways price action in between. The Trading Service focus remains on Industrials, Energy, and also some selected Tech, and Bio-Tech stocks.

Have a good trading day!

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