Profits come from high probability zones

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.

Monday was the anticipated mark-up day, as the President was all over the TV on the economy in front of the elections. The SPX was sitting in a 6-day range, and this was the 4th mark-up day since the SPX 1327 high was taken out. Most of the gains above 1327 have come in just 4 days (see Oct 23 commentary). Yesterday was the normal narrow range day that follows these mystery moves. The SPX had a daily range of 5.4 points, closing at a new high of 1377.33 (+.02). $INDU closed at 12,127 (+0.1) while both the QQQQ (-0.7) and $COMPX (-0.5) finished red. NYSE volume expanded to 1.69 billion shares as month-end activity continues to pick up. The volume ratio was 59 and breadth +391 vs +543 on the Monday markup. Despite the SPX making new cycle highs, the 4 MA's of the volume ratio and breadth are only 55 and +352. This is not unusual when nothing happens for five or six days, and then there is a mark-up day initiated by buy programs in a smaller universe of stocks. This forces many of the portfolio managers to go along with the higher prices, because most now are just quasi-indexed funds anyway. In Monday's commentary, I said any weakness would be reversed in front of the election and month end. Also, there is an added incentive because October is fiscal-year end for a few very large mutual funds, so they will be pushing price for their major holdings.

In the sectors, it was all energy yesterday, as the OIH (+3.6%) hit the 200 dema at 135 before closing at 134.50. That is a +14.2% in 14 days, despite the decline in crude oil. The advance was off a key price zone, with symmetry from 120.26-118.89. The low was 118.19. It was also extremely extended on a 1-year standard deviation basis, so it was a very high probability reversal, despite the negative hype on energy stocks. Crude oil remains extended beyond the 1-year -2.0 standard deviation zone, with the most extreme band down at the 55 level. You have to remember, the high from crude oil (December contract) was 80.70 on 7/14/06, and the SPX rally started on 7/18. Crude reversed from the 1-year +2.0 level and the SPX from the -2.0 standard deviation zone, which was why it was a key price zone following the May 1327 high. The SPX is now extreme to the upside, and based on the angle of ascent, it will most likely be a similar knife to the downside on the next reversal.

Today is the Fed circus, so price action will probably go flat until the futures games start at 2:15 PM. If there is something in it for daytraders, it will be during the first hour, which is when most of the money is made anyway.

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.