High Probability Trading Strategy
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. Mr. Haggerty is a co-founder of Tradingmarkets.com and is the founder of www.KevinHaggerty.com.
The anticipated reversal “red alert” described in the previous commentary is in progress, and the $SPX hit a 1388.81 intraday low on Wednesday, which is -3.6 % from the 1440.24 Monday high of the current rally.
The XLE, and OIH, which were extended to their 1-year Standard Deviation Bands, have declined -2.9 %, and -3.1% the last two days. I said that volatility would revert to the mean, and when it did, the leading sectors like energy, materials, and transportation, would put immediate pressure on the $SPX because the financials had already reversed their previous uptrend with a 123 Lower Top change in short term trend.
In fact, the $TRAN was extended out to the 1 year +3.0 STDV zone, and had taken out its 5486 7/18/07 bull cycle high last Friday to 5537, and then reversed down to a 5198 low yesterday, before closing at 5247. The degree of sector hype by the empty suits on CNBC has a high correlation with extended Standard Deviation levels.
The $SPX traded in a narrow 8.7 point range yesterday between 1398.85 and 1390.27, so day traders didn’t have much to work with. The internals were neutral with the Volume Ratio [ADV VOL/ADV VOL + DEC VOL] at 55, and breadth +313. However, there were trades to play in the energy sector because of the sharp morning decline. One example of this is the XLE (see chart at bottom) which declined from 89.68 to 87.59, which was the exact -1.0 VB, and it was a low common denominator entry above 87.68.
The 10-day average range is 1.8 points, and it had already traded 2.09 points between 89.68-87.59, so that was a major factor in trade management, with exit below the 88.47 initial resistance. The XLE was extended up to the 1 year +2.0 STDV band on the daily chart, but on the 5-min intraday chart it was extended down to the 1 day -1.0 VB 87.59, so that is a high probability trade for the day trader. The XLE went on to a 88.84 high, but closed at 87.75.
The volatility bands are a significant tool in all of my strategies, and they are published daily in the Trading Service for the S&P 500, DOW 30, and NDX 100 stocks in addition to the major sector ETF’s. You can take a free trial to the trading service by calling (888) 484-8200 (Ext 1-Sales), or by going to KevinHaggerty.com.
This is a long weekend, and many professionals are getting a head start, so the trading will be lighter, and the liquidity thinner. The “big players” will have an easier time influencing the price action of different stocks, as do the program gangs with the indexes.
The S&P 500 futures are minus 6.75 points as I complete this at 7:30am ET, so if it holds, and there is more continuation weakness today, it will set up a contra move for day traders. There are just 4 days left after today into month end next week, so the Generals and Hedge funds will try to mark some things up if they can, especially in the energy and materials sectors, in addition to the same universe of 50-60 mega cap stocks that the “herd” has been chasing. A rally into month end should be sold.
The next commentary is Tuesday 5/27/08.
Have a great Holiday!
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.
