The Keys to a High Probability Reversal
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 extended O/S condition was discussed in the previous commentary, as it was beyond the -2.0 STDV level on a 6-month STDV chart. I also said there were two key time dates on 7/17, and 7/18 (+/- 2 days), measured from the 1576 high (10/11/07), and 769 bear market low (10/10/02), in addition to being an option expiration week. That very day (7/15), the $SPX made a 1200.44 low, and has since rallied +5.5% in 4 days to an intraday high of 1262.31, and closed yesterday at 1260.68. There was ample price symmetry at the 1200.44 low, which included the 1207 1.272 fib extension of the 1257-1440.24 last significant leg up, the 1204 (180 Degree) angle measured from 1576, and the 1191 bull market high in 1998. The reversal was a high probability, but I don’t think the short covering rally initiated in the financials can be sustained enough for 1200.44 to be the final bear market low.
The Energy and Materials stocks have been correcting from almost parabolic advances, and in the Trading Service we focus on these key pullbacks where we can capitalize on any price, time, and momentum symmetry. For example, the XLE declined -17.9% in ten trading days to 74.05 last Thursday There was price symmetry with the .50RT-.618RT zones, as you see can see on the chart, in addition the 180 Degree angle (Square of 9) at 73.95. The momentum part of the anticipated trade was the positive divergence in the RSI (5) as the XLE made a lower low to 74.05 There was also symmetry with the 78.05, and 76.96 233DEMA’s. All of this made Energy, and commodity related stocks like Coal, AG Chemicals, and Gold, the immediate primary daytrading focus.
The XLE opened strong yesterday to 77.65 on the second bar, and then pulled back to 76.49, setting up the inside bar reversal above 76.83 on the 10:00AM bar, as so often happens with my 1st Hour Reversal Strategies. There were similar setups with component stocks, as you would expect. The XLE went on to close at 79.20, which was also the high, although the trade was exited before that in two parts, both on the reversal below the 78.05 200DEMA. The USO spiked on the 2:25PM bar which carried the XLE to the 79.15 high. Not a bad days work, but certainly no surprise because of the recognition, and preparation, prior to the trade. You can read the full description about this anticipated trade opportunity with a Free Trial to the Trading Service.
NYSE volume declined to 1,21 billion shares yesterday, with the Volume Ratio 53, and breadth +914. The 4 day MA indicator is now ST-O/B, with the VR 65 and breadth +1082. As anticipated, the Energy and Materials stocks were the only sectors green yesterday, with the exception of the IBB +1.1 The OIH was +3.9, XLE +2.9, XLB +2.2, and HUI +2.0 The XBD led the downside at -3.1 With the $US dollar weakness (DXY), since the last Thur high of 72.405, and now 71.78 as I finish this commentary, the Energy and Materials stocks are where daytraders should continue to focus.
After the close yesterday, AAPL said it expected Q4 earnings to be below the “streets†estimates, and the stock was -11.1% in after-hours trading at 6:30PM, while the QQQQ was -1.9%. As I complete this commentary, I see that Apple
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PowerRating) is -10.6%, and the QQQQ -1.8%. The $SPX futures are -11 points, so it points to a discount opening, which should put extended Volatility Bands in play. It doesn’t matter which direction, because when prices get extended there are always high probability setups to trade. Yesterday, the $SPX made a 1266.92 high on the 9:45AM bar, after a +5.5% gain in 4 days, so it was extended on that basis alone. This set up my RST reversal strategy, with entry below 1266.40, which also had 1.414 fib extension symmetry of the previous leg down (5 min) It traded down to 1256.45, and at the same time, the Energy reversal entries were advancing, so traders had profitable trades in both directions.
The next commentary is 7/23/08
Have a good trading day!
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alt= “S&P 500 Index Chart”
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alt=”Select Sector SPDR-Energy Chart”
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