Traders Capitalize on Extended Zone Reversals

August 29, 2007
Kevin Haggerty

Kevin Haggerty is a
full-time professional trader who was head of trading for Fidelity Capital
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The SPX has given back -3.3% of the +7.9% bounce off the 1370.60 low from
8/16. Merrill Lynch is chasing the ambulance, as they downgraded the brokers and
banks which led the downside yesterday, with the $XBD -3.5% and $BKX -3.2%. The
FOMC minutes sounds like Greenspan all over again, as the Fed says "a moderate
economic expansion in the coming quarters is most likely, but the downside risk
to growth has increased." What a defining statement! The SPX was -2.4% to
1432.36 on NYSE volume of 1.39 billion shares, with the volume ratio just 5 and
breadth -2451. The 1479.37 Monday high was into the extended Standard Deviation
zone, and was short-term overbought, with the 4-MA of the volume ratio 68 and
breadth +1148. As I said in the last commentary, Trading Service members were
ready to take advantage of this extended situation.

The Generals stepped aside yesterday, and the PPT didn’t get involved, as
they were probably tired after working so hard from the 1370.60 low. Henry
Paulson continues to refuse to answer any questions regarding the PPT, and also
refuses to release minutes of previous meetings, as requested by John Crudelle
(NY Post), and others like Representative Ron Paul under the Freedom of
Information Act. Paulson acknowledged on TV recently that the committee is
active, and meets regularly. Based on what I’ve seen, ever since the run-up to
the mid-term elections and during any perceived negative political/economic
situation, there is no doubt that the PPT is involved in accelerating many of
the "magic moves" we see in the face of negative news.

There are just 3 trading days left in the month, so my guess is that the
Generals don’t want the SPX to go minus on the year, and will spend some money
to keep the SPX above 1418, and of course move it higher if they can. In this
light volume, it will only take a few buy programs to get it done. The early SPX
futures are +6.5 points at 8 AM EST. The SPX now has 2 lower swing point highs
since the 1555.90 cycle high. The first one was 1503.89 on the bounce off the
200-233 day ema zone, and 1427.39 low on 8/6. The second is the 1479.40 high on
Monday, on the bounce off the 1370.60 low on 8/16. The SPX closed yesterday at
1432.36, and below both its 200-day ema (1449.85) and 233-day ema (1439.55).
Both the $INDU and QQQQ remain above their zones, while the IWM is below, and
the weakest of the group. The key SPX retracement zone is 1485-1516, and the
trend remains down until the lower swing point highs and lows are reversed.
Unless the financials make a turnaround, the SPX will soon take out the 1370.60
low. Daytraders don’t have to worry about whether it will or won’t, and just
need the intraday volatility to remain high, especially in the energy,
commodity, and big-cap multinational stocks. Trading the index proxies, ETFs and
energy stocks are the best risk/reward for daytraders right now, who run it like
a business, and are not just emotional button pushers.