Buying the Weakness and Selling the Strength
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.
In the previous commentary for Friday 11/21, I said “There is nothing positive in the news, Paulson and Congress have spooked the market the last few days, and the SPX has taken out the 2002 magnet 769 low, so the probability is high for a sharp reversal.”
The SPX then made a new bear market low of 741 on Friday (11/21), and then reversed on another of those last hour “magic moves”, and the SPX closed at 800.03 or +6.3%. This reversal continued higher on Monday as the SPX advanced +6.5% to the 851.81 close, which is in that initial 840-850 trading range resistance, which provided a chance to take some profits on index proxy positions taken on the reversal of that 769 bear market low. The SPX made a +17.3% move from the 741 intraday low to the Monday 868.90 yesterday, before it closed at 857.39 or +0.7 on the day.
There were other contributing factors to the reversal other than the technical significance of the 769 reversal, which are: (1) Wednesday is essentially month’s end because the NYSE is closed Thursday for the Holiday, and there is an early market close on Friday at 1:00 PM EST. (2) Our new U.S. Government junta bailed out C, or essentially nationalized another major financial institution. (3) The Stock/Bond Ratio (SPX/TLT) reached record lows last week at 7.2 because of the panic run on Treasury paper, so there was definitely some program swaps out of bonds into stocks by different institutions.
The NYSE volume yesterday was 1.87 bill shs, with the volume ratio 65 and breadth +1025, as the major indexes and most major sectors like the financials and energy are short term O/B after the reversal from the SPX 741 low on Friday. The SPX trading range resistance is 840-850, and the SPX has closed at 851.81 and 857.39 the last two days, so 840 is the key downside level right now.
The early SPX futures are -21 points after the expected weak economic numbers were announced, but they were down as much as -18 points before the numbers. The market is closed tomorrow for Thanksgiving and then it closes early at 1:00 PM EST on Friday, so today is the last real trading day of the month. The liquidity will be thinner today, which makes it easier to muscle the indexes, so the trading could be erratic at best, and day traders should be very selective before playing the game today.
There is still significant downside market risk after the rally in light of the daily bailout flip flops by Paulson/Bernanke & Co, and the “no nothing congress” that seems more concerned about symbolism than reality. The mantra all along has been to buy weakness and not strength, which is still the case. The reversal of the 769 10/10/02 bear market low was a significant technical reversal, and if you didn’t play it you missed a key opportunity, with some cushion to work with after the strong 3 day run.
Have a good trading day!
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