Erractic volatility is daytraders’ gold
Kevin Haggerty is
the former head of trading for Fidelity Capital Markets. His column is
intended for more advanced traders. Kevin has trained thousands of traders
over the past decade. If you would like to be trained by him,
ext. 1.
It was essentially a non-trend day
Thursday until the futures-induced SPX 10-point spike that started just after
1:30 PM ET. There was no real demand/supply
differential prior to the knife up, as the initial SPX morning move was down to
the lower end of the 5-day trading range, hitting a 1215.05 intraday low and
taking out Wednesday’s 1216.53 low, which set up the RST long entry above
1216.27 (see chart). This was followed by a 1,2,3 higher bottom entry above
1217. Partial profits (+4.25 points) were taken at the .50 retracement zones of
the 1226.59 Wednesday high and a trailing 2-point stop was initialed on the
balance of the position, fully expecting to get stopped out before 1224. Well,
as luck has it sometimes–provided you have a position–the SPX traded up to
1232.41 before there was a 2-point pullback and the SPX finished at 1230.96,
+0.8% on the day. The Treasury auction went well, with supposed foreign buying
and the TLT
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PowerRating) was +1.2% while the US dollar also gained, closing at
92.06. I guess the flight to safety after France and Jordan far outweighed the
inflation scenario–at least for the day. Jordan gets hit, and it is as if our
infamous “THEY” said the terrorists will not disrupt the U.S. markets It
certainly wasn’t the Generals deciding at 1:30 PM they loved the market and
increased deficit numbers. Crude oil did decline, with the CLZ5 -1.9% to 57.80
and the light crude continuous contract ($WTIC) closed at 58.74 (-2.6%) with the
200-day EMA at 57.87. The $WTIC is down about 18% from the August highs. The
energy disruption risk is obviously off the chart.
The energy volatility is gold for daytraders. The XLE
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gave us another RST long on Wednesday, with entry above 48.36, following the
48.15 low. It ran +3.1% to 49.84, setting up an RST sell with entry below 49.61,
which declined -2.1% to 48.56. Worst case is you caught the RST long and covered
on the RST sell entry. If you played both trades, congrats There was
another RST long (2nd entry) yesterday above 46.97, which gained +1.8% to 47.80,
before fading to close at 47.09. The fact that the XLE was -3.1% yesterday did
not prohibit traders from making money on the long side from an extended
volatility band level on the contra move following the morning decline.
The SPX made another mysterious knife move on Wednesday, which
was +7.5 points, from 12:05 PM – 12:50 PM to 1226.59. This took out the trading
range high but also set up an RST sell entry that declined to the 1220.65 close.
You don’t make much money chasing moves or announced news, especially in the
Noon hour, so it was an easy decision to take the RST short entry. The SPX
closed above the 5-day range yesterday at 1230.96, +0.8% on the day, while the
Dow
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PowerRating) was +0.9% to 10,640. The QQQQ
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another new rally closing high with the old intraday rally high at 40.68 on
12/15/04. NYSE volume was 1.74 billion shares, with the volume ratio 63 and
breadth a relatively light +625, which highlights the SPX program concentration,
not broad participation.
The Generals’ markup into year-end is widely expected–and
maybe too much so. The geopolitical situation changes by the day now, so market
risk is much more extreme than just the length of the current bull cycle, now
over three years old. We expected the trading range to be resolved this week and
also some increased volatility because it is a key time period. The rally is 21
days old today and yesterday’s SPX spike put the index up to the initial
extended 3-month standard deviation zone, with the +3.0 band at 1250. – 1255.
Because of the advance off the 10/13 lows into the time week, a retracement was
expected before the Generals run for glory into a year-end markup. That can
certainly still–and probably will–happen, and it will make for a better
potential markup advance into year end. That still won’t be near the success of
the synthetic straddle so far in this volatility (see 10/17 commentary,
Current Market Perspectives).
Have a good trading day,
Kevin Haggerty
PS I hope all of you celebrated with be on the November 10
birthday (Semper Fi)
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