Extended Volatility is a Trading Opportunity

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.

Commentary for 1/31/11

The Egypt crisis was obviously the primary catalyst for the SPX -1.8% sell off Fri, in a very extended market on a 1 year STDV basis, and in the key 1300-1314 key price zone with some significant momentum divergences.

Also, as you know from previous commentaries, there is some significant Jan Pi symmetry, and without the Fed QE2 manipulation I think this correction would have been in progress before the Egypt crisis. This was all that was needed for professionals to take some money off the table, and they will now sit back see how this geopolitical crisis plays out, so the market is vulnerable for further decline without an immediate resolution.

Crude oil [WTIC] finished the day +4.4% to $89.49 after having declined from $92.92 on 1/12 to $86.23 last Wed. Obviously, any realized threat to the Suez canal will send oil much higher but the odds are against that happening during this crisis. As expected, there was a flight to perceived safety Fri as the stock market declined to extended intraday levels while gold and bonds advanced to extended Volatility Band levels.

I have included the 3 charts that outline the flight to safety trade Fri that most Trading Service members played in one form or another. You can see that all 3 entries were made in the 10:00AM time period as the GLD and TLT broke out from narrow range, and at the same time the SPX broke down below the 2 previous reversal bars, with entry below 1299 on the 10:00AM bar. The SPX short trade [SH, SDS, or future] was exited on the dynamite triangle B/O above 1280.32, following the 1277.05 low versus the
-2.0 VB at 1281.24.

The GLD entry was taken on the 10:05AM bar and exited below 130.98 on the 12:15PM bar following the 131.47 high versus the +3.0 VB at 131.40 The +3.0 VB is extremely extended and there is usually a reversal which in this case the 131.47 high proved to be the intraday high and GLD declined to a 130.28 so some aggressive traders made out both ways.

The TLT formed a 3 bar range and the entry was taken above 91.07 on the 9:55AM bar. The trade was exited below 92.02 on the same 12:15PM bar as the GLD and SPX so it was a “Hat Trick” flight to safety trade as day traders capitalized on the emotion.

I will include one of my Volatility Band tables for you each day next week that I provide in the trading service, as next week could be volatile. You can follow the one day Standard Deviation reactions at the different Volatility Band levels for the major indexes and key ETF’s most affected by the crisis. If you take a 1 week trial subscription to the trading service you can see the universe of VB`s, how they are used, and many examples in the archives of the different reversal strategies used, which are often triggered by the VB levels.

Have a good trading day!

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