Here Are The Levels, People…Be Prepared To Act

January 27, 2003
Kevin Haggerty

The war noise heated up
Friday, as evidenced by gold and oil up, along with the Treasury bonds on a
flight to quality. I can’t wait to short them again after, and if, we initiate a
military action. The other side of the war equation was stocks down, along with
the US dollar. The NYSE volume was less than normal for a mini puke shot at 1.53
billion, a volume ratio of 17, and breadth -1579.

Looking at the big early
red in the futures, that could accelerate today. I certainly hope it does
because it means opportunity. Needless to say, the strategies put on the week of
Jan. 13, which were geared to a significant increase in volatility either way
have worked out more than well, and I will cover today. The trades were taken
from both a high-probability time and price zone. They were also put on when
volatility had gotten down to the low end and a retracement to the longer-term
declining moving averages for the major indices. The other high probability at
the time was war or exile, either of which made a significant move to resolve
that narrowing volatility trading range. The least probable was a long
continuation of that trading range, which would have meant time decay working
against me. Re-read the

commentary for Jan. 13.

I have included charts
today of both the SPX and QQQs framed from the October lows to the Dec. 2 high
so you will be alert to the awareness levels. Remember, don’t trade the number
without a change-in-direction pattern. The daytrade is the initial trade. That
framework is outlined in

the Jan. 21 commentary.

The VIX exploded on
Friday to a 37.11 high, just below its three-month 3.0 standard deviation band
and closed at 36.02. Spikes like that are often followed with another move up,
so I will look for a reversal back below the 3.0 standard deviation band if
there is a price rally for the major indices. As you may recall, my VIX entry
was above 27.63 which occurred on Jan. 15, then again above the significant
swing point high of 28.78, which as some of you know, was also an RST buy entry.
I use the VIX the same as I would the major indices and stocks, which means I
want to see the reversal pattern before committing funds to a reversal trade.

On the SPX chart, you see
some confluence at the 850 zone, with the .618 retracement right below at 840,
or just -1.2%. There is also a monthly pivot at 854.05 and a daily pivot today
at 851.62, along with the 3.0 three-month standard deviation band, which today
is about 850. Needless to say, this 855 – 840 zone gets my undivided attention
today. If the fear intensifies, 825 – 805 comes into play. The entire zone
combined is less than 6.0%. You’ve got to be prepared to act.

Hopefully we get a
significant opening gap down following Friday’s -2.9% for the SPX and Dow, with
the Nasdaq declining -3.3% and the NDX -3.5%. I am looking to put on some combos
today using the Jan. ’04 LEAPS, calls and puts. On Friday I did one that has a
maximum return of 110% if called, 45% if unchanged, and if the stock is put to
me, I own it at a 28% discount from Friday’s price, which I am comfortable with.
It is also a low-debt company.

Fear creates opportunity,
but not many take advantage of it. That in one sentence sums up any book on
trading psychology you will read. There is no way around making a decision, but
a good options strategy at the right time gives you an edge.

Have a good trading day.