Here’s my core framework
Kevin Haggerty is a full-time professional trader who was
head of trading for Fidelity Capital Markets for seven years. Would you like
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The SPX reversed +1.8%
off the mini meltdown low of 1235.18, closing at 1257.93, +0.1%. The Dow
reversed +207 points (+1.9%) off the 10,758 before closing at 10,939, +.07%. I
would have to say the PPT (Plunge Protection Team) was involved in accelerating
the reversal. The selling accelerated the past two days, when the SPX and Dow
re-crossed their 200-233 day EMA zones and were certainly oversold versus the 5
RSI, as both the indexes have positive momentum divergences (see 6/7/06
commentary). Sequence traders nailed the afternoon SPX reversal with entry no
higher than 1238.36 following the 1235.18 intraday low. The -2.0 volatility band
was 1235.91 and 1237 was a key Square of Nine angle measured from the 1326.70
bull cycle high. These levels were anticipated in advance by members of the
Professional Trading Service and they were ready to play a change in
direction–should it occur–in that zone, which they got after the Harami
(inside bar) pattern following the 1235.18 low. The OIH was also a reversal from
a zone with strong symmetry. The intraday low was 136.30, which is also the
200-day EMA and the -2.0 volatility band was 136.31. Also, the .382 retracement
to the 5/16/05 83.79 low is 136.91. The strategies I use to trade these zones
are based on what I call my Core Framework, which is:
1. Markets get extended due to crowd psychology
and the herd instinct.
2. Volatility reverts to the mean.
3. Markets trade in a geometric fashion and high-probability turning points can
be anticipated.
Learn how to anticipate high probability zones and you will look forward to days
like yesterday–not fear them. They provide great opportunities for daytraders.
NYSE volume was big yesterday at 2.54 billion
shares and was huge in the index proxies. The volume ratio was 40 and breadth
-467. The 4 MAs are 29 and -1005, which are extreme short-term oversold numbers,
except for the fact that the reversal occurred the same day. The OIH and XLE are
both in their 200-233-EMA zones, as are many of their component stocks, so they
should warrant daytraders attention today. The XLE is -15.3% high-to-low in this
decline, closing at 53.34 versus its 50.95 intraday low yesterday. The OIH is
-19.7% in 19 days since the 5/11/06 169.75 high. It is the first Generals
pullback to the 200-233 day zone since the 83.79 low on 5/16/05. There is also a
positive divergence with the 5 RSI.
Take what the market gives you as you react to
the overreactions.
Have a good trading day,
Kevin Haggerty