Key Reversal Strategy for Traders
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.
The market action is very erratic as it continues to over react to every bit of news. The SPX rallied from the 1217.24 low last Friday, to 1274.42 on Monday, then hit 1221.60 yesterday, before closing at 1232.04 (0.6), while the INDU was +0.8 to 11270, and the QQQQ +0.8 to 42.80. The SPX futures are -11.5 points as I finish this (7:25 AM), and then there is the initial jobless claims report at 8:30 AM, which always results in some gaming in the futures, so a lot can change before the 9:30 AM opening.
NYSE volume was 1.55 billion shares, but the volume ratio was only 46, which is a negative divergence to the SPX +0.6 advance, as was breadth at only +313. The financials declined for the second straight day, and the XBD is -11.6 and obviously weighted by the -52% decline in Lehman Brothers
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PowerRating), while the BKX is -7.4 following the Monday +6.9 advance. The leadership yesterday was the bounce in energy and commodity sectors, but the trading opportunity was anticipated by the trading service members.
I have included the XLE 1-year STDV Channel chart from the trading service commentary, which shows the 9/9/08 63.25 close, which was right at the extremely extended -3.0 level, and also the 5 min chart for yesterday which shows the pullback below 64 where traders were prepared to play the long side. It closed at 65.74, so traders that carried it over have moved stops to B/E below 64 and the other traders went home happy. Crude oil hit that $100 support level on Tuesday when the XLE closed at 63.25, so it was a high probability reversal opportunity from an extended level, and an extremely O/S condition. Crude oil declined 8 of the last 9 days, and closed lower today at $102.58, despite OPEC making their regular cutting output noise.
This time was supposed to be different with the new and better global economy, so said the empty suits at CNBC, and all the shills they dragged on the show to confirm their hype. The same thing happened in the Internet boom when their buzz phrase was "new Paradigm", which obviously was another elite bit of misinformation. The bottom line is that the US is in a recession, just as in past business cycles, and the rest of the world has followed as usual, only this time, instead of an Internet bubble, we have the housing deflation, which has touched off the biggest derivative meltdown and credit crisis, which is unlike anything we have seen. The surprise is that the SPX has only declined 23.8% (1576-1200) so far. As expected, they are debating the bail-out without coming up for air, but it is still a short term positive in that the big debt buyers will get involved again and relieve some pressure in the credit markets, and the 30-year mortgage rates have already dropped below 6.0%, and unless you are in one of the 5-6 major default states you can get them with anywhere from 10-20% down
The market action following the Fannie Mae
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PowerRating) and Freddie Mac
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PowerRating) temporary takeover by the Treasury Department has not really changed the current levels. The SPX went from 1217 on Friday (9/5) to 1274 on Monday following the Paulson announcement over the weekend and then down to 1221.60 yesterday before closing at 1232.04 (+0.6) and right now it looks lower this morning depending on the initial jobless claims report the low close in this bear market so far is 1214.91 with a 1200.44 low.
If the SPX make new bear market lows into October, equity allocations should be increased regardless of what you hear or read in the news media.
Have a good trading day!
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