Lesson In Market Dynamics
I guess the title for yesterday should have been “Programs and Interest Rates.” Congratulations must go to the program traders and the S&P futures players. The market got hit with wave after wave of program selling all day, and outside of an upside attempt early on when the SPDRs hit an intra-day high of 130.28 before reversing and getting destroyed, there was little upside daylight.
If you shorted the SPDRS in the down trend, you were fine. But that was hard to do after Wednesday’s rally and in a lightly trading market–you kept thinking you’ll get that reversal back to the upside.
Just like Wednesday when they ran the stops in the SPDRS at 128 7/16 to a low of 128.09 before reversing to a high of 131 late in the day, they returned Thursday for more of the same. The assault on Wednesday’s low of 128.09 was complete (and skillfully done) by 2:10 PM ET as they ran the stops to a 128 low and then reversed for an immediate upside run to 129 9/16. If you bought the SPDRS when they reversed above 128.09, congratulations.
You won’t believe what thin markets are until you see how the volatility expands when they extend trading hours. The more you understand market dynamics and how they bring life to patterns, the better you’ll do in your short-term trading. Learning how to buy stocks in intra-day up trends when they pull back on sell programs, rather than buying the breakout on what appears to be program-induced buying, will give you an edge.
Today will probably be a light volume day, but the volatility might be extreme, so be careful.
Target Stocks Of The Day  Stocks that have set up include Aflac [AFL>AFL], Tyco [TYC>TYC], Adobe [ADBE>ADBE], Sprint [FON>FON], and Intimate Brands [IBI>IBI]. Narrow-range patterns that should only be played in the direction of the trend are Nextlink Communications [NXLK>NXLK], Alltel [AT>AT], and Hewlett-Packard [HWP>HWP].
Program trading numbers  Buy: 4.95. Sell: 1.45. Fair Value: 3.10. It might not be a bad idea to take a few days and paper trade some key market stocks and see how you do at recognizing the program trading and how it affects stock movement.
Editor’s note: If you want to learn more about Kevin Haggerty’s trading strategies, click on the link below to go to his new series of tutorial articles.