My scenario for a positive year-end

October 31, 2005
Kevin Haggerty

Suffice to say it was an interesting
week but a good one for daytraders. The magic
number last week was 1.7%, which was the advance on Monday. This was followed by
three straight downside days for a total of -1.7% followed by Friday’s +1.7%
futures-accelerated move. It was evident from the pre-9:30 AM strong up-futures
that “they” were intent on not letting any Washington news disrupt the markets
to the downside. The SPX was +8.1 points to 1187.04 by the 9:55 AM bar. It was a
gap pullback (see SPY chart) where the SPX hit 1180.71, which set up the 1,2,3
higher bottom trade in place with entry above SPX 1181.48 and SPY 118.28. The
market advanced from the 10:50 AM bar into the 1198.41 close. The Generals had
an easy time pushing price as the buy programs hit the NYSE floor in the
afternoon. Forget all that media babble about indictments. It was the PPT and
mutual fund markup as some big funds have October year ends. It will be easy to
hold the gains through Monday. After 18 days without an SPX close above the 1201
resistance, some early November institutional program activity could get some
more upside, maybe into the next time date zone of November 8, 9,10 (specifics
to Inner Circle), The Generals will obviously try to take the SPX to a positive
year-end 2005, which is above the 1211.92 SPX 2004 close. This would be another
opportunity for investors to sell into it. However, downside risk for a low
below 1168 still remains high before the attempt into year end. FYI, the SPX
trade (using SPY) was exited after the 1191.40 high and re-cross of 1190.44, the
233-day EMA. I’d like to say there was a long re-entryÂ out of that
consolidation, but no guts, no glory. However, the +8.5 SPX points was not all
bad.

The energy stocks are by far and away the major winners for the Generals this
year and they are also a major source of short-term trading profits for
professional traders. This sector was down in the early morning on Friday and
then formed 8-9 bar Slim Jims at the lows and around their -1.0 – 1.28
volatility bands. There was also positive divergence in the momentum
oscillators. Stocks like Valero
(
VLO |
Quote |
Chart |
News |
PowerRating), Sunoco
(
SUN |
Quote |
Chart |
News |
PowerRating), Transocean
(
RIG |
Quote |
Chart |
News |
PowerRating)
and Diamond Offshore
(
DO |
Quote |
Chart |
News |
PowerRating)–just to name a few–all had the same Slim Jim
patterns with similar positive momentum divergences. They broke out of their
Slim Jims from 11:15 AM – 11:30 AM and all ran +3-4% before their first
retracement which took you out of all or 50% of the trade. Needless to say they
all went higher with that 2PM- 4PM eight point SPX program burst, but what is
wrong with daytrading gains of 3-4% depending on which one(s) you selected.

NYSE volume was 1.74 billion shares on Friday, with the volume
ratio 84 and breadth +1516. The SPX (1198.41) and Dow (10,403) were +1.7% with
the QQQQ only +0.8%, which highlights the SPX program action by the large mutual
funds, most of which are now quasi index funds. The weak sector on the week,
-4.1% and Friday, -0.2% was the Semis
(
SMH |
Quote |
Chart |
News |
PowerRating). The leader going away for the
week was energy with the OIH +6.4%.. The SMH was -0.2% on Friday but rallied off
the 32.57 intraday low to the 33.31 high. The -2.0 volatility band was 32.40 and
-1.5 volatility band, 32.64. Good things happen when stock gets extended. The
XBD and RTH were +2.0% and +2.4% on Friday, while the BKX was +1.8%. Long rates
edged higher with the TLT -2% on the week and well over its 200-day EMA.