No Near Term Sustained Advance

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.

Commentary for 8/16/11

The last commentary was the morning of 8/8 following the 8/5 week ending 1199.38 close with the SPX -7.2% on the week, after making an 1168.09 intraday low that week, or -14.8% from the 1370.58 5/2/11 high at the 25.8 month [3 x 8.6] Pi date, with the monthly 5RSI extremely O/B at 85. The US debt was downgraded by S&P that weekend and the SPX finished -6.7% on 8/8, making an 1119.28 intraday low, and it closed on the lows.

The SPX made an 1101.54 intraday low on 8/9 versus the .382RT to 666.79 from 1370.58 at 1101.73, and then it reversed immediately to close at 1172.59 However, it reversed again on 8/10 to an 1120.76 close, followed by a reversal on 8/11 to an 1172.64 close, and then closed the week ending 8/12 at 1178.81 It was an unprecedented week of volatility, which is obviously and understatement.

The SPX declined -19.6% [high to low] from the 137.58 high to the 1101.54 low at the .382RT level, while the IWM declined -26.6% from its cycle high of 85.46 on 5/2/11 to the 63.76 low on 8/9/11 The market made a vertical move to the upside following the 1101.54 low as the SPX advanced +9.3% to the 1204.49 close yesterday. Declines like the 13 day market knife down are rare, and typically followed by a “V” shape double digit bounce, and then a test of the low, which is what the odds favor, and I expect.

Derivatives accelerate the market in the direction it is going and now high-frequency trading [HFT] is the primary catalyst. In a research report I read Fri it said that from 8/4-8/10 the average equity volume was 15.97 bill shs, a historical record for any 5-day period, which beats the previous record during the Lehman bankruptcy. According to the report, HFT volume was about 53% of the average daily volume earlier this year, and it is estimated that HFT volume in August was 75% of the average daily volume, and it should remain high during the current turmoil in Europe and the US. That has been, and is very beneficial to the specific daytrading strategies in the Trading Service, especially since volatility has exploded.

I don`t think this is anything more than a relief bounce, and not a sustained advance. The SPX is +7.9% in 3 straight up days, and the futures are -15.80 points as I complete this commentary, following the lead from Europe as both the DAX and CAC 40 are down better than -2.5%. The Euro zone debt saga is not going away anytime soon, and will continue to be an impediment to the US market which has its own fiscal and economic problems.

The SPX has resistance at 1200, but more significantly at the 1220 [4/26/10] and 1227 [11/5/10] highs which includes the 1229 .618RT to 1576 from 667. The 20DEMA is at 1231, and then the mountain of all resistance at the 1250-1268 [200DEMA] zone. After the devastating technical damage done in such a short time it would be another chance for investors to reduce equity allocations which most failed to do when the SPX was +105% to the 1370.58 high, and then again when it reversed the long term MA`s following the lower highs at 1357 and 1347. Like a Deer in the headlights for many.

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