Reversal Strategy in Extended STDV Zone
Kevin Haggerty is a
full-time professional trader who was head of trading for Fidelity Capital
Markets for seven years. Would you like Kevin to alert you of opportunities in
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Just about every -2% or more “fear” day since early 2007 has occurred on
negative subprime writedowns or credit crisis news. The Citigroup news was
expected, and the reality was an air pocket that started with the SPX futures
-17 points or more in Globex, which of course resulted in a steep discount open.
The SPX finished -2.5% to 1380.95, which is a new bear market cycle low close,
taking out the previous 1390.19 low close on 1/8/08. NYSE volume was 1.8 billion
shares, with 1.6 billion down, for a volume ratio of 9, while breadth was -1546.
Energy and financials led the downside, with OIH -5.0%, XLE -4.0%, $XBD -4.3%,
and $BKX -4.2%.
Most all of the TV and print financial media have swung to the
recession/global slowdown scenario, in addition to most brokerage firms. As
always, they are very late to the party, and are as much of a lagging indicator
as the U.S. employment report. It has been the new CNBC reality show to “guess
the writedown number.” The retail sales number is the least reliable of all
economic reports, in addition to the jobs report. Yesterday CNBC was all over a
less than expected retail sales number, like that was a real surprise to anyone.
The retail sales have been weak for quite some time, despite some of the
positive reports, most of which were probably bogus. All you have to do is look
at the declining sales tax receipts numbers for the past year versus the retail
sales number to know there is a problem with bogus reporting.
The discount opening took the SPX down to the -1.5-2.0 Volatility Band zone,
so that immediately put daytraders on the reversal side. The first reversal
strategy trade in the SPY advanced only +.27 before making a new 138.24 low,
versus the 138 -2.0 Volatility Band. The second VB entry ran +.58 to 139.09, and
then declined in the last hour to 137.94, which set up the RST long reversal
strategy with entry at 138.25, right on the -2.0 VB. This third reversal trade
ran +.91 to 139.16 on the 3:35 PM bar, and was exited before the market on close
session, where the SPY declined to a 138.17 close. About 95% of the time, the
market on close session will go in the direction of the extended -/+ 2.0
Volatility Band trend that day. The bottom line is that daytraders using the
defined reversal strategies were still able to close the day on the plus side,
by taking all three strategy setups. The SPX futures are -13.75 points at 8:32
AM as I complete this, following the negative INTC earnings report last night,
where the stock was off by almost 15% in after hours trading. There is also the
JP Morgan below estimate earnings, and a $2.6 billion credit loss provision
today. Tomorrow we get to see how much pain Merrill Lynch gets to take up front.
If I were John Thain, I would imagine it would be quite a bit.
The SPX remains extended, and if the futures hold, the expected discount
opening will take the SPX close to the 1-year -3.0 Standard Deviation zone. This
puts traders in the same reversal position as yesterday to play the long-side
reversal strategies on the weakness. The rallies in this bear market will be
sharp, but the odds favor a decline to at least the .382 retracement zone
(1576-769) at 1268, which is a -19.5% decline from 1576. For that to change,
there must be some overt positive measure taken to reverse some of the obvious
problems we have right now.
Check out Kevin’s strategies and more in
the
1st Hour Reversals Module,
Sequence Trading Module,
Trading With The Generals 2004 and the
1-2-3 Trading Module.
Have a good trading day,
Kevin Haggerty
