The Best Legal Trading Game in this Market

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 10/21/10

When a senior official at the Fed [Brian Sack] makes a statement in a speech [last week] that, among other things, balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by “keeping asset prices higher than they otherwise would be”, you know that this rally is, and will continue to be manipulated by the Fed inflating asset prices, and they will be at higher levels than intrinsic value, but it won’t be a happy ending folks.

The market continues to respond to the US dollar, and as it declines then stocks and commodities rise, and vice versa. That inverse relationship continues to be the trading catalyst, especially since the Fed’s QE1, which did nothing to solve the structural economic problems, and now QE2 which will be more of the same. However, the market has been vertical since QE1 as the US dollar is devalued, which all means inflated asset prices, which we obviously have in stocks and commodities.

The USD/SPX-Commodity relationships continue to provide multiple opportunities for day traders. I have included some charts, from the Trading Service from last Friday, which outline some of the obvious trades. The inverse relationships of the US dollar with the SPX and Commodity ETFs is obvious on the charts.

On 10/15 the USD was already reversing in Europe, yet it [UUP] opened to the downside on the NYSE, and the SPX gapped on the opening to the 1181.20 high, and immediately reversed. That was the cue for day traders to short the SPX. The SPX traded down to the 1167.12 low and the 480EMA on the 10:25AM signal bar. This set up the long SPX trade above 1169.10, which ran to 1177.32 on the 11:35AM bar, versus the 1177.07 symmetry.

The UUP reversed on the 11:40AM bar so the SPX trade was exited below 1176.51, and that was another opportunity to short the SPX if it looked like the UUP would keep advancing. When the SPX reversed on the 10:30AM bar, the XME was the choice to go long in the Commodity ETFs because it was very extended, as it had declined to the -1.5 VB and the 816EMA. The entry above 55.64 was exited below 56.62.

Yesterday, the UUP gapped open to the downside, so the SPX of course had a gap up opening, and then they both trended in the direction of their openings and went sideways for most of the afternoon. The best part is that day traders can catch most of the daily extended moves during the day and have no overnight foreign exposure to the USD or pre-market headline risk.

It is a great “game” for as long as the Fed continues to inflate asset prices, because the current Marxist policies in Washington, and those intended in 2011, have us on a path to make this a depression like economy, not just a double dip. The Fed is simply kicking the inevitable down the road and regardless which party is in power, the private sector will take the brunt of the Government’s ponzi scheme, which is probably Obama’s intended consequence.

SPX Chart

UUP Chart

XME Chart

Have a good trading day!

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