Traders have an edge with a contrarian approach
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 stocks, the SPYs, QQQQs (and
more) for the next day’s trading?
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The SPX has had a very selective rally on diminishing volume into Friday’s
1324.65 intraday high. It closed the week at 1319.59. Downside volume has
decreased very little on the rally. On the week, the SPX and $INDU were +1..6% and
+1.5%, while the QQQQ and $COMPX were +3.6% and +3.1%. The XBD led the week at
+7.2.%, followed the $TRAN, +4.9%, RTH, +4.3%, and SMH +3.1%. Downside
leaders were the XAU, -9.9%, OIH, -4.7%, and XLE, -3.4%. NYSE volume expanded to
2.15 billion shares on Friday because of the quarterly expiration, but the volume ratio
was neutral at 56 and breadth just +588. The internals lagged the price advance
on Friday. In fact, most of the breadth improvement during this rally has come
from preferred stocks and other similar instruments as interest rates have
declined. Over 35% of NYSE listed stocks are interest-rate sensitive.
After three straight up-days,
markets are vulnerable to quick reversals and currently the QQQQ and $COMPX have
advanced six straight days, with the QQQQ 5 RSI overbought at 81.22 and extended
to the three-month +2.0 standard deviation band, in addition to other major
price resistance. The casino has the obvious edge, so it is a short-side
focus starting the week in the technology area. The SPX and $INDU are also showing a
negative divergence in their 5 RSI, but I expect the 1326.70 wave 5 cycle high
magnet to get taken out before the index reverses to the downside.
Crude oil has declined about 17% over the last five
weeks, and the pundits/media are once again saying that it will trade in the
40s. However, this is the sixth such decline since 2004, with the past five
measuring -15.8%, -26.2%, -15.1%, -19.6% and -15.7%. The energy stocks have
obviously declined with crude oil and the OIH and XLE are currently extended to
their 1-year -2.0 standard deviation bands with their 5 RSI showing positive
divergences from below 20. This sector becomes the primary short-term trading focus this
week, as well as some gold stocks like NEM, which is also at the 1-year extended
level.
The overall market risk/reward for investors and
portfolio managers is extremely poor right here, with the potential for
significant market losses very high. For example, the next key Fib retracement
level is 1385, which is the .786 retracement to 1553 from 769. If you are
bullish and feel there is an 80% probability that the SPX will gain 5% from here
to 1385 and there is only a 20% chance that it will decline 10%, the expected
return is no more than half of what the 13-week T-bill rate is right now at
4.81. Why take the position risk? Net net, it is a trader’s market and the
contrarian approach remains the most profitable way to play in the casino.
Have a good trading day,
Kevin Haggerty
