The Trader's High Probability 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 stocks, the SPYs, QQQQs (and more) for the next day's trading? Click here for a free one-week trial to Kevin Haggerty's Professional Trading Service or call 888-484-8220 ext. 1.

The SPX bounced from the 1439.59 Wednesday low and extended price zone to a 1476.43 high on Thursday, and the short-term oversold bounce was in progress. However, it was aborted on Friday as a result of the knife down in the SPX starting on the 2:10 PM bar after the Bear Stearns conference call which said it was the "worst credit condition seen in 22 years." Of course, BSC blew up 2 hedge funds, so it was a "blame the market" attempt to rationalize their bad trading decisions about risk and leverage. The SPX declined from 1465.67 on the 2:10 PM bar to a 1432.80 low and 1433.06 close (-2.7%). The futures were hit right away on the conference call, and any hedge funds that loaded up with long positions to play the oversold bounce were probably forced to bail out, not wanting to risk a weekend carry-over with the possibility of more negative news.

NYSE volume was 2.1 billion shares with the volume ratio 8 and breadth -2217. The financials led the downside, as you might expect, with the $XBD -4.6% and $BKX -4.1%. The airheads on TV talk about the financials as if their decline started with the subprime problems, but that is not the case. MER and BSC hit their cycle highs on 1/18/07 and are now -30% and -38% respectively (high to low). LEH is -47% and peaked on 2/7/07 while the $BKX hit its peak on 2/20/07. These financials will not take out their cycle highs until maybe the next bull cycle, but not on any oversold rally in this current market. The SPX has declined 7.9% so far, with the $INDU -6.3%, QQQQ -7.3% and $COMPX -7.9%. Trading below their 200-day emas are the $SPX, $NYA, IWM, $TRAN, $XBD, $BKX, RTH, IBB, XLY. The $INDU, QQQQ, $COMPX, OIH and XLE remain above their 200-day emas at this point.

The Wednesday SPX 1439.59 low hit the 1430-1437 key price zone, and was obviously very short-term ovsold and ready for a bounce, which it started and got to 1476.43 until the BSC news reversal and prospects of more similar news about different hedge funds and institutions. We start this week with the SPX extended to the -3.0 Standard Deviation level on a 3-month basis, and also some Fib time symmetry in play that any traders that have attended my seminars or have the different trading modules should be well aware of. There was 21 weeks from the SPX 1461.57 high (2/22/07) to the 1555.90 bull cycle high (7/16/07), and this is week 21 from the 3/16/07 SPX 1364 low. This week is also the 1.618 Fib time ratio of the 34 weeks between the $INDU 7/21/06-3/16/07 weekly lows. As it was on Wednesday, the SPX is in a high probability reversal zone for a short term oversold bounce, and as traders, that is what we look for in order to gain an edge.

The OIH and XLE are off their recent highs by -12.9% and -11.7% in the last 9 and 10 days on above average increase in volume. This is due to the Democratic Congress tax attack on the energy industry which forces money managers to book profits in this leading sector. They are still above the line with the 20 > 50 > 200 ema. On the current advance from the 3/5/07 54.95 low, the XLE was +36% to 74.73 and the OIH +45.2% to 191.09 from 131.65, so it certainly makes sense to take money off the table. For daytraders, the energy sector remains the most productive sector, and despite the decline, the reversal opportunities are mostly on the long side, as these stocks hit intraday Volatility Band levels, and this also generates many RST and 1-2-3 higher bottom setups. The SPX is the most extended major index, so daytraders should make it the primary focus along with the energy stocks.

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