Markets Will Trade Lower After Oversold Bounce

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.

In the previous commentary (8/6) I said we started the week with the SPX extremely short-term oversold and extended to the -3.0 Standard Deviation level, which you can see on the Trading Service chart from Friday. The initial bounce from the -3.0 band was on Wednesday off the 1439.59 low, which hit 1476.43 on Thursday. This bounce was aborted by the Bear Stearns conference call on Friday about negative credit conditions. That carried over just 1 day to Monday, when the SPX hit 1427.39, versus the 1427 .382 retracement to the 6/14/06 1219.29 low, and closed at 1467.67. This was followed by the FOMC knee-jerk 1488.30 high yesterday, before closing at 1476.71 +0.6% and +3% so far this week. I said this a key time week, as there was 21 weeks from the SPX 1461.57 2/22/07 high to the 1555.90 bull cycle high on 7/16/07, and that this is week 21 from the 3/16/07 SPX 1364 low. My core framework is to anticipate these high probability key price and time zones in all time periods, and that is part of what we do in the Trading Service, except there, we show you how to use the primary tools to accomplish this.

NYSE volume was 2.2 billion shares yesterday, with the volume ratio 65 and breadth +486. Also in that commentary I said that the SPX was the most extended major index, so traders should make it their primary focus, along with the energy stocks, where the OIH and XLE were -12.9% and -11.7% in the last 9-10 days. Yesterday's leadership was energy, with the OIH +2.5% and XLE +2.4%, with excellent defined strategy setups in the morning, so you were able to exit profitably and get out of the market before the FOMC amateur hour. The brokers were obviously extremely oversold, as pointed out in that commentary, with MER -30%, BSC -38% and LEH -47%. I said they would not take out their bull cycle highs again in this cycle. The brokers and homebuilders had significant price and volume moves the last 2 days, as generals bottom fished and shorts scrambled for cover. There are a few institutions that I know just love to squeeze these kind of short situations like there is in the financials. But after this game ends, the financials will trade lower, as will the major indexes.

The Fed was under a lot pressure to act boldly this week and calm the markets after last week's dislocation. But just like "magic," the market rallied in front of the FOMC meeting, and crude oil had declined -8.1% since 8/1/07, which alleviated some of this pressure on the Fed. There seems to be a lot of positive coincidences that occurred during these financial dislocations, so my guess is that the PPT (Plunge Protection Team) is alive and well. With financials in an oversold bounce and squeeze along with the homebuilders, in addition to this oversold bounce in energy, the SPX can sustain more of this move to higher retracement levels to the 1555.90 SPX cycle high. Financials are below the line stocks right now (200 > 50 >20), and will become shorts again on significant pullbacks.

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