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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.
If there were any doubts about the PPT (Plunge Protection Team) being active in this market, you have probably changed your views by now. There have been 3 significant intraday upside reversals over the last 2 weeks, following negative subprime or related news. The SPX spike starting on the 3:10 PM bar Thursday, from 1377.64 to 1411.30 close just happened to come in front of the Fed discount rate cut from 6.25% to 5.75% the next day. This type of "magic" has become the norm, not the exception. The SPX hit its first bear cycle milestone Thursday with the 1370.60 intraday low, which is a -11.6% decline from the 7/16/07 1555.90 cycle high. The milestone is that 1370 is the .236 retracement to the 769 10/10/02 last bear market low. The -11.6% decline surpassed the minimum 4-year cycle low decline of -9.7% in 1994 (soft landing). That covers a period of 54 years.
The initial bounce off 1370.60 was to the 1411.27 Thursday close, and then there was a significant gap opening Friday on the discount rate news. This was a bonus for daytraders who utilized the 1st hour Trap Door strategy in confluence with the Volatility Bands. The SPY closed at 142.10 on Thursday, and opened at 145.56 (+2.4%) on Friday's discount rate news. The SPY +2.0 Volatility Band level Friday was 145.81, and it traded to 145.80 on the 9:35 AM bar and 145.81 on the 9:40 AM bar. The Trap Door reversal short entry below 145.38 traded down to a 142.33 intraday low before it resumed the direction of the open (90%-60% rule) and closed at 144.51, and the SPX at 1445.94. It doesn't matter whether you select the SPY or e-mini future for these trades, and that is the same for all of my strategies.
The discount rate was obviously a timely positive move by the Fed for the banking system, but the reality is that the Fed funds rate (5.25%) is the lower rate that banks lend to each other on an overnight basis, so the question is whether that will be reduced, because that is what the market will focus on. Banks are notorious for overreacting to fear and greed, as they always tighten too much or give it away to whoever walks in the door if it's a greed environment. The Fed has the same $US Dollar dilemma if it lowers rates, and of course the reverse is true if it doesn't, with the credit and liquidity problems we have now. If the $US Dollar breaks the 80-78 range, and Treasury Secretary Paulson makes a statement and spins the lower dollar as positive, then run for more cover, because that is what then-Treasury Secretary Brady did in 1987 preceding the crash.
This market had the longest run between bull cycle tops in over 50 years, so why would it be such a surprise if it is time for a 4-year cycle low decline? This is also the second-longest time period between 4-year cycle lows since 1982-1987 period. The highest probability right now is that the SPX will trade below 1370 in this cycle decline. It is obviously a fear market and will react negatively to more of this subprime related news. Sellers will take advantage of this current upside spike, especially if it trades higher on another spike if the Fed cuts the Fed funds rate.
Daytraders have done extremely well, and should continue to do so trading the extended volatility strategies using the volatility bands with strategies like the RST, 1-2-3 and Trap Doors (see Trading Modules) The primary daytrading focus remains on the major indexes, ETFs, energy stocks and some big-cap multinationals. The SPX 200-day ema is 1449 and the .618 retracement to 1503.89 is 1453, while the .50 retracement to 1555.90 from 1470.60 is 1463. You should always be aware of the different levels in play when you are using the daytrading strategies.
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
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