High Probability Reversal Strategies Thrive on Current Volatility

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 Monday's commentary, I said that this week was a key time period, and that there was a high probability of a short-term reversal, especially on continued weakness. In this case, the weak technicals were in sync with the price and time symmetry. As of Monday, the SPX was -5.4% and QQQQ -11.7% in 4 straight down days, in addition to the 4-MA of the volume ratio at 31, breadth at -958 and 5-RSI at 17. Those of you who are familiar with my strategies know that these numbers are in the very short-term oversold condition. Also, it is an option expiration week, and there is usually at least 1 big percentage move day during the week, but you certainly can't tell if it will be up or down. In the trading service, I said that there was significant weakness into the mid-November time zone, then it would be the best opportunity for a mark-up rally into year-end, so the 1438.53 low on Monday could hold. The 1449.10 .618 retracement zone to the SPX 1370.60 from the 10/11/07 1576.09 high had 3 excellent long RST daytrading bounces last Thursday, Friday and Monday. It was only the market on close session (3:30-4:00 PM) where the SPX declined from 1449.35 to 1438.53, and broke the zone.

NYSE volume yesterday was 1.65 billion shares, with the volume ratio one-sided, at 92 and breadth +2121, as the SPX finished +2.9% to 1481.05. The QQQQ was +4.1%, making up some of the previous 4 days -11.7%, created by the "herd" all running to the exits at the same time following the Cisco news. The most oversold sector (financials) led yesterday, as the $XBD was +5.8%, and $BKX +4.8%, followed by the RTH +3.9% and XLE +3.5%. All sectors finished green. The $US Dollar Index was -0.3% to 75.88, but gold ($GOLD) also declined -1.1% to 799. Crude oil ($WTIC) was -3.6% to 90.20, but both the XLE (+3.5%) and OIH (+2.9%) advanced, as did the $HUI (gold stocks) +2.3%. The SPX spike yesterday afternoon was just shy of vertical, so when that happens, there has to be overt news, which there wasn't, or else a significant buy program agenda that accelerates the market and forces buy-side traders to adjust their algorithm buttons to chase price and volume. It was also another of what I call "coincidence days," where the President was on the TV hyping the economy, and then it seems like the "magic dust" was sprinkled, as the SPX went almost vertical from 1458 to the 1481.05 close. I will give you 10 to 1 that the PPT was active yesterday, because the table is certainly set for them to accelerate the market from the oversold conditions in order to postpone any meltdown.

You can anticipate high probability reversal zones with significant success, but you can't know the duration and extent of each move. The current volatility is obviously high, and trading erratic, as both the Generals and Hedge Funds have fast sell triggers, reacting to the constant flow of credit, liquidity, housing, slowing economy, and weak $US Dollar, etc, news, and there is lots more of that coming our way. However, the seasonality factor is positive, and the Generals/ Hedge Funds will do their best to finish 2007 on the plus side. This will generate some excellent short-term trading opportunities. However, year-end or not, if the SPX trades high enough on any rally into year-end, it will be another, and maybe the best short opportunity for position traders.

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