Keep it Simple to Stay Profitable

From 1990 to 1997, Kevin Haggerty served as Senior Vice President for Equity Trading at Fidelity Capital Markets, Boston, a division of Fidelity Investments. He was responsible for all U.S. institutional Listed, OTC and Option trading in addition to all major Exchange Floor Executions. For a free trial to Kevin’s Daily Trading Report, please click here.

The $SPX reversed from a key price and time zone last week, as anticipated in the previous commentary (Short Term Reversal Zone), and closed the week at 1360.03 after bouncing off the 1331.29 low. There was price, time, and momentum symmetry, which is the key to a high probability reversal zone. The price symmetry was the 1327 .618RT to 1257 from 1440.24, and the key time symmetry was the 2.618 Fibonacci ratio between the 1270 (1/23/08) and 1257 (3/17/08) lows. There was also additional time symmetry as the rally to 1440.24 from 1257 was 44 trading days, and the decline to 1331.29 was 17 days, which is a .382RT. The momentum symmetry was that the $SPX and $INDU were extended to their 3-month -2.0 STDV bands, and the short term internals (volume ratio and breadth) were oversold with the VR 26, and breadth -1477 as of the close on Wed (6/11), while the 5RSI was 21. The $SPX closed at 1360.14 yesterday, on NYSE volume of 1.12 billion shares, which is the lowest volume for the last six days. The financials led with the $XBD +2.3 as traders play the "losing game" of anticipating the Goldman Sachs (GS | Quote | Chart | News | PowerRating) and Morgan Stanley (MS | Quote | Chart | News | PowerRating) earnings, and the $BKX was +1.4.

However, don't mistake this trading opportunity for a change in trend for the $SPX/$INDU, because that is not the case, and they remain in their downtrend until there is a swing to higher highs and lower lows. Both of them are what I call BTL (below the line) situations where the 20DEMA is <50DEMA, which is <200DEMA. There is a positive divergence in the MDY, and QQQQ, which are both ATL (above the line) and of course that is the same for the XLE, OIH, XLB, and IYT. The financials are obviously BTL, but some are calling for another bottom right here in the XLF, which had a Harami reversal from the 22.33 low. Let the bottom pickers play that game, because there is no rush for daytraders to get involved. We do a lot better trading the ATL situations from the long side in individual stocks, but you can always trade the major indexes both ways. "Keep it simple and you will keep it profitable."

The news theme flavor of the week is now "fighting inflation" as a result of Bernanke's jawboning the $US Dollar. The vertical move in food prices is a direct result of the "ethanol hoax," and raising interest rates won't stop that, nor will it stop the rise in crude oil, if it is in fact a supply/demand situation. The consumer is reeling from the increase in gas prices at the pump, food prices, and a continuing deflation in housing prices, so raising rates certainly won't help them. The next money supply report will most likely expose the Fed's jawboning, when in fact they are probably still growing the M3 at a double digit rate. The derivative meltdown threat to the solvency of various financial institutions is the Fed's primary focus, regardless of what they are saying about inflation. If they start raising rates, and housing prices continue to decline, you will see another round of significant write downs, which will put the onus on these institutions to scramble for more capital to shore up their balance sheets, and that won't be as easy the next time.

I expect the current $SPX reversal to hold the 1327 level into month end, with the initial resistance zone from 1375-1406. There are 5 months left until the election, so I anticipate that the PPT (plunge protection team) won't let any market decline get out of hand, nor will the Fed do anything construed as a major negative to the current economy etc.

This is a big option expiration week, and we usually get at least one significant move during this week, especially when it is a "triple witch" expiration. The $SPX futures are +7.5 points as I complete this at 7:20AM ET, and crude oil is trading down, so that sets up a possible upside move today. However, today is the crude expiration, and after yesterdays spike in the morning, then a $4 reversal to the downside in the afternoon, there are no bets for today. I think the "dealers" will easily hold the $140 strike price.

The next commentary is Thursday 6/19/08.

Have a good trading day!

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