The Key Bear Market Reversal Zone

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 "derivative meltdown" intensified with the FNM and FRE expected meltdown last week, and then the bail out over the weekend. The Fannie Mae (FNM | Quote | Chart | News | PowerRating) and Freddie Mac (FRE | Quote | Chart | News | PowerRating) euphoria ended on the opening bar yesterday as the XLF was +3.9 on the gap opening bar, and finished the day -4.8, with the BKX -8.5, and XBD -4.9. LEH continues down the BSC belly up road, as it was down another -14.1 to close at a new 12.40 low, as did Merrill Lynch (MER | Quote | Chart | News | PowerRating) to 25.88, MS to 31.75, and the NYX to 41.01 On Friday, the FDIC took control of IndyMac, which is one of the biggest mortgage specialists in the country, and will be close to the largest bank failure in American history. People were lined up to withdraw money in good part due to premature comments from the idiot NY Senator Chuck Schumer.

The Energy and Materials stocks led the upside yesterday, with the HUI +3.3, OIH +2.3, XLE +1.0, in addition the the Coal and Ag Chem stocks. NYSE volume was 1.42 billion shares, with the VR 32, and breadth -1574. At 7:00AM this morning, it looks like the same sector scenario with crude oil and gold up, while the $US Dollar is down. The overseas markets, which follow the $US market like sheep, are off sharply, and the $SPX futures are -16.5 points at 7:00 AM EST, so if that holds daytraders will start the day with our extended 1st hour reversal strategies.

The only new absolute price low in the major indexes yesterday was the $SPX, which hit 1225.01 versus the 1225.25 low on Friday, and this set up an RST long reversal with entry above 1227.59. It made a 1237.63 high before selling off in the MOC session to close at 1228.30. The best defined ETF strategy setup yesterday was the RST short reversal in the XLE, following the 83.27 high of the 10:10AM bar (5 Min). There was symmetry with the +1.0 VB 83.41 It declined to 81.29 before reversing to close at 82.34. Daytraders continue to prosper trading the reactions to news, and not the news itself.

This is a busy week, as Bernanke speaks today and tomorrow, it is also an option expiration week, in addition to a few economic reports starting with the PPI this morning, and also some $SPX earnings reports, so the volatility will be excellent for traders familiar with key price levels, time symmetry and volatility band levels each day.

There is key time symmetry on 7/17 and 7/18 [+/- 2 days] measured from the 1576 10/11/07 high, and the 769 last bear market low (10/10/02). The $SPX is extremely extended, as it is beyond the -2.0 STDV level on the 6-month STDV Channel chart. There is Angle symmetry from 1576 at 1204, followed by 1191-1187, which includes the 1191-1998 bull market top. The most significant potential reversal zone is 1172-1170, which includes the .50RT to 769 from 1576. This is followed by the .618RT at 1077. The $SPX would be -25.6% from 1576 at 1172, and -31.6% at 1077. The average $SPX decline in post WWII bear markets is -27.6%, (The chartstore.com) which makes 1172-1077 a high probability reversal zone. I said in the last commentary that I thought there would be a sharp reversal before a decline to the 1172 zone, but the new surge in derivative meltdown news can obviously alter that outcome.

As I finish this at 8:25AM, the $SPX futures are still in the hole at -14 points, waiting for the PPI knee jerk reaction as the empty suits on CNBC hype the number.

The next commentary is Thursday 7/17/08.

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