Anticipating the Next Key Time and Price 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.

Crude oil had declined below $119 before the NYSE opening Tuesday, which resulted in a gap up opening for the major indexes, and both the SPX and INDU finished +2.9, while the QQQQ was +3.4. The financials led, with the BKX +5.5, and XBD +4.6, but there was a divergence in the energy stocks despite the crude decline, with the XLE +0.8, and OIH flat at -.04. The XLE had hit its long term trend line from 200, with the OIH at the 200-233DEMA zone. The XLE was extended to its 1 year -2.0 STDV level, so a long XLE / short XLF trade was instituted on the close (8/5).

The energy sector decline has been accelerated as many hedge funds were forced to unwind the short financial/long energy macro trade. There has also been some normal bear market rotation from the energy and cyclical commodity stocks, to the defensive issues like consumer staples, drugs, and health care. For example: The XLE has declined -22.5% from its 7/1/08 90.16 high, while the XLP (consumer staples) has advanced +8.1% from its 7/2/08 26.29 low. In addition the consumer staples, the PPH hit its low on 7/3 at 65.70, and closed at 71.21 yesterday (+8.4), while the XLV has run from 29.90 (6/26) to a 33.15 close yesterday (+10.9). The surprise short squeeze in financials by the SEC enforcing the "pre-borrow" rule has cost the hedge funds a lot of money, which will be evident as the July results are reported.

NYSE volume was 1.2 billion shares yesterday, with the Volume Ratio 58, and breadth only +304, so the major indexes did better than the internals, The SPX made a new bear market rally high since the 1200.44 low (7/15) at 1291.67, and new high close at 1289.19. The combination of declining crude oil, and the rising $US Dollar, is obviously a positive for the equity market. The $DXY made a new closing high yesterday at 74.29, which is at the top of the range (74.31-70.69) since 2/28/08. If "they" can run the SPX through the 1289-1292 zone, the SPX will test the 1320 .50RT to 1440.24 from 1200.44. There are two very important key time dates remaining in August, and if this rally continues, there is a very high probability the market will reverse around these key time dates. The time dates, and explanation, are outlined in the trading service commentary for today, and you can access it with a free trial to the service.

The next commentary is Tues 8/13/08

Have a good trading day!

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