The Short and Long of SPX/XLE Trades

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 hit the initial key price zone of 1289-1292 yesterday making a 1291.17 intraday high on the 10:40AM bar but then only declined to 1277.06 before trading sideways into the 1282.19 close. It was still enough for the Trading Service members to capitalize green on the trade, because we had anticipated the high probability reversal zone. The SPX decline was cut short as crude oil had a significant knife down starting on the 12:30PM bar, when the USO declined from 103.73, to a 100.02 close, or -3.1 on the day. On the NYMEX, crude settled below $125 to $124.44 (-3.1), while the $US Dollar index (DXY) was +0.5.

NYSE volume expanded to 1.72 billion shares, with the VR 62, and breadth +768, both which are softer than the previous day, despite the rise in the SPX. The significant market action yesterday was in the Energy, and Materials sectors again, as the HUI was -5.4, OIH -4.7, XLE -3.4, and XLB -1.7. There was no leadership that stood out as the BKX was +1.0, and PPH +1.2. The QQQQ led the major indexes at +1.3, with the leadership being mostly the low priced junk that are useless for daytrading.

The big decline in energy yesterday meant big profits on the long side for the Trading Service daytraders. The game plan starting the day for the members was to play the reversals from extended volatility band levels on continuation early weakness, and that is what happened. The XLE hit 74.18 on the 10:40AM bar, and then reversed the extended -1.5 VB 74.35, and ran to 76.67, before reversing in concert with the USO. The entry choices were the reversal of either 74.35, and/or 74.50, and the signal bar entry was above 74.88 In this case, the 74.50, and 74.88 entries were taken. After the sharp advance, the trade was exited in two parts below 76.45, and 76.12, as the USO reversed to the downside. In the afternoon, the XLE declined to 73.40 before closing at 73.79, which was because of the large drop in crude oil, as mentioned above with the USO.

The XLE is -18.6% in 14 days, and oversold, so the game plan today is once again to play the extended VB reversals, especially on early continuation weakness. The short financials/long basic materials trade by the hedge funds has obviously taken a hit, accelerated by the SEC pre-borrow surprise, and reversal in crude. However, the initial reversal in the XLE to the previous 90.16 high should reach the low to mid eighties.

If the financials continue to advance, and there is a reversal in the energy/materials sectors, then that would be enough to take the SPX to the 1320 level, with 1343 being the upside stretch. The $SPX is +7.5% in 6 days, and ST-O/B, so daytraders will get more short opportunities like yesterday before the Generals play the "mark-up game" into month end.

The next commentary is 1/29/08.

Have a good trading day!

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