Traders Win Both Ways with SPX and Energy 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.

Crude oil has continued to decline since the last commentary (8/7) and the $US Dollar rally carried the $US Dollar index to a B/O of its range since 2/28/07 and it's the first time since 2006 that it has traded back above its 200DEMA. Crude hit 112.72 yesterday, before settling at 114.45 On Friday, the $SPX was +2.4, and then +0.7 yesterday to finish at 1305.32, following the 1313.15 intraday high. The initial key price zone is 1320-1325, followed by 1343-1350, and then the declining 200DEMA at 1360.64.

Crude oil hit $112.72 yesterday versus its rising 200DEMA at 111.79, minor support at 110, with the next major support at 100. My thoughts are that both Crude oil and Gold will soon reverse sharply to the upside, as will the current equity bear market rally to the downside, and the $US Dollar will not sustain the current advance. Nothing has really changed to halt the deepening economic downturn, which has spread quickly to a global recession, much to the dismay of the empty CNBC suits that keep saying that this time is different. Yeah, just like in 2000 with the Internet/Tech bubble. The credit crisis, and housing deflation, has not abated, and we will see many more banks with solvency problems.

The macro hedge unwind of short financials and long energy and commodity related assets has been a driving force of this rally in the major indexes, in addition the decline in crude oil and rising $US Dollar. This relationship has also been a bonus for day traders as they capitalize in both directions almost daily.

For example: the initial SPX long trade yesterday was a B/O of the 5 bar opening range between 1294.81-1291.41 on the 9:55AM bar. It ran to 1313.15 before reversing on the 2:00PM bar down to 1298.12, before closing at 1305.32. It just so happens that the +1.28 VB was 1313.16, and there is an 80% probability at that level that volatility would revert to the mean, and it did. Traders had a price reversal pattern at a significant VB level which enabled them to make the exit decision and/or go short. These are the type of defined strategies that we do in the Trading Service. It just so happens that the XLE had declined to 69.66 on the 1:55PM bar, which was right at the -1.0 VB 69.65, so the long entry was taken above 69.78 on that same 2:00PM bar, and it ran to 71.11 before closing at 70.95. Traders also had the option of shorting the SPX on the reversal from 1313.16, at the same time as they took the XLE long position, and both were winners. These are the kind of trades we have been getting as crude oil dictates the direction of the equity market.

The XRT (retail), XLY (consumer discretionary) SMH (semis) and XHB (homebuilders) have all rallied back on good % moves to their declining 200DEMA's on the crude oil euphoria, so they are in position for a short reversal.

Volatility means opportunity, and it's only going to increase, so day traders, take advantage of it while you can.

The next commentary is Thursday 8/14/08

Have a good trading day!

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