Best Daytrading Risk/Reward Strategies

Kevin Haggerty is a full-time professional trader who was head of trading for Fidelity Capital Markets for seven years. Would you like Kevin to alert you of opportunities in stocks, the SPYs, QQQQs (and more) for the next day's trading? Click here for a free one-week trial to Kevin Haggerty's Professional Trading Service or call 888-484-8220 ext. 1.

The spike from the -6.7% decline to 1364 continues, as the SPX closed at 1505.62 (+0.2%) on Friday, and was +0.7% for the week. The $INDU has closed higher 23 of 26 days, and finished the week at +1.2% at 13264. The SPX is +10.7% low (1364) to high (1510) in 36 days, while the $INDU is +11.2% for the same time period. It is interesting to note that a major portion of this spike was engineered in the opening period, due to the pre-market futures, gapping up and forcing the 9:30 AM stock openings higher, which is even easier to do now that it is a primarily an inefficient electronic opening process. Take a look at the 60-minute chart for the past 40 days and you will see what I mean.

The SPX began a -8.1% decline on 5/8/06 from 1327 down to 1219 on 6/14/06, so we have that anniversary this week, with the SPX extremely overbought on the spike since the 1364 low. The bubble all started about 4 months preceding the mid-term elections, and it seems that any time there was negative economic or political news, the futures would spike pre-9:30 AM, and there would often be trend up days. It happened much too often to be coincidence, and it is likely the PPT has been actively involved in accelerating the buy programs to force the market higher, and it's pretty obvious they are currently active. The Fed is pumping liquidity into a slowing economy with rising inflation and a weak $US dollar. The money supply has been growing at a double-digit pace for the last 5-6 months. That is how the Fed has responded to economic problems in the past, so they must be worried about something.

The highest probability is that "they" will take out the SPX 1552.87 3/24/00 high before there is any significant decline, so it is business as usual for daytraders, concentrating on ATL (above the line) stocks that pullback for several days, in addition to selected contracted volatility patterns. The Volatility Band reversals after the discount and premium 9:30 AM openings continue to be excellent risk/reward for traders, while the energy sector has been the major contributor to the green side of the ledger. The OIH is +39% since 10/4/06, and is +30.4% from the 1/11/07 125.81 counter-trend low following the 151 high. The OIH bull cycle high is 169.75 on 5/11/06, and it hit 164.08 on Friday before closing at 161.30, so like the SPX, it is another magnet that should fall before any significant reversal.

Time is a major negative for this market, because it is already the longest period between market tops in over 50 years, and is currently the 3rd longest period between bear cycle lows, with the longest being 1898 days from 8/9/82-10/20/87. As of Friday, this cycle is 1667 days versus 1707 from 10/22/57-6/25/62.

Have a good trading day,
Kevin Haggerty

Check out Kevin's strategies and more in the 1st Hour Reversals Module, Sequence Trading Module, Trading With The Generals 2004 and the 1-2-3 Trading Module.