Short-Term Buy Zone in Bear Market

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 SPX is -5.4% year to date, and is -4.0% so far in this key time period from 1/4-1/11. The downside magnet for the SPX was the 1406.70 head and shoulder neckline close, and that was taken out yesterday with the 2:30 PM knife down with the SPX falling from 1424.89 to a 1388.30 low, and 1390.19 close. The unfolding of this bear market is no surprise for frequent readers of my commentaries. The SPX is -11.9% high to low so far, after yesterday's decline. The SPX head and shoulders chart is a weekly chart, but the head and shoulder numbers are the actual lows and highs from the daily chart, while 1406.70 is a closing daily price.

To catch up with my market view for 2008, read the 12/28/07 (The Early Warning Signs for 2008) and also the 1/2/08 commentary (Traders View for 2008). They highlight many of the technical divergences in sectors and foreign indexes that topped out in June/July 2007, in addition to the IWM. There are also negative divergences in the SPX equal-weighted index that failed to confirm the SPX capitalization-weighted index new high to 1576, in addition to the $TRAN failing to confirm the $INDU high, plus the many momentum divergences. I have said many times that the highest probability is for new market lows for 2008, as the bear cycle continues to unfold, and we would start 2008 with an expanding housing decline, rising oil prices, tighter credit and sinking consumer confidence, all of which will most likely lead to a sharp decline in corporate profits in the first half of 2008. The analysts were already cutting 2007 estimates, and will be lowering 2008 Q1 estimates as well. I also said that volatility will increase in 2008, as the global economy slows and earnings disappoint, in addition to tighter credit in both the U.S. and global markets.

The market was short-term oversold trading into the 11/26/07 1406.10 low, and again into the 1/4/07 1411.63 low. The bounce off the head and shoulder neckline was only to 1430.38 yesterday, followed by the so-called T-meltdown, due to a CEO's statement about slowdown as people fail to pay their phone and cable bills. Telephone declined -10.6% immediately, but then bounced to close at 39.16 (-4.6%). VZ had dropped -8.2%, but closed at only -2.2%. That was just a free ride for hedge funds hitting bids on minus ticks, because as of 7/6/07, the uptick rule was eliminated, and it is simply a license to steal. "They" blew out the bids on minus ticks, and that forces the buy side traders to hit the algorithm buttons to sweep the street and take out any bids, with their portfolio managers over their shoulder, with the sell first mentality, ask questions later. The sell programs were then triggered, and the end result was a mini-meltdown.

The herd is chasing the pharmaceuticals, utilities, and other defensive issues like KO, PEP, MO and BUD, to name a few. The energy stocks will remain overweighted by the Generals despite any global slowdown for the obvious geopolitical reasons. The major indexes (except IWM) held up quite well in light of the 2007 bear market carnage in the $BKX, $XBD, XLF, XLY, SMH, IYT, IYR, XRT, RTH, and IWM. The initial bounce was from the SPX head and shoulder 1406.10 neckline, but now, yesterday's 1388 low has hit some price symmetry from 1387-1384, which includes the .236 retracement to 769 from 1576. The 1387-1374 zone is a key price zone, while the 1-year -2.0 Standard Deviation channel band is about 1406-1407, with the -3.0 Standard Deviation level at about 1375. This is a short-term buy zone for traders, and this week is a key time period, so there is symmetry.

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Have a good trading day and Happy New Year,
Kevin Haggerty