Traders continue to trade extended volatility

Kevin Haggerty is the former head of trading for Fidelity Capital Markets. His column is intended for more advanced traders. Kevin has trained thousands of traders over the past decade. If you would like to be trained by him, click here. or call 888-484-8220 ext. 1.

On Friday the SPX closed at 1234.72 with NYSE volume at 1.29 billion shares in a daily range of five points. The 4 MA of the volume ratio was neutral at 56 and 4 MA of the breadth only +151. The closing range from 11/3 - 11/10 of 1224.51 - 1216.40 was broken to the upside on 11/10 with an 11-point program-initiated spurt that started just after 1:00 PM. On Monday (11/14) the SPX closed at 1233.84, with a daily range of just 5.4 points and light NYSE volume again of 1.38 billion shares. On Tuesday, the SPX closed at 1229, -0.4%, on NYSE volume of 1.7 billion shares, with a volume ratio of 35 and breadth -1166, with the 4 MA now -236 and the 4 MA of the volume ratio 52. Yesterday's decline was another program-initiated move to the downside of about 11 points from 1237 -1226, starting on the 1:20 PM bar. The programs accelerated on the 1:40 PM bar with NYSE $TICKs -1015 and remained heavy to the downside to the 2:10 PM bar at -986. Once the program gang took their fingers off their keys, the SPX jiggled up from the 1226.41 low on the 3:00 PM bar low to the 1229 close. 

Regular investors and traders are just pawns in the game of index and statistical arbitrage that now comprises over 60% of NYSE volume, so you have to have a methodology of trading that can survive in this market environment. That is why the "Core Framework" and related tools that some of you have learned will always be extremely profitable. Yesterday's SPX RST short setup with entry below 1237.39 vs. the intraday 1237.94 high caught the full reversal down--as it most often does--and the program acceleration that made it a significant move was the bonus. However, you have to take the initial position to catch the bonus--(see SPX chart)--but why would you not have taken it seeing that 1237.94 was right at the 3-month extended +2.0 standard deviation band and the breadth preceding the high was very weak relative to the SPX price advance. This meant it was a high-probability setup and that is the best a trader can hope for in the trading business. The energy stocks provided for some excellent early Trap Door longs on Tuesday. Both the XLE and OIH were +2.6% and +2.2% by the Noon hour before reversing hard and finishing at +0.2% and -0.4% on the day. Who said it isn't a casino? I see by the emails that many Inner Circle members took the XLE Flip Top breakout above 47.95, which ran to 48.94 (+1.5 volatility band, 48.92) before reversing down to the 47.80 close.

This is option expiration week, in addition to the erratic behavior of the SPX as bad news continues to be good news. The PPT (Plunge Protection Team) will probably continue to stabilize in all fear situations and the Generals will, if possible, attempt to mark their funds up into year-end. This means there will be ample daytrading opportunities, but don't fall in love with any naked positions overnight

Have a good trading day,

Kevin Haggerty

Be sure and vote in the 13th Annual Stocks & Commodities 2006 Readers' Choice Awards