Generals Protect November Gains Into Month-End

The holiday bias held last week as the SPX ($SPX.X | Quote | Chart | News | PowerRating) traded from an 1167.89 Monday low to an 1186.62 Friday high, closing at 1182.65, +1.1% on the week. In fact, the SPX has traded in just a 1.8% range, low-to-high, for the past 10 days, with the high close still 1184.17 on 11/12.

The Generals have a good month going with two trading days remaining. We start the week with the SPX +4.6% so far in November, and I expect them to protect it barring any overt news.

Friday's holiday trading (NYSE closed at 1:00 p.m. ET), with NYSE volume of 504 million shares, has little significance, but the 4 MA of the volume ratio is now 65 and 4 MA of breadth +1016. These short-term overbought conditions have been worked off sideways this month, and as the SPX churns just under the 1191 extension of the 1163 - 1061 leg and the 1193.91 extension of the most recent leg down from 1142.05 to 1090.19, which was the key price and time zone and also a "Generals' Pullback" entry (seminar and sequence trading modules).

The immediate price objective for the SPX continues to be the .618 retracement zone to the 1553 top from the 769 October 2002 low, which is 1254. That is just a +6.0% move from the current trading range. There is a confluence with several different sequence numbers from 1220 to 1254.

This corner will be lightening up considerably on long index proxy positions into this zone, in addition to selling near-term out-of-the-money calls on the remaining long allocation and will do the same each month should the rally continue through 1254. Also, some new synthetic straddle positions will be initiated into the .618 retracement zone as implied volatility screams out, "Buy me." On the other hand, if this current range is resolved to the downside in early December to, say, the 1160 - 1165 .236 retracement to 1090 or the .382 retracement level at 1150 - 1155, this corner will get involved on additional longside index proxy positions betting on the 2004 year-end mark-up by the Generals. The SPX is +6.4% year-to-date, so I know the Generals want to get that, and more, on the books at year-end.

The SPX closed at 1182.65 and is considerably "above the lines" with the 20-day EMA at 1165.45, 50-day EMA at 1144.10 and 200-day EMA down at 1113.42. The trading tree has been stretched higher, but is weaker relative to entry at any lowest common denominator, and that is when it is susceptible to quick downside air pockets, which I consider a positive to set the table for the Generals to play their year-end game.

Monday is the 13th day of the (OIH | Quote | Chart | News | PowerRating) current rally off the 89-day EMA and 76.67 low. This is a trade we have been on for nine trade-through OIH entries in 12 days. This was a bonanza for daytraders that made the ride on that trade each day. The OIH advanced +15% during this current rally, but many of our focus stocks, like (DO | Quote | Chart | News | PowerRating) +21.5%, have outperformed the OIH. I would expect energy stocks to hold most of their current rally gains through month-end, and then, of course, have some sort of decent retracement.

The (SMH | Quote | Chart | News | PowerRating) gained +9.6% low-to-high (34.85) in the last six days and traded through the 233-/200-day EMAs of 33.83 and 34.04. The SMH closed at 33.25 and has retraced in the past five days on lower volume each of these days. Hedge funds will try to accelerate price on any re-cross of the 33.83 - 34.04 zone. The 20-day EMA is 33 with the 89- and 50-day EMAs from 32.42 - 32.25, so you have a frame of reference.

This is being done Sunday for Monday.

Have a good trading day,

Kevin Haggerty

Trade with Kevin for a year. Click here for details.