1st Hour Strategy Captures Index Decline

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.

The major indexes took another hit yesterday with the SPX and QQQQ -1.9, while the INDU was -2.1 NYSE volume declined to 1.17 billion shares as the buyers had their hands in their pockets as more “derivative meltdown” news weighed on the market. This was the lowest volume since 6/25/08, excluding the 7/3/08 1:00PM close day. The financials led the downside, with the XBD -5.2, and BKX -4.5.

The most significant news on Monday was Bank of America (BAC | Quote | Chart | News | PowerRating) stating that they thought the Country Wide assets were most likely less than their stated value, which is a prelude to further write downs, and the obvious need to raise capital which will be the same for many other institutions going forward. This was followed by the Merrill Lynch (MER | Quote | Chart | News | PowerRating) news last night on a surprise significant write down, and the need to sell more shares to raise capital for the fourth time. John Thain has been double talking every inch of the way about the MER exposure etc, as investors got sucked in on his positive comments. However, the news after the close didn’t surprise anyone except the retail investor. MER had advanced +56.4% in 6 days from 23.64 to 36.97, and in the last 3 days came full cycle to make a new low close at 24.33, and 24.21 intraday low. It is pretty obvious that many institutions were already dialed in, and the MER news last night was most likely no surprise to them. The spin today is that MER got most of the pain out of the way by selling off the derivative assets at $0.20 on the dollar, in addition to raising capital for the fourth time. It also sold off other blue chip assets like Bloomberg LP to raise capital, so MER looks to be just one step ahead of Lehman Brothers (LEH | Quote | Chart | News | PowerRating), which will not exist 12 months from now in its present form.

There were some excellent strategy trading setups yesterday in the first hour, both long and short. The energy, coal, and agricultural chemicals opened strong yesterday, and then pulled back, which set up some good strategy entries, especially in Coal stocks like KOL (ETF), ACI, CNX, and BTU. The best index short setup was the contracted volatility short entry (Flip Top strategy) in the DIA, below all of its intraday EMAs, and continuation below the previous low (see chart). The spread was only .42, which was a very low common denominator entry, as it was only 19.2% of the 2.19 Point 10 day average range.

Month end is Thursday, so the Generals obviously want to prevent the $SPX from having an “air pocket” by taking out the previous 1200.44 bear market low (to this point).

The next commentary is Thursday 7/30/08.

Have a good trading day!

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