Contracted Volatility and Key Price Zone

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.

It was a shut-out yesterday, with all the major indexes and sectors finishing on the downside. The SPX was -1.1% to 1423.91, the $INDU -0.9% to 12503, and the QQQQ -1.3% to 43.73. NYSE volume expanded to 1.75 billion shares, with the volume ratio just 26 and breadth -1782, which is the most negative since the -2097 on 11/27/06. TLT was a factor on the breadth figure, as it was -0.7% yesterday, and is -1.3% on the week so far. Most all of the reasons given by the media for these daily ups and downs are all Wall Street clichés, and if you follow them closely, you'll see that the same reasons are often given for both the advancing and declining days. I will give you a few of the most frequently used on Monday for a few laughs. "Interest rates, taxes and government spending do matter. The other economic numbers are so bogus that even a couple of the regional Federal Reserves Presidents have been commenting on the need for more timely and valid information."

The SPX daily range last week was just 11 points, with a daily average of 6.8 points. I mentioned in the last commentary that contracted volatility usually precedes good moves, and we see some of that expanded volatility this week. The weekly range has almost doubled last week's at 20.3 points into today's trading session. Yesterday the SPX's decline was from the initial level of the key price zone, with entry on the reversal of 1438, which is a primary Fibonacci extension of Wave 1 (769-954) for this bull market cycle that started on 10/10/02. Daytraders aware of the anticipated key price zone had a bonus day yesterday because of the extended trend-down action. But you can't get lucky unless you buy your ticket. There are 4 trading days left in the month, so the generals will not let yesterday's decline get legs. The primary generals' 2006 holdings/winners are where daytraders are most likely to find opportunites for the next few days, in addition to the index proxies. The OIH and XLE had advanced 8 days, with the OIH closing Wednesday right at the 200 dema, so yesterday's reversal (OIH -2.3%, XLE -2.1%) has more downside room.

The best scenario today would be early weakness, with the SPX taking out the weekly low of 1420.40, which would put the RST into play for a pop into month-end, and maybe the first few days in February, new money time.

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.