More Downside Following Contra Rally

The SPX traded up to 1395.73 on the 10:40 AM bar, and the day ended there, as the index went sideways into the 1392.28 close, to finish +0.4%. The $INDU was +0.2% to 12160, and the QQQQ was -0.2% to 42.89. NYSE volume declined significantly on the advance yesterday to 1.51 billion shares, as the SPX bounced off the 1364 low, and 1365-1370 key price zone. The internals were positive, however, with the volume ratio 74 and breadth +1400, so it was more a case of the institutions backing off of the low levels. This key price zone also includes the 200 dema and .382 retracement to the 6/14/06 low of 1219.29, and .236 retracement to the Wave 4 1061 low on 8/13/04. There was also some key time symmetry, as explained in the trading service. The initial 4-day bounce off the 1374 low (3/5/07) failed to close above the .382 retracement to 1461.57, and that is now lower at 1401.27, with the .50 retracement from 1364 at 1412.78 and .618 at 1424.30. In the sectors, gold led with the $HUI +1.7%, and it will go higher today if the overnight dollar weakness holds. The banks and brokers, which took a significant hit on Tuesday, have regained about 50% of that decline. This sector will be all over the lot based on the mortgage news blips.

The daytrading focus on the mini-meltdown from the SPX 1461.57 high has been the major indexes, ETFs and energy sector, while staying away from the institutional/hedge fund rush to the exits in many of their extended profitable holdings. There has also been a significant increase in the average volume for the leveraged 2-1 short index proxies like the QID (QQQQ) and SDS (SPX). Institutional hedging of portfolios by buying these ETFs puts less pressure on the market than the constant pressure from selling futures, which in turn only accelerates the sell programs.

Today is triple witch expiration, and the early SPX futures are -5 points at 8:20 AM in front of the "funny money" CPI number, with the media trying to create a midnight madness on every economic report. Traders might get a chance to play another one of the extreme openings we are now getting with the electronic opening process, which is a windfall for daytraders. Keep the focus on the major indexes, ETFs and the energy sector. 1364 will get taken out following any continuation of a contra rally.

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.