First Hour Reversal Strategy

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After three straight up days, and a +8.2% gain from the 1257 low (3/17) to 1359.68 on Mon, the major indexes backed off yesterday with the $SPX -0.9% to 1349.88 NYSE volume was the lowest in the last 9 days at 1.43 billion shares, with the VR 31 and breadth -494. The $US dollar index (-1.1%) declined for the second day to close at 71.45 and this accelerated energy, gold, and other commodity related stocks to big two day gains. Crude oil ($WTIC) was +4.6% to 105.90, while the OIH was +3.1%, and Energy Select Sector SPDR (XLE | Quote | Chart | News | PowerRating) +2.2% The $HUI was +1.9% yesterday, and is +6.7% in two days There were also significant gains in the Trading Service focus list fertilizer and agricultural commodity stocks.

The energy stocks have opened strong the last two days, but our traders were able to take advantage of basic pullback and go moves. The XLE hit 73.71 on the opening wide range bar, but was not a valid strategy pullback. However, many of the component stocks did make .50RT pullbacks, with valid reversal signal bars like XOM, so traders had higher probability setups to choose from. The First Hour Reversal strategies continue to be the most productive for daytraders. The $SPX had a gap opening to the downside, and then hit 1336.41 on the 10:45AM bar, versus the -1.0 VB at 1336. The reversal entry was above 1338.92, and only ran to 1343.66 before reversing the entry price to 1337.20. This was followed by a pop to 1347.56 on the 3:00PM bar, then a decline into the 1341.13 close.

The financials led the downside yesterday on a 1st quarter down grade of earnings estimates, and the $BKX finished at -4.0%, and $XBD -3.7%. The major brokers also took hits as Treasury Secretary Paulson called for more regulation if the brokers continue to borrow from the Fed. Merrill Lynch (MER | Quote | Chart | News | PowerRating) was -7.2%, LEH -6.0%, MS -3.3%, and GS -2.3% Bear Stearns (BSC | Quote | Chart | News | PowerRating) is not the "lonesome end," and there are more significant derivative meltdown problems ahead, which means excellent trading volatility for daytraders, who have a significant edge in this market.

There are just two trading days left in the quarter, so the Generals and Hedge Funds obviously have a reason to hold these levels, or push the market a bit higher in the absence of overt credit crisis news. The $SPX futures are +9.0 points as I complete this at 8:30AM, so that is a start for the Generals.

Have a good trading day!