First hour energy reversal strategies

Kevin Haggerty is the former head of trading for Fidelity Capital Markets. His column is intended for more advanced traders. Kevin has trained thousands of traders over the past decade. If you would like to be trained by him, click here. or call 888-484-8220 ext. 1.

The SPX is range-bound since last Thursday between 1224.70 - 1214.45 (0.8%), so expect this contracted volatility pattern to be resolved this week. The initial daily chart downside support is again at 1201 which, if broken, could take the SPX to the 1196 -1190 zone quickly (relative to the 10/13/05 1168 low from 1224.70.) Minor support on a break of the 1214.45 low would be the 1205 -1204 level (see SPX chart). NYSE volume declined to 1.41 billion shares as the SPX trades in this contracted volatility pattern. The SPX (1218.59) and Dow (10,540) were each -0.4%, while the QQQQ was essentially unchanged at 40.14. The volume ratio was 38 and breadth -734. The TLT reversed last week's -1.3% decline and was +1% yesterday following Monday's +0.3% move. The HGX, -5.4%, was the downside story, with Toll Brothers (TOL | Quote | Chart | News | PowerRating) -14% to 33.91, taking out the 10/27 low of 34.60. FYI, the housing stocks have been declining since their July highs. TOL was -41% into the 10/27/05 low, while (CTX | Quote | Chart | News | PowerRating), (PHM | Quote | Chart | News | PowerRating) and (KBH | Quote | Chart | News | PowerRating) were all down about -29%. I would say they (the Generals) had a head start on selling this sector.

However, for daytraders the profitable action was in the energy sector once again yesterday as the XLE was +0.8% and OIH +0.5%. However, that didn't tell the story. The OIH was a combination Trap Door, 1,2,3 lower bottom and RST after the 117.11 signal bar low. Entry was above 117.59 on the 9:55 AM bar which ran to 120.88 (+2.8%) before reversing into the 119.35 close. The XLE had the same combination and ran +2% from the 48.41 entry level to a 49.40 intraday high. There were many component energy stocks with similar first-hour entry patterns. It may have been a narrow-range day for the major indices, but sequence daytraders made a killing in energy stocks.

The RST short yesterday in the SMH with entry below 35.72 only declined to 35.40 and closed at 35.45. The RST short-term position entry has now advanced +7.4% in eight days from the entry to the 35.79 intraday high yesterday. This move was from the .618 retracement to the 29.84 04/15/05 low (Inner Circle). The retracements on weakness to zones of symmetry for the major indexes and HOLDRs continue to be the major source of trading profits. Let the Generals break them out, but not you.

Have a good trading day,

Kevin Haggerty