Daytraders Reversal Strategy Edge

April 25, 2007
Kevin Haggerty

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The $INDU finished +0.3% to 12594, and
outperformed the SPX all day, which closed at 1480.41 -.04%. The $INDU,
which is simply a price index that can be pushed around by just a few stocks
each day, was led by the current earnings news advances, like HON +3.3%, IBM
+3.4% and CAT +1.3%. The herd chases them, shorts cover, and then daytraders
capitalize on them after the extended move. It is just like nature, where
everything lives off something else. The QQQQ, +0.5%, was pushed by the semis,
where the SMH was +3.2% and gapped out of its 8-month trading range. It is safe
to say that “they” were running out of sectors to push, so the spin doctors are
once again putting a ribbon around the semis and spinning the story. By my
count, this is the 7th hype job since 8/06, and there were 3 downgrades during
the same period, with the net result being the 8-month trading range. The SMH
closed yesterday at 37.14, on 36.3 million shares, the most upside volume since
the 40.9 million shares on 10/5/05. As most of you traders know, we have
played both sides of this range with excellent results. If this move is real, it
has to break above the 37.5-38 upper channel resistance line, starting from the
45.14 high the week of 1/12/04 (see chart). The big push for the SMH yesterday
was the “herd” chasing TXN, which finished +7.7% to 34.92, but did hit a 35.50
high and had opened at 35.45, much to the delight of daytraders.

The “gang” will push the $INDU through 13000 this
week, which is only 46 points away, and as of 8:45 AM this morning, the S&P
futures are +6, so that is the right color to start the 13000 move. There
will be lots of hype over the next few days on the Democrats ongoing resolution,
and the media will of course attack the President, so I imagine the PPT (Plunge
Protection Team) is on call to cushion any decline, and they will probably get
some help from the Generals and hedge funds into month-end.

Daytraders caught a quick short-side play in the
SPX yesterday when the 1480.19 Monday low was taken out, and it traded down to
1473.74 on the 10:30 AM bar. This level had some Fibonacci retracement and
extension symmetry, in addition to the -1.0 Volatility Band at 1472.25. The
reversal off this low carried ot 1483.82 before closing almost unchanged at
1480.81, which is the low end of the current key price zone, which extends to
1495. The major indexes remain extended on a 3-month standard deviation basis,
as well as short-term momentum. However, the internals have not been in sync
with the major index price advance on all but 2 of the last 7 days. Yesterday
the volume ratio was only 47 with breadth -369, which reflects the narrow
advance of some $INDU stocks and the semiconductors as opposed to the overall
market of stocks. The 4 MA of the volume ratio remains neutral at 53, as
does breadth at only +101. Reversal strategies continue to be the
strongest contributor to the trader’s bottom line, because of the erratic
volatility, especially on the openings. That will not change in the
foreseeable future.