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January 23, 2007

Change of Heart

My read on yesterday's energy and metals reversal... that it set up the potential for a capitulative sell-off... was dead wrong. In my defense, I wrote that it set up the potential for such a move, not that such a move would happen. Oil futures burst out of the gate in the early going and never looked back, tacking on 3% for the session. Gold and silver followed suit, gaining about 2.5% each. As for mining shares, they handily topped yesterday's highs and drew me back into the fray. I added to my Newmont Mining calls (a position which I neglected to reveal at the bottom of yesterday's post) and also threw some Pan American Silver into the mix.

The good news for us metals bulls is that today's move is supported by monster volume, and prices on both the metals and miners went out on a high. At the risk of jinxing a breakout, I will say the opposite of what I said yesterday: today's action feels like the beginning of an important move higher. This statement comes from the view of a trader who needs to be nimble enough to catch inflections in psychology, meaning one has to be willing to reverse one's view completely when strong evidence emerges. From the investor's standpoint, it is important that anyone who believes in the case for a long term bull market in metals keep a core position open through thick and thin.

Metals-related purchases weren't my only moves today. By the end of the session, the action in equities left me with a distinct feeling that things are about to get nasty. After putting in some hard labor to get the indices up about a half to three-quarters percent by early afternoon, selling pressure came in and swiftly erased those gains. In the case of the Nasdaq 100, the session ended in the red and recorded a very bearish candle with price sitting directly on the moving average:

stock chart

Given this setup, I decided to sell the NDX in the futures market and also returned to an old favorite, Intel, for a put option play. Looking forward, I will be considering re-opening my short on Research in Motion, which has graciously risen $6 since I covered it yesterday, as well as selling some F5 Networks, which is also looking quite bearish on my charts.

In the anomaly department, homebuilders popped higher this morning on the release of a dismal earnings report from D.R. Horton which apparently was not as dismal as anticipated. At one point DHI shares were 8% higher while the group was up about 3%. Half of those gains were forfeited by the close, but the end result was higher prices for those of us waiting patiently to short them.

This evening we hear from Yahoo and tomorrow, eBay, both of which could set the tone for coming days.

Disclosure: Long NEM Calls; Long PAAS; Long INTC Puts


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