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February 2, 2007

Decaffeinated Action

Today's market was so dull, I was induced into consuming a rare afternoon cup of coffee. The action during the first half hour screamed for a sell-off. The NDX opened higher about 3-4 points and then immediately ran into trouble. After swaggering about for 15 minutes, some resolute selling came in and swept the index into negative territory, and the first 30 minutes showed a solid, red bar pointing downward.

And that was it.

The 11 o'clock buy programs kicked in about an hour early, and stocks screamed higher. In 15 minutes the NDX tacked on 10 points. As has been the norm recently, nearly all sharp moves have been head fakes, and the high for the day was recorded about an hour into the session. From there, the market hacked its way sideways and was not even worth watching.

The most deceptive morning action could be found in Research in Motion. Viewed on a 15-minute scale, you can see how this morning's price was beautifully rejected by resistance and then devolved into a failed open.

stock chart

At this point, RIMM shares were taking the shape of an imperfect head-and-shoulders pattern. After pounding the neckline for a bit, price finally broke through and looked to want to go to lower support. This break was a cruel head-fake. Price immediately reversed and zoomed higher. Astute traders, however, could have noted two red flags to a bear trap. First, whip out your handy Edwards & Magee TA bible, and note that necklines must be broken by a "decisive margin" before the pattern can be considered complete. Second, and more importantly, the crossover itself typically occurs on tame volume. You can see above that volume was picking up, and this came in to support price.

A half hour later, resistance became futile, and the short squeeze was on. I marvel at how easily the bulls pushed this issue higher even as it becomes more obvious by the day that RIMM's glory is history. The strength reinforces my apprehension over the possibility of a monster short squeeze. Although, I certainly wouldn't put money on that idea, I'm not going to lay out a big bet on a market decline until the bears can show some stamina.

Speaking of short squeezes, the ramp in home builder shares continued. The group tacked on another 3% as measured by the SPDR Homebuilders ETF. This morning's employment report showed a greater-than-expected increase in new jobs in the building sector, sparking more banter about the bottom being behind us for housing. I am certainly glad to have refrained from recent temptations to begin shorting the sector again, but this type of frenetic buying begs a fade play. I'm going to ponder some moves along this line over the weekend.

The "just right" perception of the employment report also took some steam out of precious metals. Gold fell ten bucks and silver slipped 22c, but both had been down much more in the early-going. The action hit miners for about 2%, but overall I did not see anything to undermine their potential for a big run in the near future. In the interest of disclosure, however, I did close my small Pan American Silver position, simply because the chart looks ready to give some back, and I felt it was prudent to lock in a 10%, two-week gain. Since I still hold silver futures and Newmont Mining calls, I hope this sale proves to be untimely.

By the way, I'll bet you'll never guess who I'll be cheering for in the Super Bowl...

Disclosure: Long NEM Calls


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