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December 29, 2005

Dislocated Shoulder

In a week that was supposed to be quiet and meaningless, we are suddenly seeing some behavior that cannot be ignored. The major equity indices coughed up early gains, making this week shape up not so much like last week as was first expected. The Nasdaq 100 index slid about three-quarters of a percent and now, along with the Composite and the SPX, looks to be heading straight into the precipice. The NDX is now 45 points below the point where my model generated a sell signal in early December. Still, the fact that this week is a holiday week can also not be ignored. The results of the first couple of trading days next week will be immoderately important.

stock chart

A hefty drop in Building Materials Holding, one of my favorite housing shorts, has provided a dislocated shoulder. I've been watching this chart closely for such a break and now must consider whether to press my bet. Today I did not add to my small short.

stock chart

Apple Computer, one of the NDX components that conspicuously contributed to the decline in the index today, shed a couple points. After a sharp drop two weeks ago on the heels of a downgrade, AAPL clawed its way higher but failed to set a new high. Today's drop appears to verify that failure, and so I put back on my short position.

stock chart

This trade exemplifies a situation in which I make a move independently of a concrete signal from my technical trading model. In its strictest form, my model requires an extreme overbought or oversold reading in conjunction with a technical reversal to generate a signal. Apple has worked off some of its overbought condition and is no longer in extreme overbought territory. I opened a trade today because I perceive a situation that is a low-risk entry point. The motif of all this elaboration is that I use my trading model as a guide, not as a mechanical trading tool.

Two other NDX components, Intel and Yahoo, both recorded losses over 1.5% today. Though the drops themselves are not noteworthy, both stocks now sit at or slightly below their moving averages. It will be important to watch how these two big names behave around the MAs in the coming trading days.

Disclosure: Short BMHC, AAPL, INTC; Long YHOO Puts


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