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October 14, 2005

Head & Shoulders Is Not Just a Shampoo

The market provided follow-thru to yesterday's late bounce, with equities up about three-quarters of a percent across the board. Tech lead the charge and is forming what, in my humble opinion, will likely prove to be a sharp bear market rally. These things happen, as anyone who has studied the charts from Y2K will understand. Such action is exactly what keeps bears on their collective toes, and rightly so.

Next week will see a slew of big-name earnings report, including Intel (Tuesday), IBM (Monday), CDW (Tuesday), and Yahoo (Tuesday). How the market reacts to these releases will give traders keen insight into the ever-shifting mood of Mr. Market. If the big boys fail to excite people, the bounce that started yesterday could fizzle quickly.

Home builders are also at an interesting juncture. Many of them are technically oversold and put in a bit of a bounce this morning before tailing off in the afternoon. A look at the charts of Toll Brothers and Centex (among others), shows a classic head-and-shoulders formation, except that the tailing shoulder is missing. Given that many of these stocks are very oversold, this would be the perfect juncture to put in the second shoulder! If this action were to occur, housing bears would be in for a bit of a test for the next couple of months. Furthermore, everyone and his brother seems to have figured out the housing short story by now, so we need to wash a few folks out. Be careful were you tread. I have lightened up on my housing puts in deference to this possibility.

Disclosure: Short INTC; Long INTC, IBM, CDWC, YHOO, TOL Puts


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