Be wary of false breakouts
Good morning and welcome back to the scorning. Yesterday's rip tightened the grip of the bovine grasp on the ursine lips. The bear camp had spread after three days of red and, true to minx form, they were all left for dead. Can Boo take the heat and land on his feet or will he sadly become Hoofy's furry car seat? It's a new day of flicks and bickering ticks so settle in tight and let's see if it sticks.
We sensed that an upside shakeout was possible (if not probable) and sure enough, once the Minx blinked above S&P 1050, we giggled hard to the double top at S&P 1060. Now things get interesting, as two schools of technicians have emerged. The purist breakout bunch want to see a close above S&P 1062ish (NDX 1455) to "ensure" brighter skies. Other (trusted) technicians maintain that the S&P 1060-1075 zone is the optimal spot for a trading top. These next few sessions will go a long way in resolving that dichotomy.
We wanted to measure the breadth and scope of the bounce and we've now got a mouthful to chew on. To be sure, the semis, homies, internets and biotechs--four measures of speculative excess--put in strong showings yesterday. As a matter of fact, outside of the noticeable lethargy in the financials, it seemed like the most heavily shorted sectors were the best performers. That's usually a sign of pressage and, odd as it may sound, the newbie shorts prolly needed to be shaken out (if the downside is to reemerge).
Will the bulls have a gut check before year end? I think so--this remains an area of contention and the conditional elements (we've spoken of) have effectively filled the forest with dry leaves. What I don't know, at the moment, is what will provide the spark that ignites the fright. The dip shtick has proved profitable and until a trend change emerges, the fat cats will sit back and rub their bellies.
I pared exposure on Tuesday with the intention of reinitiating some meat into the (perceived) lift. My overall strategy remains relatively unfazed. I've set myself up with gamma (long option positions) that center around the central theme of consumers over cyclicals and a short bias in the financials and tech. Against those option positions, I have long "situations" and, over the course of a session, will augment my risk profile via tight day trading positions. Right? Maybe. Honest? Always. Advice? Never.
Keep a close eye on the financials (and breadth) as they remain central players in the near term picture. Applied Materials (AMAT:NASD) reaction to earnings will also offer insight into the digestion process of this current juncture. A quick morning sniff shows the dollar getting hammered (again), gold flirting with $400, Europe flattish, the Jinx scraping back a percent and Fokker bummin' that I made it to work.
Good luck today.
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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