The Contrarian Trader

Stock market, economic and political analysis for the intermediate term stock, commodity and equity option trader.

Contrarian Commentary, The Week Ahead 01.14.2007

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On Friday I typed out more emails to the membership base and individual members then any other day since I started The Contrarian Trader. AMD and the SPY put trade were tied as the number one topics.

Let’s start with AMD. They cited a pricing war with Intel as being the chief cause of their earning shortfall. An earnings war with Intel has been going on for the past six months and it’s affect upon earnings should have come and no surprise. When margins are squeezed profits suffer. So, how do we manage the position now? I mentioned yesterday that there is support at the 17.56

‘level. That is our new baseline. We now turn to our 15 minute charts to watch for a successful retest of that support level. If the NASDAQ rallies there should be a rising tide lifts all boats effect. If the NASDAQ poops out and goes down then the 17.56 becomes all the more difficult to defend. If it holds that support level then I will add to the position thereby lowering our basis cost. Stop loss in at 17.33.

SPYMarch 139 Puts. Volume on the Spy’s dropped to below average for the second consecutive day. It kind of flys in the face of conventional wisdom that we need rising volume to break out. Here is my take. Given the that the exchanges will be closed on Monday in the US shorts may have been unwilling to open up new positions with such a gap in trading days.In fact many may have closed their short positions ahead of the weekend and gone to cash. This short covering may have added to the day’s gains making it look more bullish then it actually was. Many may have chosen to simply take the day off. Next week is going to be interesting. The fact remains that the SPX Weekly remains very overbought and the likely hood of a sustained breakout at these levels remains suspect. Take Friday for instance, resistance on the index is at 1431.81 and the high of the day was 1431.23.You don’t get much closer than that. There are sellers at 1432 so next week is going to be interesting. Yes, I am still holding the put position and should we see a bearish key reversal I will add more.

So, let’s play the “What’s the Catalyst?” game. What could derail this market. Behind curtain #1 The market shook off AMD’s pre-announcement on Friday but should Intel announce poor results and earnings become a concern fear of of declining future earnings may cause a sell off . Remember, the current rally is in technology. Money has rotated out of the Oil Stocks and into the Semi Conductor Stocks so it’s technology that will be a major focus this earnings season.

Behind curtain #2 we have Interest Rate Fears- Boo! Yes, take one look at the Utilities Index. The index had been consolidating after a sell off. On Friday however the consolidation failed and it broke support on heavy volume. If the Utilities fail as it looks they are going to then it’s a pretty sure bet that interest rates will head higher. Why am I so confident? Institutions are putting their money where there mouth. I am not listening to CNBC’s talking heads who are pumping the market. Watch the XLU it’s critical.

Behind curtain #3 we have Crude Oil Prices which had earlier in the week been predicted to go down into the 30’s rebounded on Friday. I am not saying that Crude Prices are going to go straight up. What I am saying is that we are near a bottom in crude prices. Earlier in the week we picked up the June 50 call contracts in VLO. We are currently up 19% on this trade. Remember we entered this trade when oil was plummeting. We identified that VLO was trading up and was displaying relative strength. We concluded that the risk to reward was in favor of the long trade. Watch the OIH as it displayed bullish strength on Friday.

I am not dismissing the recent run in stocks. In my commentaries I predicted days in advance that we would have a short term rally and we added long positions to the portfolio so that we could profit from the rally. The test is always at the top and we are at the top. There are reasons to be skeptical of a break out And I have layed out my concerns. The bullish sentiment is high and once again the VIX Indexis approaching the lows of it’s trading range. The VIX has not broken out but it has been a good barometer of as to when the the markets are going to stall and pull back. There is no fear in this market and without fear you have panic buying which can result in a blow off top in the market. A blow off top is truly the end of any bull run as the correction is tenacious and people panic sell which then cascades into stop loss selling, and margin calls. Can we break out? Of course but I am not willing to commit new money to the long side of this market until we have broken out on highs volume and it’s volume that we are missing as we approach resistance.

To our subscribers we will do a run down of the current positions as well as the stocks on our Watch List. To those who are not currently subscribers please take advantage of our 30 day free trial offer. Visit our home page to register.

Enjoy your weekend!

Robert Desmond

President and Chief Investment Strategist

The Contrarian Trader

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