Some Interesting Trades Are Setting Up

Remember a couple of
weeks back
when I wrote about how there are days when
it is challenging to find something to write about that will not only be
enjoyable to read, but also helpful? No, today is not one of those days, but
with the market quiet recently, there certainly were. As I mentioned in
Monday’s column, I am mainly taking part in HVT
during the opening only, and then looking for intermediate-term trades after
that. The trade in the SMHs is an example
of that.

However, I see some interesting trades setting up
on the horizon. And what better place to search for these than in “fairy tale
land,” i.e., tech stocks. They have had a nice run in the last few sessions, and
with mid-quarter “previews” due in the next couple of weeks, they are
particularly vulnerable. Witness the layoffs at
(
MU |
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and
(
AMAT |
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, certainly not a sign of
strength, however, some rocket scientist figured that if the chip equipment
makers were laying off, that would mean that Intel is not only selling more
chips, but also looking to make more (??). Or maybe because of its “value.”
Either way, a rally in the next few sessions will put the following stocks in a
nice position for shorts, if, as I expect, the companies continue to “spin” or
come right out and say business stinks.

You may recall that there was a similar setup
back in mid-January. You had many an analyst (if you can call them that)
recommending chip stocks, not only after the meteoric rise from the Jan 2, but
also right into a Fibonacci time cycle (Jan. 14-16) which nailed the turning
point to the day. Boy, I wish I could get paid $2 million a year to blow up
clients!

Well, it may just be deja vu all over
again. The tables are being pounded, valuations are insane (although the chap
who upgraded
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cited good valuations), business stinks, but more
importantly, the charts are beginning to set up. So let’s take a look, and
decide on a game plan. Mid-quarter updates are due out in a couple of weeks,
last week of February and first week in March. Based on what I read (not the
mainstream press) it is hard to imagine anything genuinely positive coming out
of these companies. The following information was derived from The High Tech
Strategist
:


(
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:

  • Underfunded pensions has left little
    cash to buy back more shares. In fact only $75 million were purchased in Q4.
    This will be dilutive going forward, a trick that IBM has been playing for
    some time now in order to magically make that estimate or beat it by a penny.

  • Revenue actually fell in Q4 when you take out
    the Price Waterhouse acquisition.

  • (
    INTC |
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    &
    (
    AMD |
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    :

    • “There’s no doubt about it. There is
      going to be some computer channel clearing in the first quarter. That’s bad
      news for the computer component makers. Intel and AMD are both high on my
      list of Q1 pre-announcement candidates (early March)”

      THTS


    (
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    &
    (
    NOK |
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    :

    • Excess inventory is everywhere. Both admitted
      last month that there were excess inventories in the channel.
    • MOT reported 9.8 weeks of inventory at year
      end, a 10% increase from last year

    Again, these bullet points are not meant to be
    the backdrop for trade recommendations, and certainly most traders do not pay
    attention to fundamentals. However, they are the catalyst which can further
    intensify a move lower, once the technical picture weakens. I use it more as a
    back-drop for what may coincide with some great shorts setups on the technical
    side in the days and weeks to come. Naturally, with a trading approach like
    this, one may do better to consider using puts vs. selling the stock short
    outright. Look at the charts below, all of these stocks have come up nicely off
    their recent lows.





    The timing of these mid-quarter updates falls
    rather nicely right into another Fib time extension (March 9, give or take),
    if (
    and that is a big if) the market continues higher up to that
    point, there will be suddenly many pieces starting to come together for a trend
    change. Naturally, bad news in tech would lead the market lower, Fib time cycles
    would add fuel, and a potential war in Iraq point to a potentially nice trade(s).

    Remember, a Fib time cycle
    only predicts time, not direction. Typically the trend is reversed at these
    periods. Witness Jan. 14-16, Feb. 14.

    Going back to some HVT
    material. The current market is still only offering a few setups each
    morning. The rest of the day, for me at least, does not offer good risk/reward.
    Keep the powder dry and focus on intermediate setups until Iraq comes to a head.
    Regardless of the outcome or market direction, I suspect that we will have a
    very nice pocket of volatility. You will need to be ready and step up to the
    plate.

    The following is an excerpt from my nightly trading service. It was written
    by my colleague, Bo Harvey. I am putting it in today’s column because he
    eloquently outlines the current state of the market on an intraday basis:

    “The past
    week or so has been somewhat choppy from an intraday swing trading
    standpoint. The S&P and Nasdaq futures are both stuck between some pretty
    critical levels, and right now there is little momentum to carry us
    decisively one way or the other. Whether this has to do with the
    uncertainty regarding the situation in Iraq or not does not really concern
    us, but what does matter is putting the probabilities in our favor. Quite
    simply, there are very few intraday swing setups appearing on our screens,
    and I suspect that it will take a break one way or the other before the
    setups begin appearing again. Patience is one of the most critical aspects
    of trading and must be exercised now.

    The levels we are closely watching are: 856 in the S&P, which, if
    cleared, puts the odds in favor of a retest of 875. 808 and 813 are key to
    the downside. The H&S neckline target in the SPX is 784, if we can get a
    daily close below 813 we see a probable test of this level.

    In the Nasdaq, 1019-1025 and 1039-1044 are both huge resistance levels
    that need to be cleared for any upside to take hold. 975-977 is a big
    support level to the south, and then 962 underneath that.

    It is important that you continue to pay attention to the commentary on
    S&R levels for individuals stocks below, as they will help you navigate
    intraday on both a scalping and a swing trading basis. We are seeing a few
    pullback patterns form, which we will keep you posted on as we enter
    them.”

     

    Support/Resistance
    Numbers for S&P and Nasdaq Futures

    S&Ps Nasdaq
    975* 1039-1044*
    864-65 1019-1025*
    856-57** 1013
    851 1004
    846 994
    839-40** 987
    829 974
    824 971
    813-14
    808**

    * indicates a level that is more
    significant

    Don’t forget, my new book, How
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    As always, feel free to send me your comments and
    questions.

    Dave

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