What The Hedge Fund Shorts Could Mean
What started off as an apparent short-covering rally
on Thursday afternoon fed upon itself throughout the Friday
session. While it is impossible to know if short covering was the cause (nor is
it important), the price action certainly has implications. Today should shed
more light on the future direction. As I mentioned in
Friday’s column, in and around the 14th there was/is a Fibonacci time cycle,
for now it appears as though it may have been called to the day.
If we simply go back and look at the classic bond/stock relationship, bonds
had a horrible week after pushing higher early on, stocks have been the
recipients of cash apparently. The difficult question at this point is will this
rally have any legs? A move, and more importantly, a close above 840 in the S&Ps
and 989 in the Nasdaq 100 would place the answer in the “yes” camp. However,
Tuesday will offer more clues.
Chris Tyler and
Kevin Haggerty in their articles on Friday both drove home the point of
always taking trades based on your signals/technical setups. Over time, if you
have positive expectancy, it will pay dividends. For Kevin, it was the 1,2,3
bottom on Thursday afternoon, for Chris it was the opening reversal. There is
little doubt with traders I talk to that this is a pretty challenging
environment. Curveballs are more the norm than the exception. However, if there
were ever a time for extreme focus and rigid adherence to your game plan, it is
now. As I have repeatedly stated recently, MY approach favors the opening hour
only under current market conditions. I will be the first to admit that trading
1,2,3s is not my approach, so naturally I sat idle on Thursday afternoon. I
cannot possibly be stalking every type of setup and expect to achieve
consistency. (This is not a reflection on my views of 1,2,3s, it is just an area
that I have little expertise). Whatever your approach may be, stick to
it. Dabbling, as always, is pure poison currently.
Dabbling intraday vs. dabbling (serious dabbling I may add) intermediate term
are two very different things. Intermediate term time frames appear, in my
opinion and actual results, to be unfolding with more clarity at present
time. These time frames can range from a couple of hours to a couple of days.
Right now the markets are poised to offer nimble traders one such
opportunity. Here is how I see it unfolding:
Depending on how Tuesday’s price action plays out, you need to focus on the
flying pigs (semis) yet again. This sector in just two days has already posted
impressive returns, and there will be more if the market maintains its current
posture. As one who enjoys simplicity, the
Semiconductor HOLDRs (SMH) will be my weapon of choice on the long
side. Naturally, every rally/selloff in the market is different than the
previous one, however, it appears as though the idea of pursuing techs in
rallies is in place. I expect these to outperform on the long side if this rally
catches.
Naturally, a pullback is in order, and probably a more prudent approach
unless you are already long. Look for 21.83 and 21.58 as potential entry points
provided that the S&Ps and Nasdaq futures have pulled back and also appear to be
continuing their upside move. Resistance is seen at 22.50 and 22.80. If you are
looking at this as more of a multi-day trade, the gap that occurred at 23.88 on
Jan. 16 may indeed be filled. So, under either scenario, there appears to be
some good potential in this sector.
One other thing to bear in mind is the size of a short squeeze, especially
under the current market conditions. I had breakfast yesterday with a hedge fund
manager from Chicago who approaches the market from the options side. To make a
long story short, his concern, other than the lack of volatility, was the
growing number of hedge funds in recent years who are very short the
market, and a lot of it on big margin. The point is simple. If Iraq were to
prove to be a cakewalk in ALL aspects, it would not be out of question for one
hell of a rally to take hold. As he put it, it is possible for the reverse of an
October 1987 scenario, up 20% in one day. Now that is something I have heard
nobody say. He also said that it may be fierce, but likely
short-lived. Nonetheless, the damage would be done, and the market may very well
roll back over since fundamentally, nothing has changed.Â
And lastly, my book is finally ready. My understanding is that it will be
available on Wednesday. I will keep you updated as to the specific area to go,
however,
TradersGalleria will be the likely area where you can purchase it. I
feel as though I have put together a very concise and useful guide to my trading
style. I trust you will find it helpful. The accompanying video for the book has
been shot and should be available in the next month or so.
Key Technical
Numbers (futures):
S&Ps |
Nasdaq |
| 863 | *1019-23* |
| 856 | 1013 |
| 849 | 1004 |
| 841 | 987 |
| 834 | 974 |
| 827 | 971 |
| 819 | 961 |
| 808 | 952 |
As always, feel free to send me your comments and
questions. See you in TradersWire.