Wednesday, July 15, 2009

Leeroy Alert

Today we have a good example of how a minor Leeroy event can threaten to completely change the stable pattern that was forming. Earnings season is very prone to Leeroy popping up, and this is why I prefer the quieter months of the year. Earnings is when excessive divergences from reality get reined in and loose ends in the minds of investors get tied up somewhat. As a whole we will correct our worst mistakes and decide where to go in the future. Well, that sounds very egalitarian, but let's focus on putting trading dollars to work.

The event I'm going to highlight is the Intel earnings report. I'm pretty sure that they beat. I'm not particularly concerned with the details. Yes, I know. Just leaving nice, solid information out on the clothes line to get bleached in the sun. But the truth is that I have my eye on a bigger ball. Within this cycle of earnings, the Dow and several individual stocks I'm watching will all be decided. What I mean is that we're on the cusp of the technical patterns diverging either north or south. A 5% move this week will probably turn into a 30% move in the next month. Check out what this little pop has done to the Dow's chart:

The Dow is unquestionably running into a well established downtrend and the only question is whether it's going to head south to consolidate the bottom or break out for a summer rally. There's always the possibility of stagnation, but doldrums neither lose or make money, so I'm typically focused on identifying the divergent behavior even if stagnation takes hold. In the previous article, it was looking pretty set in stone that traders would respond to that echo resonating in the 200-day moving average and take the market south. This one day of upbeat earnings has pushed north of the 200-day, and now we're left with a much more exciting picture. It could break either way. I say that not because the stock has simply crossed the line, but has done so on the back of plausible evidence that the economy is doing alright.

Back to AMD, we're seeing that the 20-day exponential moving average has been broken. I'm going to fast forward given what I know about AMD. The investors who follow AMD are the most rabid, underdog loving, cinderella buying lot on Earth. INTC just put out a positive earnings report. This usually bodes well for AMD stock. I'm going out on a limb to predict that without some contradicting earnings report from somewhere else in the sector, the AMD dead cat will bounce one last time. Although they're bleeding less on the income statement, note that this is only because the fab operation has been spun off. Just like the flash operation, AMD's partial stake of 44% in the fab will continue to dog them one way or another.

I'm keeping an eye on AMD and NVDA. Short AMD. Long NVDA. Depending on how they break, I'll be looking for one of them to develop into a nice profitable trade. I'm going to do a little bit of research into AMD's chips before the 20th, when AMD's earnings come out. It doesn't take a rocket scientist at this point to determine whether AMD can survive or not. Chips tend to be make or break products, with most of the money concentrated in the ability to earn the performance premium across you product line. Flagship chip prices are very telling as to how well a company is doing this. If AMD can't gain this premium, they will never return to enough profitability to have even a slight chance of paying down their massive debt and getting back in the black on the balance sheet.

The important thing to take home from this Leeroy upset is that stocks are very sensitive at the breaking point. Minor disturbances can take something that was stable and make it start diverging one way or the other. Focus on the medium-term outcomes that will result from the short term chaos. Once the pattern starts to stabalize, if it is founded in at the very least trader hope and confidence, it will usually go on to develop a solid upshot or breakdown depending on the circumstances.

The Leeroy watch has begun.

1 comment:

  1. i thought i'd drop by to check out your blog. i saw your entry via kaChing. I take it you are not a user there? Check out another blogspot guy...markettime - he analyzes in a way similar to your site.


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