Rebel Traders – Analysis Without The Hype

As was expected American Home Mortgage (AHM) filed for bankruptcy this morning. No surprise here. With all the job cuts and bad news coming from AHM it was only a matter of time before they filed the legal paperwork for bankruptcy.

Over night the Asian markets were down huge. But before the end of the day in Asia they closed up from the lows. They still closed in the red but not as bad as it was at one point during their trading day.

US Futures were up earlier this morning as shorts in the markets started doing some covering in anticipation of any bounce in the markets. But during the past 1/2 hour the futures have been dropping. Will there be a bounce today? Following any huge sell off there is more chance of a bounce than not. It is a matter of large money moving into and out of short positions that mostly starts a bounce. But for the bounce to hold there has to be more than just short covering. There has to be substantial buying on the long side. Today will be a very strange trading day. I say that because I anticipate a large amount of continued fear in the markets along with risk takers doing some buying before the FOMC meeting tomorrow. A lot of speculation and taking any position (long or short) here before the FED meeting will be akin to dropping some quarters into a slot machine. There is no way to predict the reaction of the markets tomorrow. There are some well respected financial analysts who say that even if the FOMC cut the rate the bounce in the markets would be short lived and we will still end the year down. I feel that the financial situation has not been fully exposed yet. There is more to come and I anticipate that the unemployment rate report for next month will more accurately reflect the decline in the housing sector as builders have been cutting back in their work force. This will likely be reflected in the next jobs data next month. That kind of news would pull more money out of the stock market and into bonds and other perceived “safer” investments.

Fundamentally nothing has changed this morning from Friday’s bloodletting sell off. So any advance today could be met again with those still wanting to cash out on any advances. If the markets close up today it will be a signal of huge bets being placed ahead of tomorrows FOMC announcement. I don’t see any substantial buying today before the meeting.

Trading in this market is still highly risky. I do have stocks I want to watch but I any trade I take will be done with caution.

Stocks in the current newsletter are:

• Allion Healthcare (ALLI)
• Blue Dolphin Energy (BDCO)
• ENGlobal Corp (ENG)
• ExlService Holdings (EXLS)
• Layne Christensen Co (LAYN)
• NVE Corp (NVEC)
• Sun Cal Energy (SCEY)
• Syntax-Brillian Corp (BRLC)

For details on each item in the watch list download the weekly newsletter here

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Good Evening Rebels…

Before I get started I have breaking news that just came over the wire. American Home Mortgage (AHM) has announced that effective tomorrow, Friday August 3rd 2007, they will lay off most of their employees. They are reducing their workforce from 7,000 down to 750! The CEO says they are doing this to preserve the value of what assets they have left. They also announced that they are no longer taking any mortgage applications. It is not looking good for American Home Mortgage, and I feel this is just the beginning of the financial sector problems. In his statement the CEO said the following:

“the market conditions in both the secondary mortgage market as well as the
national real estate market have deteriorated to the point that we have no
realistic alternative”

The market made some advances today but the technical indications are still signalling that another shoe may drop. The advance on the S&P 500 today was on slightly lower volume. On any advance you must have increasing volume in order for it to be registered as strong. With volume being higher on the down days than the up days is showing continued weakness. We may still see another large drop in the indices to levels that may be lower than the drop we had last week.

The wild price swings in the S&P over the past two days is signalling increasing confusion in the market. There is no clear direction and this becomes a dangerous condition to be in. The market can be easily spooked here and if a skeleton pops out of the closet and it is scary enough then we drop hard.

Another sign that there is no confidence in the market is how many advances in individual stocks keep getting sold off. No body is comfortable leaving money in the market yet.

The news tonight about American Home Mortgage will probably be felt in the financial sector tomorrow. And the chart for the XLF (Financials SPDR) is showing a continued weak sector. I project that the XLF will eventually drop to the 200 period moving average.

I received an email from one of my subscribers asking why I am not swing trading more during this period where everything looks to be “cheap”. The answer comes down to one word “RISK”. It is all about risk management and protecting ones capital. Trying to trade inside of the volatile swings can take your money away very quickly. We are in a state here where the market has no direction. Within a day we go from negative to positive, and back and forth over and over. You watch a stock start to go up and by the end of the day is has lost all of its gains and then some. Don’t try to trade in this volatility. If you want to keep your money then you have to exercise restraint and wait out the storm. Trying to swing trade in this current environment is like driving a car on ice, down hill, with bald tires, and no breaks! Leave the keys on the kitchen table and when the storms clear and we can see clearly then we can establish our trades in the direction the market is taking.

The new RebelTrader watch list and commentary printouts will be completed this weekend. I know you will like it. You will be able to print out the watch list and keep it with you. You will know what I am looking for on each trade to become valid and you will know when you should get out if the market turns sour. There will be some other things in there too that I will let you see when I release the first issue this weekend. I strive to make you all great traders!

Tomorrow we have unemployment data and that will be very closely watched. If there is a negative tilt to the data then we will have a sell off tomorrow. Tomorrow also being Friday will add to the anxiety of the market. Whenever the market volatility is high like we have now there is more likely to be a “take some money home for the weekend”.

S&P 500

DOW

XLF (Financial SPDR)

AHM resumes trading. Stock price is down 87%!

American Home Mortgage is the nations 10th largest retail mortgage lender according to the company statement. This was expected to happen to someone at some point. But just the news that one of these lenders may be on the verge of bankruptcy now has waken up the bears again.

The markets are running into resistance and each time pull back. Not enough strength yet to move any higher. This may be picked up by the bears as they catch the scent of a ’stalled’ rally and may come in at the end of the day and start taking more profits off the tables. There are some good gains in some stocks today but they can’t seem to go any further. Little bit at a time is better than nothing. Each day that we can close above the previous day is an upside closure. And a good technical indication. But we still have resistance overhead causing us troubles. We will pullback again, maybe not today but soon.

If this is only going to be a market pullback (and not a bear market) then there has to be some pullbacks in order to consolidate and then make another run at the door. What we watch for is the failure of a break through resistance and then pullbacks that are lower than the previous. That signals more than a market correction is at hand.

American Home Mortgage (AHM) just announced that they can not locate funds to support their lending obligations. Looks like AHM will be the first mortgage company to possibly go bankrupt over the sub prime debacle. This news may now weigh on the financials again this afternoon and bring them back in.