Tuesday, July 14, 2009

INTC Set to Gap Up Tomorrow

INTC traded up about 7% on earnings after hours today. So it seems almost certain that the QQQQ's will gap up tomorrow due to the weighting of INTC in the index. However, past large INTC gap ups on earnings have tended to be decent/good short to intermediate term contrary indicators. In the past, the QQQQ's have often closed well below the open in this situation. When the markets gap up, particularly large ones, while in the short-term model is overbought (which it is extremely in this case), that also often results in the gap closing below the open.

Gaps like that can really squeeze short positions and worry those who are betting against the rally....(cough cough). So while it is not always easy to emotionally tolerate such a situation, past experience suggests that waiting for the market to exhaust itself to the upside and give the next oversold signal is the way to go for exiting the current SDS trade.

Also of note, a few ways of looking at the VIX (relative to its 10 day average and relative to VIX futures) are showing that the VIX is due to move up (and the market pull back) based on past tendencies. Also the VIX/VXV ratio has continued to decline the past month or two, never yet giving a market buy signal to reverse the sell signals I have noted in the past few months. Another extremely low reading (0.85) registered today which is basically even with the lowest reading since the inception of the VXV. The prior low was right at the market peak of May 2008.

Just to clarify, I am not at all suggesting to short INTC tomorrow. But I do think it is wise to let any gap play out and wait for the next objective oversold signal rather than making an emotional exit on the current SDS trade.


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