Holiday-Induced Action

Low Volume Trading Sparks “Odd” Tendencies

By Bryan Bottarelli
Thursday, August 28, 2008 12:35 PM EDT
Thu, 28 Aug 2008 16:35:00 GMT

Dear Bottarelli Research Member,

First thing this morning, I questioned the simultaneous rise in gold, oil, and the major market averages. Since that alert, we’re seen a major reversal in oil and gold prices, which has sparked a sell-off in the entire commodity, oil, and energy sectors.

This is certainly a strange move — especially when a hurricane threatens to disrupt oil supply. At the same time, this oil reversal has helped the major market averages move higher. As I write, the Dow is 180 points higher — and even more impressive is the fact that the Dow has now broken above its 50-day moving average. See below:

INDU

Now, before we all jump on board the bullish bandwagon, let’s keep a few items in perspective. First and foremost, it’s quite apparent that today’s sharp oil and energy price correction is a result of low-volume trading floor activity in advance of a 3-day market holiday. You see, three-day market holidays do not come around too often, so it’s customary for many of the top floor traders to extend these 3-day breaks by taking off the Friday beforehand as well. As a result, Thursday morning is the time when most of these trader’s larger positions are closed off leading up to this break — and you can clearly see this reaction today.

First thing in the morning (as oil, gold, and the markets were all trading higher), positions were un-wound and closed off. Once this was finished, that’s when we witnessed the sharp corrections in oil, energy, and gold prices. In other words, a lot of the seemingly “odd” trading patterns we’ve witnessed today were due to this holiday un-winding. And the resulting moves, all coming on low-volume action, exacerbated the follow-on reversals.

It’s difficult to put too much emphasis on action like this, especially when you know that these trends could easily reverse course in the blink of an eye. Therefore, I’d like to stand pat with our positions leading into next week.

The one and only play that we have to address comes in the form of Sears Holdings (SHLD – NASDAQ). As noted this morning, their latest earnings report was awful, yet today’s market rally has actually pushed shares higher. How anyone can buy shares of SHLD today is beyond me. I still feel that SHLD will touch $80.00 before September expiration, but considering today’s move, we have no choice but to close out our SHLD September 85 Puts (KTQ UQ). Close the position now.

SHLD

I’ll be out with further updates as needed. But until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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