Friday, August 04, 2006

Top Tick in Housing?

If you're in the Housing sector, you are seeing a massive technical reversal on bullish news (supposedly the rate hikes are nearing the (at least intermediate) top, according to briefing.com). The top tick must be in place.

I think not.

If you bought this morning you're bleeding to death and hating it. Granted, that was the wrong time to buy. But given the slightly longer timeframe (days), this dip is an excellent buying opportunity. Maybe not today (actually if you're buying premium, definitely not today), but given a bit more downside (look for a breakdown on Monday morning), it's a dead giveaway.

Reasons:
  1. The uptrend isn't over. Why do I say this? It's a tough questi0n and I don't have a full, satisfying answer. Let's just say, I've seen this situation (ala Housing) before and I'd loathe to bet against it. My best answer: uncouncious competence. Go ahead and laugh.

  2. Technical reversal at this point is likely to be a headfake. It's just too book-obvious and every TA guru has got to be calling a top. Plus, housing sentiment and fundamentals are terrible, aren't they? To most people it will "feel" right to sell this thing - the odds seem to favor it. (BTW, the "seem" part is an excellent subject for discussion - I recommend reading Victor Niederhoffer's "Education of a Speculator" on topic of deception)

  3. The crowd hasn't really caught on the exiting uptrend and any buying done up to this point had to be "quiet". Remember, just a couple of weeks ago the sector threw up all over the low bids, these bids got filled and the stocks stopped. After the initial bounce every down-leg was met with massive flows of new bids. Today these bids turned into offers and the first wave of the crowd bought. This "first wave" is key.
Caveat: I am not calling the bottom in the sector and I don't have a long term view. All I am seeing is that the trend isn't over and the next dip will be very opportune.

What do we do with options? My recommendation is to buy September calls that became OTM as of this afternoon. For example, this morning RYL 45 calls were ATM and gave back about 40% of their premium due to the dip. HOV 30's, BZH 45's all fit this category.

Additionally, if you're uncomfortable owning too much delta, convert it into long gamma and race the vol (which isn't pricing in imminent action). I think these stocks aren't stopping here (even if I am dead wrong on the direction) so, gamma will give you a more conservative, higher odds trade.

Cheers,
/Dmitry

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