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Wednesday, July 09, 2008

Coal & Steel Sectors Breakdown - Wait for Retest

Alcoa Inc. (NYSE:AA) officially kicked off the earnings season today and is up almost 3.5% after hours. All eyes are on earnings & guidance report card this quarter. Will the high commodities cost and economic slowdown affect company guidance to a much greater extent than analysts expect? Or are expectations already so low on the street and the pessimism set in that market will actually turn for the better?

As you already know, we are now in a bear market. But be prepared to expect some relief rally this week as the market rallied strongly in second half of Monday session and today. This is the first bear market I've encountered in my trading experience and it is a tough market to trade because of the sharp brief rallies that could stop you out of a good trade and then go your way again. Be highly selective in choosing your trade candidates and be sure to manage your risk wisely.

I mentioned in my last post that commodities and energy sectors were good places to be long in or have Call option position in the last quarter. How quickly that has changed! Steel, Coal and Energy stocks were the most beaten up over the last few days. These sectors, which have the strongest uptrend, have since broken down with very high volume. Here's a look at Steel and Coal:

Market Vectors-Coal ETF (NYSE:KOL)
There is good support and consolidation at 47.5 right now. I expect a retest of the 52.5 region. When retest and fail, be ready to load up on Put options either in KOL itself or coal stocks.

Market Vectors - Steel ETF (AMEX:SLX)
Another former market darling, this sector has been showing signs of weakness with lower highs printed and officially broke down on 2/7. Its too late to enter Put options now in my opinion, at least from a risk/reward perspective. Wait for a retest near the 100 region.


Wed:
Notable earnings: SGR

Thurs:
Initial Claims, MPC Rate Statement, Paulson & Bernanke to testify on financial regulation

Fri: Trade Balance, Michigan Sentiment
Notable earnings: GE, FAST

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