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Practice makes perfect

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Last week we were "all over" the software stocks on the downside and some are still performing nicely. Today a subscriber notes our bearishness in some of the telecom and telecom-equipment providers.

In the past, I've referred to some stocks as "bear food" as bears will get on a scent where food is found and continue to feed aggressively until a bad experience is found.

With the North American Telecom Index (XTC.X) breaking to new lows, our latest "rolled down" retracement bracket gives sector traders some levels to be monitoring.

All we're doing is "creating" some levels that "fit" with a retracement bracket that may just be levels where the bulk of MARKET participants have been trading. If so, then the resulting levels lower may also be target levels.

North American Telecom Index Chart - Daily Interval

Where in the heck is the bottom in the telecoms? A fitted retracement on the North American Telecom Index (XTC.X) gives the look that market participants are playing some defense in the group and assessing risk to the 518 level. With very little "nearby" history to try and tie any support levels too, then the retracement bracket is a tool often used by professional traders to understand risk levels. If I had been a buyer at $600, then I was either assessing risk to the 518 level, or looking to eliminate the risk from my account on the break to new lows.

My current thinking is for any bull to be buying this group, he/she has to know of some type of market moving news to get this index reversed to the upside.

A bear is thinking... "There are no defenders of this food source until the 518 level and I can control my risk with a stop just above the 600 level. That makes for a relatively attractive swing trade over the next week or so as MACD trends lower below the zero level.

The fundamentalist that notes the technical deterioration of the group then begins to "wonder" why the MARKET is still willing to sell the group. Are earnings that bad? If so, will there be any budgets from many of these telecom service providers to buy any telecom equipment?

Then a fundamentalist reviews earlier notes from this morning that telecom equipment company Nortel (NYSE:NT) said something about writing off $200 million in obsolete and excess inventory and the snowball begins to roll.

Jeff Bailey
Senior Market Technician
Option Investor

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