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“Market Fails to Find Green in Beige.” While I reckon that headline can’t be found anywhere but on this page in cyberspace, those first to the accident scene attempting to expose what’s driving investors were close with their near-uniform, depressive-sounding bytes and bites stating market bulls were disappointed with the latest Beige Book findings.

In places where the market is anything but a simple color coated read, the broader market as evidenced by both the NASDAQ100 and S&P500 did sport a second straight session of distribution. Further evidence of deterioration comes from the former breaking free of its recent trend of relative strength and the bullish earmarks of a cup with handle pattern.

On the other hand and not meant to confuse, small and midcap ETFs (IWM, IJR) have somewhat quietly managed to maintain both relative strength and technical leadership.  However, coupled with the fore-mentioned turn for the worse in the Naz’100 and an existing but ornery EW4 sell signal in the SPY—and the directional edge is thought still M.I.A.

Entering Thursday, there are plenty of good looking charts sporting bullish and bearish formations. The continuing problem though is one of execution and qualifying the risk for the triggers which do work versus the larger body of failures which currently plague the market. The good news is each day of churn and mixed signals should find the market one step closer to finding a playable trend.

For now, staying prepared, not overtrading and reducing the risk with a softer delta spread on the few choice set ups which are taken, seems a smart approach. That being said, I’m still willing to share one fresh selection from this market observer’s technical coffers. Be safe.

Figure 1:  Varian Medical Systems (VAR) Daily

Varian Medical Systems, a provider of cancer therapy systems is a less familiar name for many traders to be certain. However, the stock has more than a couple of reasons to consider monitoring for bullish breakouts or just as a leading issue worthy of being a cure-all of sorts for bulls currently in the sick bay.

So, what exactly is Varian offering investors? First but in no particular order of importance, VAR sports a market cap smack in the middle and in the sweet spot of today’s still-leading mid capitalization stocks with an approximate $8.0B market weight.

Varian’s fundamentals also look very solid all things considered. In late July the company posted a $0.12 earnings beat on better-than-expected sales and raised its FY08 profit range above Street views. Those numbers and more also look good to IBD. Varian ranks as one the best in the Medical Systems / Equipment Industry Group, an area which also happens to boast leading all-around fundamental and technical wherewithal with bulls.

Third, the company’s ability to beat on paper hasn’t gone unnoticed and instead, has enjoyed strong institutional support. Following its “b-t-e” earnings report, investors catapulted shares by nearly 10% on heavy volume, to close in on its all-time-highs set back in early 2006.

Technically and looking at Figure 1, we can see that initial bout of enthusiasm has been followed up with strong characteristics indicative of support, despite initially pressing shares into an overbought condition. Of late, those efforts have furthered the stock’s prospects by shaping a near four-week long flat base that’s found support off its prior all-time-highs.

Figure 2: The “Buy Write?” Varian Nov 60 Puts

Lastly and acting as a secondary guesstimate type of prop for this option strategist, in today’s session 2,000 November 60 Puts changed hands. The bulk of the activity was in the form of a single block print at 2.15 per contract. With implieds skewed to reflect the protective value of those downside puts, as well as November being the next in the earnings cycle, the inclination could be to see the trade as being initiated by a buyer.

If executed naked (with clothes on), the near $425K premium would represent a sizable bearish bet on Varian. However, the bet could easily represent an existing long in the stock now looking to hedge during a quieter period in shares of VAR. If that’s the case, we could be looking at a very cheap synthetic call, after the initial risk assumption.

On the other hand, but following in the spirit of the overall bullish profile, a trader could have simply put on a conservative Buy Write, well kind of. The naked put sale is most often associated with a more reckless brand of directional trading. However, the risk characteristics are for all intents and purposes, the same as those found in the risk profile of a trader long stock and short calls on a one-to-one basis. And this could very well be what occurred in Varian today. Not that the sale is my cup of tea. However, for traders which covet the idea of buying theoretical and gentle dips down to key supports like the 50-day moving average, the trade does make “sense and cents” here in the present.  


Chris Tyler
Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual. 

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