MARKET ANALYSIS 

Bulls wield a daily hammer in support of continuing a move into higher ground as Microsoft stages a breakout. For the three day period, the SP-500 (SPY) is up 0.84% and constructively improving upon the technical thesis of “flying” towards 1400 in accordance with Fibonacci.

Highlights for bulls confidently looking towards higher ground:         

• Technical testing and larger weekly technical picture (see below).
• Successful Portuguese debt auction eases credit market fears.
• Incrementally improving global PMI readings.
• Wild card “on again” optimistic buzz of Greek debt negotiations.

Key Reasons for bears awakening during winter:         

• Continued Troika and bondholders impasse with Greece stokes bears Monday.
• Varied and mostly lackluster earnings (AMZN, XOM).
• Weaker-than-forecast reports including Case Shiller, Chicago PMI, consumer confidence, ADP and ISM.

Market Outlook

Figure 1: SP-500 ($SPX) Weekly Fibonacci Butterfly

Following a key test and hold of 1300 to start the week and a cooperative, benign VIX ($VIX); the market has shaped up for higher prices. Monday’s bullishly-shaped hammer candlestick saw a bit of hesitation on Tuesday but managed to persuade traders to bid up the SP-500 on Wednesday by 0.77% and confirm the low.

Shown in Figure 1 and a weekly view of the SP-500, the action this week marks a continuation of a mostly lateral trading range of about 2% in width that’s developed since the breakout above 1300. Overall, the price action has done a fairly good job of neutralizing short-term overbought readings after 8 weeks of strong gains, while holding above the prior resistance level now acting as support.

Looking forward, optimistically we see the constructive behavior of the past couple weeks as being bullish as it sets up within a weekly Fibonacci butterfly pattern whose “wing” symmetry suggests (to us at least) an eventual test of 1400. There are no guarantees of course and even if the SP-500 were to get there, being judicious in timing both pullbacks and breakouts and using money management with limited risk options as a hedge hog, makes more sense and cents than over-reaching as a bull.

MARKET LAB
Bullish Technicals

• First Week Effect 2012.
• October’s historical record for producing bottoms.
• “Best Six” period for market.
• Early Day 3 FTD and Late Day 17 confirmation.
• Fib-based bullish butterfly projection 1400.
• Two week lateral range and hold of 1300 support SP-500.
• VIX neutralized short-term while trading in normalized teens.

Bearish Technicals

• 1930 Bear Market Rally repeat states EW Intl.
• H & S weekly top SPY and trendline breakdown.
• Bear market time and price labels still in effect for some.
• Historically weak FTD.

RADAR WATCH

Last Friday we added Green Mountain Coffee Roasters (GMCR) to the Bulls Radar as a pullback candidate after featuring it in an earlier Trader’s Radar column. With earnings pending at the time and percolating premiums, we discussed the vertical or a bullish modified fly as interesting strategies for participating in the event with less risk and on the premise of a dramatic move in the underlying.

With shares of GMCR percolating higher by more than 17% in Thursday’s early going; those strategies and all their variations, while not the most profitable on the session, nonetheless are enjoying a very nice, adjustment-worthy and espresso-like shot of quick profitability.  

In removing GMCR from the list and after a job well done, as well as due to our optimistic outlook for the market, one name of technical interest for the Bulls Radar is Microsoft (MSFT). The Naz’ 100 heavyweight recently reported better-than-expected results and found traders bidding shares appreciatively higher.

Subsequent action in MSFT has allowed the stock to develop a weekly handle within a large one-year long, slightly quirky “W” pattern. Shares are up 0.50% and staging a breakout in Thursday’s early action. With premiums cheap in terms of both implied and statistical pricing, an at-the-money long call strategy in March or April look attractive in conjunction with risk management.

RADAR SCREEN
The following optionable stocks look to have a combination of technicals and fundamentals that might warrant further investigation based on a trader’s own methodology and risk acceptance. The list is not a recommendation and is intended for educational purposes only.

The Bulls

Table 1: Bull Watch list

Non-Directional

Table 2: Basing Watch list

The Bears

Table 3: Bear Watch list

Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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.