MARKET ANALYSIS 

Entering Thursday, it’s one of those less heralded but technically correct occasions to buy in May. Through Wednesday, the SP-500 (SPY) is off 1.06%, shown its share of “Sell in May” tendencies, as well as opportunities to buy within a newly-minted downtrend and undetermined correction.  

Highlights for bulls supporting fresh rally attempts and corrective lows:

• QE3 lurking in background.
• Short-term, fearful VIX signals and corrective rally attempt low for SP-500.

Highlights for bearing in mind and prepping for the Worst Six:  

• Political instability in Eurozone led by Greece, France and Spain calls into question austerity programs.
• Seasonal “Worst Six”  and daily downtrend for SP-500 following weekly butterfly top.

Technicals

Figure 1: SP-500 ($SPX) Daily Chart

Entering Thursday, a newly-minted downtrend put in place by lower highs and lower lows on the daily chart is squaring off with a bullish rally attempt signal from short-term fearful ($VIX), fresh corrective lows. Not that the writing was 110% on the wall regarding Thursday’s opening bid in the broader market, but there were strong clues available.

As written about in the Trader’s Radar titled “Sell and Even Buy in May, but Don’t Go Away” Wednesday (hat tip); fast money bulls and certainly bears enjoying in-the-money profitability, had a couple very strong technical reasons to think about securing long deltas.

Our technical observation was based on a stretched and overbought VIX taking out its former highs. In turn, the overly-bearish sentiment complemented a nice washout of a classic hammer into a picture perfect hit of less obvious and “good enough” support at the 1343 level, which we’ve detailed in days past.  

Where do we go from here? We’re still of the technical mind of greater downside risk than strong upside opportunities for intermediate bulls. Ultimately though, there are also better opportunities to sell in may than those presented in Thursday’s session. It doesn’t mean the market can’t and won’t move lower and traders long from Wednesday should respect those lows. However, we’d estimate a counter-trend rally into the 1380 – 1400 area should find resistance, result in another lower high and a less risky spot to secure short deltas.

MARKET LAB
Bullish Technicals

• First Week Effect 2012.
• Rally Attempt signal Thursday following fearful corrective lows into 1343.
• Back-to-back short-term signals of VIX Stretch.

Bearish Technicals

• Fibonacci-based butterfly into 1400 potentially completes.
• “Early and truly Best Six” period from October lows in place.
• SP-500 daily downtrend established into Worst Six period.

RADAR WATCH

Given what’s been said above about bears essentially not looking a gift horse in the mouth due to the short-term movement in the VIX and SP-500, we’re removing the broader market (SPY) from our Bears Radar temporarily after a nice, albeit sometimes bumpy, stay.  

SodaStream (SODA) is also being given the boot after a brief stint on the radar. Shares are aggressively higher following its all-around surprisingly strong earnings report, but did offer its share of opportunities leading into the release, for bearish positions to adjust with minimal harm.

Caterpillar (CAT) has been given the axe too after a nice downside run of 10% or so. As with the broader market, CAT has established a downtrend pattern. After three days of testing in around the 200SMA, the action looks prone to reversing higher; before and if, another lower high and less risky spot for bears to enter, might present itself.

And finally, from the Bulls Radar, Molycorp (MCP) reports after the bell today. Of late, a very long-standing dynamic collar has presented opportunities to accumulate shares over the past month. With the stock off about 30%, MCP has gone from a nice-looking weekly uptrend off its December bottom, to a more technically-trying situation; and one card-carrying intermediate bulls acting consistently will want to see an upside resolution from.  Failing that and depending on how Molycorp’s report looks, we’ll re-evaluate this limited risk position for either exiting or staying the course.

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.