As fearful “investors pull-out” on continued credit market headwinds, bargain-hunting bulls are handed a well-oversold market challenging key support entering the week. For the five day period the SP-500 (SPY) is off 4.33% with bears now increasingly likely to be the next group to “go away” after some hard-hitting “sell in May” action.

THE WEEKLY NUTSHELL  

• “Moody Monday.” SP-500 sees distribution day and 1.11% drop to fresh corrective lows as VIX ($VIX) jumps by a fearfully-stretched 9.95% to fresh one month highs. Inspiring the action, weekend Greek gridlock and growing anti-austerity sentiment in Germany raise questions about stability of the Euro. Not helping matters, Spain’s beefed up reserve requirements gains additional bearish notice and Eurozone industrial production data takes unexpected 0.3% dip and affirming the “R” word for region. China’s move to loosen its reserve ratio also causes a stir amongst bulls as the action underscores a wholly different, but entangled monetary dilemma as the world’s second largest economy attempts to manufacture a soft economic landing.
• “Turn-for-the-Worse Tuesday.” Following a flat start, bulls shop to gains in excess of 0.75% in the SP-500, but drop to a closing loss of 0.56% in bearish second half turnaround. Initial support governed by Germany’s stronger-than-forecast 0.5% GDP increase, allowing the Eurozone to skirt narrowly past the “R” label with a 0.0% reading. Stateside data helps as CPI comes in flat and in-line, New York’s Empire Index smashes forecasts with 9.5 point increase to 17.1 and NAHB data proves pleasing with four point increase to 29. Assisting bulls to drop first half bargains, retail sales data comes in light with 0.1% increase compared to expected 0.2% gain and continued, unshakable investor concern regarding Greece with EUR/USD slumping 0.84% to fresh four month lows and destined for a date with a 2012 double bottom.
• “Wins-Day for Bears.” First half attempt at bargain-hunting on the back of stronger-than-expected housing starts [717K vs. 680K] and industrial production data [1.1% vs. 0.5%], as well as stable EUR/USD following Germany’s Merkel commenting on desire to keep Greece in Eurozone assist bulls to intraday gains of nearly 1.0% in the SP-500. Second half turn into negative territory and closing loss of 0.46% for the market attributed to uncertainty of economy and varied stances of policymakers via FOMC minutes release and continued weakness in Greece (GREK) as ECB may be axing services to certain Greek banks.
• “Follow-Through & Testy Thursday.” SP-500 finishes off 1.51% into “good ‘nuff” fearful testing of 1278 – 1300 key support zone with low of 1305 and VIX ($VIX) stretching 16% to short-term overbought condition near historically overdone 25% - 30% range with highs of 24.50%. Still unresolved potential Greek Tragedy aided by Fitch’s long-term rating cut to CCC following prior session’s word some of its banks won’t be eligible for ECB services. Stateside data assists in pressure as weekly claims prove larger-than-expected at 370K, Philly Fed registers surprise sinking of 14.3 points to -5.8 and leading indicators dip by 0.1% versus estimated 0.2% increase. Gravitational pull of nearly 3% in Apple (AAPL) puts the market’s most influential stock some 18% below its April highs is another muscular drag on bulls. On the plus side, a flight to safer double bottom havens helps Comex Gold (GLD) to gains of 2.23%.
• “Fearful Investors Pull-Out Friday.” Intraday attempts at bargain-hunting ultimately fold as a few more “investors pullout” and expire third Friday of month as May comes off the board. SP-500 finishes down 0.74% into key support zone of 1278 – 1300. as quieted headline risks tied to Greece fail to quell bulls in front of weekend G-8 meeting. Moody’s downgrade of Spanish banks doesn’t help matters, though iShares MSCI Spain Index (EWP) and Greece Global X FTSE 20 (GREK) manage oversold bounce bids of about 2.50% to 3.50%. iShares Bull ETF (AAPL) manages 0.05% doji gainer on mirror AB = CD move from highs and double 19% corrective move to SP-500’s 9% decline off April highs. “The” Facebook (FB) makes a less-than-popular though massively traded debut on nearly 600 million shares  as the closely-watched, most expensive tech debut finds “investors pulling out” with gain of just 0.60%. Comex Gold rallies another 1.15% to confirm safer haven and less buggy, five-month double bottom.

WEEKLY CALENDAR OF KEY UPCOMING EVENTS

Monday:
Economic: Wildcard Eurozone credit markets spearheaded by limbo government / Eurozone status for Greece, weekend G8 talks and health of Spain’s banking system.

Earnings: Campbell’s (CPB), Lowe’s (LOW), Tech Data (TECD), Tidewater (TDW), Krispy Kreme (KKD).

After Hours: Urban Outfitters (URBN).

Tuesday:
Economic: Existing Homes (4.65M).

Earnings: AutoZone (AZO), Best Buy (BBY), DSW (DSW), Polo RL (RL), Williams-Sonoma (WSM).

After Hours: Avago (AVGO), Dell (DELL), Guess? (GES), PETsMART (PETM).

Wednesday:
Economic:  Weekly Crude, MBA Mortgage Index, New Homes (340K), FHFA Housing.

Earnings: American Eagle (AEO), Bank of Montreal (BMO), Big Lots (BIG), Toll Bros (TOL), Trina (TSL), Zale (ZLC).

After Hours: Bristow (BRS), Hewlett (HPQ), NetApp (NTAP), PVH (PVH), Synopsys (SNPS).

Thursday:
Economic:  Weekly Claims (365K), Continuing Claims (3.25M), Durable Orders (0.3% & 1.0%).

Earnings: Costco (COST), Fred’s (FRED), Flowers Foods (FLO), Heinz (HNZ), Patterson (PDCO), Tiffany (TIF), Toro (TTC), Toronto DB (TD).

After Hours: Ralcorp (RAH), rue21 (RUE), VeriFone (PAY), DryShips (DRYS).

Friday:
Economic: Michigan (77.5).

Earnings: N/A.

TECHNICAL OUTLOOK

Figure 1: SP-500 (SPY) Daily Chart

As discussed a week ago, a failure of a follow-through day to materialize and /or the double undercut rally attempt low of 1343 to hold, has indeed led to very bearish consequences with the broader market seeing its worst performance of the year with five straight daily losses totaling 4.3%. Looking forward, the good news is bargain-hunting and potentially, intermediate-minded bulls could have a meaningful low at hand.

Price in the SPX is now testing a key zone support of 1278 – 1300 made up of its 200SMA, century mark and 38% retracement from November. To complement the decline, which also features an oversold RSI and 13-day Fib cycle from highs; the index is also in an extreme position with its 50SMA more than 3 standard deviations above. As well, various sentiment surveys are displaying excessive bearish or lowly bullish readings. And not to be overlooked, the VIX ($VIX) is finally flashing more meaningful levels of fear that’s ripe for a reversal with the gauge stretched more than 17% above its short-term, mean-reverting 10SMA, while stationed in a more fearfully elevated position just above 25%.

Entering Monday and with a corrective move of about 9%, we’ll be watching for the fore-described zone support to hold so. A failure has more ominous consequences beyond what’s been a hard-hitting, but none-too-shocking or none-too-unusual necessity to cleanse out prior excesses built up by a very strong “Best Six” run to four plus year highs. If faster money operators can hold key support, longer-term bulls can then begin counting the days, typically three to seven days removed from the rally attempt low; for a high-powered bullish follow-through day to signal.

MARKET LAB
Bullish Technicals

• First Week Effect 2012.
• Oversold corrective move of 9% into key 1278 – 1300 zone in SPX.
• Lower high correction equals 13 day Fibonacci count.
• VIX in excess of 15% above its 10SMA and into historically elevated area at 25%.

Bearish Technicals

• Fibonacci based butterfly completion around test of 1400 with triple doji high.
• Failure of Transports (IYT) and small caps (IWM) to confirm rally.
• Worst Six seasonal period and market downtrend from higher low / butterfly top.

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.