MARKET ANALYSIS 

“Sell in May” pressure looks to follow-through into some June Gloom. For the two day period and counting, the SP-500 (SPY) is off 2.10% with Day 8 of the count further shaping a bearish flag.

Highlights for bulls supporting rally attempts and corrective lows:          

• Hints of development stimulus projects by Chinese policymakers.
• Word of $22.0B Greek bank infusion and party vote in favor of remaining in Eurozone.
• Thursday same-store-sales best views by 2-to-1 margin.
• QE3 lurking in background.

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

• Greece’s ongoing political and economic limbo.
• Spain’s fiscal health exacerbated by credit cut sending yields to record highs.
• Weak data: UK business confidence, Eurozone consumer sentiment and US pending home sales, ADP, GDP, Chicago PMI and weekly claims data.
• Chinese policymakers pull a “not so fast” update regarding stimulus projects.
• Seasonal “Worst Six” following weekly butterfly top for SP-500.

Technicals

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

Into Thursday’s first hour of trade, the SP-500 is off about 0.75% and confirming Wednesday’s “Kings & Queens” bearish, heavier volume reversal. On the heels of an unsuccessful FTD attempt into down-channel and “1333” double resistance; the action sets up a pivot high for a bear flag which now looks well on its way to challenge the pattern’s corrective lows.

The VIX ($VIX) is bid for a second session and testing its prior, but not-as-fearful highs of 25% and the 200SMA. Not as fearful? The assessment of VIX is based on the 10SMA and its position / differential in relation to the spot index. During the market’s May corrective low, a level of 25% was stretched 17% above the short-term, mean-reverting average while also being historically elevated into a loose fearfully elevated zone of 25% - 30%.

This time around, short-term panic is relatively absent based on a differential of about 9% versus a stretch of 15% or more. However, it wouldn’t take much, less than two absolute points for the sentiment gauge to register fear on the part of investors, both relatively and historically speaking. Our view, less than a month into the seasonally bearish “Worst Six”, we’re personally inclined to wait. Quantitatively, we’d like to see bulls stampede halfway home into the 1250 area and a full 50% retracement from the October lows with a likely estimated and excessively fearful 30% in the VIX; before entertaining long deltas with greater wide eyed optimism.

MARKET LAB
Bullish Technicals

• First Week Effect 2012.
• Corrective move of 9% into 1278 – 1300 SP-500 zone support.
• Rally attempt still alive, but late on Day 8 vs. classic Day 4 – 7 window.

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.
• Bear flag pivot high confirmed.

RADAR WATCH

With our view of the broader market setting itself up for a decent move of 3% to 5% to the downside, we like the idea of bearish positioning in the SP-500 (SPY). With outstanding liquidity provision, single strikes and Weeklys, the ability to tailor positions is second to none.

As for positioning, we like the practicality of verticals or bearishly-designed butterflies using near-term contracts which expire in the next couple weeks. Our view is based on the idea if the bear flag is going to work, downside confirmation will arrive sooner rather than later.

Finally, with the SPY still holding above its corrective lows and in effect, a “rally attempt” still intact, a technical stop loss above 1325 and what could constitute a FTD or follow-through day or certainly above recent highs of 1334; makes more than a bit of extra sense and saved cents too.

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.