MARKET ANALYSIS 

Back and forth follow-through failures make for gloomy, but neutralized conditions for hard-nosed bulls and bears. For the three day period and counting, the SP-500 (SPY) is off 0.79% as Day 9 of the count and Day 5 of key congestion are on the radar for both directional camps.

Highlights for bulls supporting rally attempts and corrective lows:

• Continued weak data promotes growing QE3 optimism for June FOMC.
• Initial enthusiasm Monday for Spanish bank $125.0B bailout.
• Tuesday upside turnaround linked to Fed Prez’ comments on quant easing.
• Neutralized technicals with rally attempt low intact.

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

• Re-evaluation of “not enough” Spanish bank bailout.
• Looming Greek re-vote.
• Buzz of looming US bank downgrades by Moody’s.
• Fitch Spanish bank downgrade on Tuesday pushes yields to record highs.
• Weaker-than-forecast retail sales decline 0.2% and ex-autos down 0.4%.
• Seasonal “Worst Six” following weekly butterfly top for SP-500.

Technicals

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

It’s been some very tricky business this week for both bears and bulls as an overbought condition set against resistance entering the week has morphed into a fifth day of neutralized consolidation work. The good news in our view is some follow-through for one of our two beloved directional camps, is likely nearing with prices stymied by 10SMA and 1300 support and overhead resistance defined by the 30SMA and “double” value of 1333 from the devilish March 2009 low of 666 in the SP-500.

Out-the-gate Thursday and the back and forth action has once again prompted a modest inside win of 0.55% for the bulls within the existing congestion. With the VIX ($VIX) bid into modestly elevated territory historically speaking near 25% and challenging its 200SMA and slightly above its mean-reverting 200SMA; we’re less gloomy regarding the typical June forecast and anticipate a breakout currently favoring the bulls.

Further evidence the next meaningful reaction by the market will be an upside resolution is supported by an eight week cycle of corrective action followed by a bullish two-bar Kings & Queens ( i.e. red, then green weekly candle of same size) pattern. The weekly Fibonacci time count is confirmed by the daily chart’s still intact rally attempt and Day 9 of a late, but not-too-late count (up to Day 13) still waiting on a Follow-Through Day.

MARKET LAB
Bullish Technicals

• First Week Effect 2012.
• “Closing” corrective move of 11% into 1278 – 1300 SP-500 zone support.
• RSI 13 positive divergence off lower low double bottom.
• Rally attempt Day 9 with assistance from elevated VIX ($VIX).
• Eight week corrective cycle followed by weekly Kings & Queens reversal SP-500.

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.
• “Worst Six” and June Gloom historically bearish tendencies.
• Resistance 1328 – 1333 in SP-500.

RADAR WATCH

Given what’s been said and our obvious shifting of gears this week as market conditions change, we’re set to remove the SP-500 (SPY) from the Bears Radar. Exiting above 1328 – 1335 would result in a mostly a “no harm, no foul” situation for hypothetical positioning using bearish verticals or modified flies with those traders respecting the potential trend change to “up” or at least being appreciative of waiting for better-suited conditions in which to turn bearish once more.

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.