MARKET ANALYSIS 

A more complex three day pullback enters the technical landscape as bulls do “whatever is necessary” to take profits. For the three day and counting period, the SP-500 (SPY) is off 1.30% and minding those Olympic-sized gaps becoming slightly more challenging after last week’s swim across the Channel.

Highlights for bulls supporting the swim up the Channel:  

• Subdued but pent up hopes for monetary action Monday in front of Fed and ECB.
• Flirting with 50 expansion / contraction level in China’s PMI is “just right” for bulls looking to be stimulated on Wednesday.
• Other “bad is good” stimulants include weak Euro PMI readings and Dallas Fed Survey.
• “Technically” good data from Chicago PMI, Income, Consumer Confidence and ADP.
• Technical (see below).

Highlights for bears feeding on bullish tourists:        

• “Bad is bad” data on week with no monetary action to reinvigorate bulls.
• Seasonal “Worst Six” aspirations.

Technicals

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

Entering Thursday and following two much needed days of consolidation testing into the SP-500’s prior highs, bulls were set to challenge Monday’s highs in the premarket in front of dialogue from the ECB’s President Draghi. They i.e. the bulls, are now doing “whatever is necessary” to rid themselves of those positions as a two day simple pullback becomes a more complex three day consolidation with a big question mark regarding where support ultimately comes in.

Our guess, with the VIX ($VIX) cooperating this week by keeping sentiment well-removed from complacency readings at 19% and still removed from more systematically frightening levels above 22%, is the bulls can maintain the up-channel, keep conditions constructive and ultimately allow for a supportive entry. That said and bulls still facing Friday’s BLS jobs report, minding those prior Olympic-sized gaps is going to prove challenging without the use of softer delta, limited risk strategies, lest the hazard of becoming a serial bull.

MARKET LAB
Bullish Technicals

• First Week Effect 2012.
• “Closing” corrective move of 11% into 1278 – 1300 SP-500 zone support.
• 8 week corrective cycle followed by weekly Kings & Queens reversal SP-500.
• VIX at normalized levels with MA alignment.
• Established 4 point uptrend pivot low and 50SMA / “1333” double test in SPX.

Bearish Technicals

• Fibonacci-based butterfly into 1400 potentially completes.
• SP-500 daily downtrend established into Worst Six period.
• Historically weak June and July FTD signals.

RADAR WATCH                                            

The best that can be said of last week’s discussion of the Bear Radar and a resistance play in Apple (AAPL) is an appreciation for option strategies such as the bear credit spread. Ultimately, the limited risk spread would have allowed traders the ability to keep their losses to a known and manageable percent of their portfolio despite two back-to-back gaps above critical 50SMAresistance and then jumping above the 600 level. In conjunction with a couple weeks still left on the calendar for the likes of the August contract, those bears can take a bit more solace in time having been on their side with max losses more difficult to come by.  

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.