MARKET ANALYSIS 

A two day extension has a fully employed and in-the-zone bull ready to take profits.  For the two day and counting period, the SP-500 (SPY) is up about 0.50% and completed a successful and optimistic swim across The Channel.

Highlights for bulls supporting the swim up the Channel:   

• Building optimism for central bank stimulus action.
• Monday buzz China will beef up its monetary policy.
• IMF pushing Euro Zone to lighten Greece’s bailout obligations.
• Weaker-than-forecast Italian GDP dip of 2.5% and word Merkel will concede hardline stance on ECB bond purchase program “stimulates” bulls.

Highlights for bears nurturing flags and double tops:   

• Seasonal “Worst Six” aspirations and technicals (see below).

Technicals

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

Entering Wednesday, back-to-back gains in the SP-500 has resulted in the broad market index testing zone resistance comprised of the psychologically pleasing 1400 level, upper channel line and prior April highs of 1422. Now and unsurprisingly in early trade this morning, bulls are taking modest profits out-the-gate. Given a bearish reversal bar for bears to defend and confident but, too close to complacency readings in the VIX ($VIX) which look to back up technical resistance; short-term at least, bears maintain the upper hand.

So, how far and / or how long before buyers might be willing to step up to the plate and buy the pullback? That’s the million dollar question (unadjusted for inflation) and if we were to take a guess, the 138.50 – 138.75 in the SPY seems approachable as it holds Friday’s jobs report gap open lows (bad candle lows in PS) and the former trend closing highs.

Technically, we’re not particularly comfortable with Friday’s lows defining a durable bottom. That’s simply where we’d expect the fast money algorithms to deploy and lure sidelined bulls into seeing a bottom. For something more meaningful and if recent history is any indicator, we’d estimate 135 – 136 to be critical. The narrow zone looks to represent key and sufficient testing with the 38% - 50% retracement levels, 50SMA and up-channel support all in play and the percentage retreat likely severe enough to firm the VIX back up to more normalized levels in the high teens.    

MARKET LAB
Bullish Technicals

• First Week Effect 2012.
• Established 5 point uptrend off 30SMA and Channel support in SPX.

Bearish Technicals

• Fibonacci-based butterfly into 1400 potentially completes.
• SP-500 bear flag into double top pattern during Worst Six period.
• Historically weak June and July FTD signals.
• VIX near three month and multi-year lows with stretchy 14% 10SMA differential Friday.

RADAR WATCH                                            

Stealing from our cautious theme above and in appreciating a “Strategy Snapshot” article penned this past weekend which discussed a long put calendar in the SP-500 (SPY) with the objective of affording bears cheaper protection; we’ll be watching that strategy for educational purposes and see how it might develop over the next several weeks.

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.