MARKET ANALYSIS 

The market remains on hold as bulls and bears decide on “risk-on, risk-off” positioning inside key zone resistance. For the three day period, the SP-500 (SPY) is up, but mostly flat and much to the chagrin of soon-to-expire, channel-swimming bulls and bears.

Highlights for bulls still supporting the swim up the Channel:      

• Lingering optimism for central bank stimulus action. Stimulus-worthy GDP growth of 1.4% for Japan, “just right” in-line -0.2% Eurozone GPD Tuesday.
• Retail sales data surprises with jump of 0.8% vs. 0.2% forecast.
• Wednesday buzz China will cut its reserve requirements.
• U.K. minutes shows support for additional stimulus as country’s labor market improves to 8% unemployment.
• Cooler CPI data and better-than-expected Housing Market Index.
• Surprisingly weak Empire manufacturing report for bulls looking for “stimulus.”

Highlights for bears nurturing complacent double tops:        

• Seasonal “Worst Six” aspirations and technicals (see below).
• German economic minister disappointed with Greek austerity efforts.
• ZEW sentiment survey slides unexpectedly for fourth month.
• PPI data proves hotter-than-forecast at 0.3% and core levels up 0.4%.

Technicals

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

In the week since our last Market Barometer, not much has changed on an absolute basis in the SP-500. In fact, price action has continued to consolidate narrowly in action unmatched in 2012 and very unfriendly to both soon-to-expire bulls and bears still holding August premium. Entering Thursday and after seven of eight sessions challenging 1400 from above and one initially from below, we see bears as having the likely directional edge within key zone resistance from 1400 – 1422.

Our current and cautious outlook the bull’s up-channel will resolve itself lower and as some type of bear flag / double top pattern is backed by prior weekly evidence of a Fib-based butterfly top which proved fruitful back in April, a historical “Worst Six” seasonal bias and the VIX ($VIX) generating an all-too-confident complacency differential of 15% on Monday relative to its 10SMA as the sentiment gauge struck five month and multi-year lows.

Given what’s been said, any potential upside breakouts are considered suspect. Were we to buy into the idea of the up-channel continuing to improve, we’d rather wait for constructive testing of mid-channel support near 139 or a less constructive, but fearfully good opportunity around 136. In the interim, protection is cheap and failing to appreciate that in some capacity, as either a bear or bull, makes a good deal less sense than picking "up" or "down" as the end all, say all.

MARKET LAB
Bullish Technicals

• First Week Effect 2012.
• Established 5 point uptrend off 30SMA and Channel support in SPX.
• Third FTD signal 7.26.12.

Bearish Technicals

• Fibonacci-based butterfly into 1400 completes March / April.
• SP-500 bear flag into double top pattern during Worst Six period.
• Historically weak June and July FTD signals.
• VIX hits three month and multi-year lows with complacency stretch signaled Monday.

RADAR WATCH                                            

With our cautious-to-bearish view expressed above, one idea we like is positioning with a bear call spread in an effort to secure profits from being correct on where we believe a stock is unlikely to go, rather than requiring it fulfill a downside objective. Two large cap names which might be considered candidates which offer strong option liquidity, technically show W4 down waves and / or bearish flags and worse-than-expected and ill-received earnings are McDonald’s (MCD) and Nike (NKE).

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.