Profit-taking and maybe technical action more in ‘iTune’ with historical tendencies look to challenge last week’s overly-confident bid. For the five day period the SP-500 (SPY) is up 2.02% as bulls ‘stretch’ to not miss out on fresh four year highs.

THE WEEKLY NUTSHELL

•  “Monday Mourning.” SP-500 slides 0.57% against technically limited upside and sterilized historical tendencies as index challenges up-channel resistance after two day, 2.4% run and VIX ($VIX) striking 15.5% 10SMA complacency differential within one point of August and five-year lows. Catalysts egging bulls into profit-taking include possible jitters in front of Thursday’s FOMC meeting, cut of 0.4% to France’s 2013 GDP to 0.8% growth, tough-going Greece / Troika talks, Intel (INTC) continues to weigh in following Friday’s warning and second-half profit-taking of about 2.7% in Apple (AAPL) after striking fresh, yummy all-time-highs out-the-gate. For the bulls, Chinese infrastructure ‘rails and roads’ stimulus plan spillover keeps construction material plays (MLM, VMC) bid, while country’s weaker-than-forecast 8.9% industrial production growth prompts fresh optimism regarding additional stimulus by China’s central bank.
• “Patriot Act Tuesday.” On 11^th anniversary of 9/11 bulls manage to maintain an inside bid and finish of 0.28% in SP-500 following overbought run and bearish reversal Monday. Bulls snub Moody’s warning of one-notch downgrade to US credit, ‘meeting-in-progress’ between the Troika and Greece, looming ESM ruling from Germany’s high court and Thursday’s FOMC meeting. Bulls enjoy a bid in Apple in front of iPhone5 announcement and bullish move in EUR/USD and country ETFs (GREK, EWI, EWP) despite German Finance Minister stating it’s against debt union and shared liability for a “printing press” for EU crisis.
• “Doji Wins-Day for Bulls.” German court’s decision to strike down ESM injunction finds bulls pushing their technical luck with 0.33% gain to narrow fresh closing highs in front of FOMC meeting and despite recent complacency signals. EC Prez’ spied rallying political support for Eurozone banking plan and Spain’s PM states he’s monitoring recent generous decline in yields to 5.6% from above 7.1% in early August, to determine country’s bailout status. US Wholesale inventories rise by 0.7% for July vs. 0.3% forecast, but oil sees surprise build of 1.9M vs. estimated draw of 2.8M.
• “This Time it’s Different Thursday!” Bulls throttle SP-500 higher by 1.63% after FOMC surprises markets with a QE3 style, $40.0B open-ended mortgage-backed security monthly buying program until US employment picture improves. Fed also cuts 2012 GDP to 1.7% to 2.0% but raises 2013 and 2014 outlook with 2013 expected growth of 2.5% to 3.0%. First half background noise containing bulls to support market near unchanged level include Dutch “pro-Euro” factions victory with PM retaining post, while China’s Commerce Minister sees retail sales rebounding. For the bears trying to pressure prices, Germany’s ever-vocal Finance Minister doesn’t see ESM obtaining banking license and notes financing of states isn’t in ECB mandate. Weekly claims rise by greater than forecast 15K to 382K and producer prices increase by sharper-than-expected 1.7% vs. 1.2% estimate.
• “Fed-Led Follow-Through & Profit-Taking Friday.” Strong early gains inspired by FOMC follow-through are chopped by more than 50% but SP-500 still manages 0.44% gain. Also assisting the market’s bid, retail sales rise by better-than-forecast 0.9% vs. 0.7% estimate, core CPI levels increase just 0.1% versus Street’s 0.2%, business inventories double views with 0.4% increase and Michigan sentiment shows surprise upward spike to 79.2 compared to 73.5 estimate. For the bears, industrial production slides by stiffer 1.2% vs. dip of 0.2%, China’s central bank warns of renewed global inflation risks due to QE3 program while the Hong Kong Monetary Authority chimes in about potential property bubble. Egan Jones cuts US credit rating from “AA” to “AA-.” Western Digital (WDC) and AK Steel (AKS) come under pressure of 3.5% and 9.0% respectively after warning. And the VIX slumps intraday to test of August and five year lows near 13.5% setting up short-term complacency signal and undesirable absolute levels of unsustainable bull.

WEEKLY CALENDAR OF KEY UPCOMING EVENTS

Monday:
Economic: Empire (-3.0). Ongoing Eurozone “updates” remain on radar.

Earnings: NA.

Tuesday:
Economic:  NAHB (38).

Earnings: FedEx (FDX), Manchester United (MANU).

Wednesday:
Economic:  Housing Permits & Starts (772K & 800K), Existing Homes (4.58M).

Earnings AutoZone (AZO), Cracker Barrel (CBRL), General Mills (GIS).

After Hours: AAR (AIR), Adobe (ADBE), Bed Bath & Beyond (BBBY).

Thursday:
Economic:  Weekly Claims (375K, 3.29M), Philly Fed (-5.0), Leading Indicators (0.0%).

Earnings: CarMax (KMX), ConAgra (CAG), Rite Aid (RAD), Jeffries (JEF).

After Hours: Cintas (CTAS), Oracle (ORCL), TIBCO (TIBX).

Friday:
Economic: NA.

Earnings: Darden (DRI), KB Homes (KBH).

TECHNICAL OUTLOOK

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

Is this time really different? Following Thursday’s beefy FOMC inspired percentage gainer which broke above long-standing channel resistance, bulls have continued on their technical mission of shredding September’s bearish tendencies. However, looking ahead to Monday and into the second half of a month known for its share of corrective activity, conditions are ripe for profit-taking and in ‘iTune’ with historical biases as the VIX ($VIX) suggests investor confidence has grown complacent.

With Thursday’s strong move and Friday’s early strong price extension in the SP-500, the VIX managed to retest its lowly and confident August and five-year lows on Friday. In of itself this type of action is a warning given levels are closer to historical extremes. But as the sentiment index also managed to fire off a short-term complacency reading with a 10SMA differential narrowly expanding through the 15% threshold; the “Fear Gauge’s” message of investors only fear being that of missing out, is one likely to challenge bulls thinking this time it’s different.  

MARKET LAB
Bullish Technicals

• First Week Effect 2012.
• Third FTD signal on Thursday 7.26.12.

Bearish Technicals

• Fibonacci based butterfly completion March / April.
• Worst Six period and notoriously bearish September – October period.
• Historically weak June and July FTD signals.
• Overbought conditions and topping candle SP-500.
• Lagging (IYT) and semis (SMH) not confirming rally.
• VIX back near August and 5-yr. lows with 15.5% 10SMA differential on Friday.

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.