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MARKET ANALYSIS

A brief cheer for Budweiser has turned into a different sort of toast for market bulls on more of the same ol’, same ol’ and then some more. For the three-day period the S&P500 (SPY) is off 11.72% and testing investors in more than one way.

How bad is it? Rather than getting right into all the traditional highlights of what’s driving investors mad these days, I found the ultimate albatross on CNBC. This afternoon, the business news network took in advertising dollars by allowing its direct competitor Fox Business News a spot between “Stocks Plunge Again” and the Brady Bunch style “Nine-analysts in a box” “dramedy” that is the market.

Highlights for the market’s “anti Obamaistic” behavior of the last three sessions:

• Paulson-Bernanke vs. Big Three (GM, F, DAI) in TARP sparring match on ‘da Hill.
• “No deal” news from Cliffs (CLF) and Alpha (ANR).Warnings from Corning (GLW), Host Hotels (HST), Toyota (TM).
• Double-edged weaker CPI data and outright poor building permits.
• FOMC Minutes reduce 2009 GDP, growth and inflation outlook.
• Swooning financials (XLF, C, BAC) on tightened credit markets and risk aversion.
• Sovereign wealth fund reports for Citi (C) and General Electric (GE) fail to attract systematic bargain-hunting.Mounting negative sentiment, marquee heavyweight price (GE, GS, and AA) shellackings and flight-to-quality in bonds (TLT) keep an ugly trend in motion. Continued uncertainty after three days regarding fate of Big Three. Black Gold’s sub $50 move points at further economic distress. Poor weekly claims data with continuing filings at 4.01M continues to stress cruddy labor market. 

Market Snapshot



Figure 1: Dow Industrials (DIA) Descending

Much to the chagrin of bulls, a “Mama Bottom” in the broader market has given way to a pattern breakdown. In the Dow Industrials (DIA) shown above, the action takes on the appearance of a bearish descending triangle. Coupled with PS Elliott and its W4 TAPP, an already very ugly market is looking ominous in its potential to continue lower.

If it plays out, will it be a straight line? I guess that depends on what time frame one relies on. A couple months from now, it might look that way on the monthly. However, with volatility in a heightened state, that same action could easily have made toast of intraday and daily chart bears. That being said, the consolidation breakdown does portend lower prices, whether folks rely on using EW for guidance or perhaps a measured move calculation from the triangle.  

Bearing the above in mind, downside price targets are never laid in stone. Fear as evidenced by the VIX is in an incredibly heightened state of panic. Ordinarily, a current extraordinary reading of 80.86% would have this corner pooh poohing the bears. However, the implications of the panic bid in option prices in conjunction with the fore-mentioned triangle patterns still having room to move—is taken quite seriously by a guy that’s good at brushing off 99.99% of what Wall Street is currently serving. 

The following factors and anecdotal evidence might be considered relevant in determining a suitable, limited-risk strategy in the coming days and weeks ahead.

MARKET LAB

Bullish Technicals

• Retest of closing all-time-highs VIX 80.86%.
• Seasonally kind Q4 tendencies.    
• Testing of 2002 lows S&P500.     
• Likely rubber band “wish you never shorted it” situation developing.

Bearish Technicals

• Lack of growth bases and sector leadership.
• Descending triangle / bear flag style situations triggered.
• Naz’ & Dow ‘room to move’ to 2002 lows and pattern projections.

RADAR WATCH

With the latest and not-so-greatest action for directional bulls, the Bovinus Optimus radar from below is discarding Cephalon (CEPH), Energy Conversion (ENER), Alleghany (ATI) and the S&P500 (SPY). For its part, Cephalon attempted a very rare handle breakout and subsequently failed.

Personally speaking, it’s a horrible environment for attempting breakouts like the one in Cephalon. In general, most issues at or near highs (the few remaining) are prone to mass exodus type action as traders look to move into cash or go after severely tarnished but hopefully not-expired tickers of interest.

The exception to making a play in the likes of a cup with handle breakout would be if a trader is willing to construct a very defensive bullish options play that sacrifices the really generous upside—which ultimately, isn’t sacrificing much these days.

I’m adding a couple names to the radar that appear more technically bludgeoned than the fore-mentioned tickers being removed. Covance (CVD), a one-time growth stock selection from a few months back has been systematically pummeled into its prior highs from 1999. With no debt to speak of or other easily-spied financial chicanery, the stock appears more interesting than most per the opinion of this market observer.

What’s the saying, “Can a billion Chinese be wrong?” The answer is yes, as their once trumped up Shangri la stock market was one of the early ones to get torn down. That being said, I like Aluminum Corp of China (ACH) as a reversal play. The “Obamaism” is based on the government’s recent $600B injection and a chart that’s broken a long and steep downtrend and now putting in a potential double bottom.

And finally, from the Bears Radar, Henry Schein (HSIC) is being removed from the watchlist. The stock afforded a decent but now stretched 17% three day price plunge from its descending triangle pattern. In its place, I’ve added Apple (AAPL) and the Diamonds (DIA) from Wednesday night’s HOTSHOTs and McDonalds (MCD).  

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
Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
Visit Chris Tyler’s Forum
 
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. 

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