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Note: This week's Market Outlook was covered by Optionetics.com's Chris Tyler.

Will a chilly 5.55% corrective start to October find bargain-hunters stepping up to the plate in front of the Q3 earnings season? The SP-500 (SPY) is off 1.88% and confirming some well-overdue seasonal tendencies, much to the perma bulls' chagrin.

THE WEEKLY NUTSHELL

• Merger Monday headlines (XRX, ACS, ABT and GETI) and technical "Monbacky!" platform inspire bulls to kick off week with percentage gainer. Energy complex (OIH, XLE and USO) and financials (XLF) assist efforts with relative strength performances in light volume bid for market following three day corrective move of 3.60% in SP-500.
• Bulls' schnitzel a little Tuesday as absence of catalysts fails to motivate / capitalize on early bid. Out-the-gate investors bid market on better-than-expected -13.3% Case Shiller housing data. Unexpected dip in consumer confidence rattles intraday as does word FDIC will require insured institutions to prepay estimated quarterly risk assessments through 2012.
• Volatile Wednesday on high volume end-of-quarter "bullish hammer vs. bearish lower high" stumper for investors. Bear-wear from weaker than expected ADP job losses of 254K and unexpected contraction reading of 46.1 from Chicago PMI. Weak guidance from Darden (DRI). For the bulls, Nike (NKE) sprints higher on good results as does Jabil (JBL). Final Q2 GDP results are stronger than expected with annualized decline of 0.7% vs 1.0%. Weaker Greenback helps inspire bid into commodity complex (GSG, USO, GLD, SLV).
• "Terribull Thursday" as "Worst Since"" headlines kick off October. Worse-than-expected weekly claims and ISM data. Bernanke comments goad Dollar (UUP) higher, dragging commodities down and planting "red chutes" worries. Ken Lewis' pending removal as BofA (BAC) CEO puts a cloud over financials. Mr. Softy (MSFT) reduced to "Buy" at Goldie. Lost in the 1.75% stampede lower, "b-t-e" income / spending and construction data and the IMF's global growth booster of 3.10%.
• Early "Friday Freefall" on "weaker-than-Goldman estimates" for September nonfarm payrolls [250K vs. 263K]. Technical test of market's 50-DMA, first since July correction, 30% VIX and 5.50% corrective "Monbacky!" find bulls willing to nibble off woeful "fourth-straight" loss for market. Upgrades in tech for heavyweights Intel (INTC) and Apple (AAPL) aid and abet lift from out-the-gate lows. First Solar's (FSLR) addition to SP-500 and bulls gambling on secondary in Wynn (WYNN) earn early assist points.

ON TAP THIS WEEK

The song remains the same for earnings hounds, well almost. On tap, it's a third straight week of light officially sanctioned corporate confessionals, with the possibility of additional warnings or positive preannouncements entering the equation. However, this week does mark the start to the third quarter earnings parade.

Token leader and Dow component Alcoa (AA) reports on Wednesday night. Analysts expect the aluminum concern with its heavy ties to the auto industry to post a third quarter loss of -$0.12 per share versus a profit of $0.37 a year ago.

In order to maintain the bulk of the market's seven month and 62% run in the SP-500, bulls will likely need to find profit ammunition from companies based on upbeat guidance of stronger business conditions moving forward. "Growth" rather than the now diminished power of cost-cutting strategies used to surprise and entice investors, by and large, over the past two quarters should prove an important part in whether a "healthy" correction of 5.55% will turn into a buying opportunity within the market's uptrend or a technical shift back into a bear market.

On the officially-sanctioned economic docket, it's a mostly light week ahead as well. The most closely-watched report will be the slug of retailers reporting same-store sales on Thursday. Separately, trader reaction to this weekend's G-7 meeting which included agreement that banks shouldn't resist reform, a handful of "Fed Head" testimonies this week and a substantial auctioning off of nearly $80.0B in Treasury coupons may also impact the market mood and price action.

Finally, the Greenback (UUP) should remain a leading indicator for equity traders. The instrument put in a year-to-date technical low eight days ago, coinciding with the market's technical double top. Continued strength in the currency which was promoted by Bernanke and Geithner this past week and could prove a major hurdle for bulls in being able to maintain the broader averages uptrend as "green shoots" get called further into question.

Weekly Calendar of Key Reports

Monday:
Economic ISM Services (49.0)
Earnings RPM (RPM), Mosaic (MOS), Robbins & Myers (RBN)
Tuesday:
Economic NA
Earnings Chattem (CHTT), GigaMedia (GIGM), Pepsi Bottling (PBG), YUM! (YUM)
Wednesday:
Economic Weekly Crude, Consumer Credit (-$9.5B), Treasury Budget
Earnings Costco (COST), Family Dollar (FDO), Monsanto (MON), Alcoa (AA), Ruby Tuesday (RT)
Thursday:
Economic Weekly Claims (550K, 6.05M), Wholesale Invs (-1.0%), Same-Store Sales
Earnings Marriott (MAR), PepsiCo (PEP), Progressive (PGR), Infosys (INFY)
Friday:
Economic Trade Balance (-$32.9B)
Earnings Cantel (CMN)

TECHNICAL PICTURE

Figure 1: S&P500 (SPY) Daily Chart

For trend traders looking for a high probability pullback with technical support and well-defined risk, Friday's session was just what the doctor, other than the guy on CNBC, ordered. The SP-500 (SPY) has corrected a full 5.55% within its existing uptrend. That amount is sandwiched fairly nice within the 3% - 7% and sometimes up to 10% category of "what's necessary" for a healthy market to continue its run.

Additionally and supportive, the price action has the SPY, along with the Dow and Naz', affording a first test of the 50-day moving average since the July corrective lows. The market has also enjoyed the benefit of confirmation from the VIX with "fear" back in the equation. It might not be the fall of 2008, but Friday's levels did essentially test the loathed 30% level in challenging its early September highs.

Further, highs just shy of that historically "ripe with fear" 30% reading also, and possibly more important, stretched 16% above the 10-day moving average. That's a percentage point above what this strategist looks for in the VIX when locating extreme behavior which typically reverses itself. The last such occurrence was also in July at the lows.

For bulls so willing to "buy the pullback", this market strategist would stress that entering and exiting any hard directional long delta positions should be tied to Friday's lows with some fractional wiggle room at most. The fact is that after a 62% price climb since March, "what's necessary" could go much closer to the 10% while still affording a "healthy" designation within the uptrend.

As well, consider that by comparison to October's infamous gut-wrenching bottoms, our current situation still bears little resemblance to those sordid affairs when viewing the daily price chart. Also raising a flag, the July correction was a much more severe affair for bulls than our current wringer thus far.

Prices three months ago squarely hit the 10% correction mark (9.50%) while also causing serious abandonment issues with bulls. The 50-day moving average fell to the wayside and the talk of the town centered on a bearish break of an H & S neckline. Bulls may also realize the market is still some 20% above July's hysteric lows.

MARKET LAB
Bullish Technicals

• Breakout of daily / weekly downtrend from Sept 2008 highs DIA.
• Weekly Inverse H & S being breakout from October lows. "MM" of 113 - 120.
• Upper zone support test of 97 - 102 on Friday with VIX Stretch and near 30% reading.
• Current "tight" buy the pullback situation on the table.
• Two-thirds of October's "positive" when September shows gains.
• Short-term oversold readings.

Bearish Technicals

• 1930 Bear Market Rally repeat and "W" pattern SPY?
• Weak calendar month of October.
• Consistent weekly breakouts suspect.
• Third time the charm? Potential W5 Daily and W4 Weekly in SPY.
• SP-500 > 20% above 200-Day MA.
• Test of 5.5% midway into "healthy" correction and just scratching support zone test.
• Technically-extended market leaders (GE, AAPL and GS).
• At 62%, market's run has "Come a long ways, baby."

Chris Tyler
Senior 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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