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Since last Thursday morning’s "Hot Shots" piece titled "RAD Action for Bulls?" the market has gone on to some beefy gains. However, a potential “Rally Attempt Day” effort did prove ill-fated. Additional pressure on Thursday and Friday to finish the month of January with losses of nearly 4.00% put the overall correction in the SP-500 up near 6.50% and easily broke the not-so-RAD lows spied the prior evening.

The month of February has been somewhat more kind to bulls. The SPY has reclaimed about 2.75% over two days and set up a second rally attempt low or “Attempted Rally Day.” More than a few intermediate-minded investors are now looking to see if day three of the FTD or follow-through day count continues to hold above Friday’s lows. However, until a FTD is confirmed by a high-powered percentage thrust in one or more of the indices, the market is still deemed as being in a correction and represents a poor time to chase pattern breakouts and that sort of overly bullish fare.

So, what’s a bull to do? As discussed last time, for those traders removed from the narrow discipline of breakouts, many prior stretched oversold stocks have likely provided some nice opportunity. Much to my chagrin, that doesn’t include this strategist’s well-intentioned analysis of A-Power Energy (APWR). Despite some solid-looking positioning on the charting tea leaves for a reversal to play out, the stock has mostly consolidated at supports and near an illustrated backspread’s Achilles Heel at the 12.50 strike.

For many other bulls though, it is likely that a rally attempt of 2.75% in the market has translated into some decent profits for some select nibbling. It’s also likely that many of those same bounce or reversal plays have hit some type of potential resistance and / or could be considered overbought. In conjunction with a market that could still be under correction, which given 2009’s historic rally, has this trader’s vote—I think it’s time to look at some “RAD”action served up right for bears.


Figure 1: Visa (V) Daily

Credit card issuer Visa (V) exudes pretty much all the characteristics just described for a possible directional short. For one, shares of V have enjoyed a nice outsized rally in excess of 100% over the past year.  Secondly, that move produced a weekly chart test of its prior all-time-highs, which until proven otherwise, is akin to a double top. Looking at the daily view used to confirm weekly pattern resistance and additional bear tracks appear to be on display.

Shown above in Figure 1, one uptrend line has already been broken after shares failed to find lateral support off its test of the weekly double top (not shown). The hard price break then quickly went on to push shares below 50-SMA support. With the last several sessions consolidating more or less laterally against the key institutional moving average, a bear flag has taken shape below a couple layers of resistance.

Fundamentally, I’m inclined to see leadership from this past year unable to hold that title for two straight, particularly so with consumers still strapped. As much, sector rotation and investors always searching for the next great story are seen as likely to occur and at the expense of a name like Visa.

 

Figure 2: Visa (V) February IV / SV Readings

One wild card for directional strategists is Visa’s earnings release out this evening, which has shown to be a mover for shares of the underlying. Appreciating that fact, the report could quickly and without recourse, make mincemeat of my bearish prognostications or just as easily, our sometimes pal PS Elliott’s bullish W4 still in-the-making.

Prices in Visa’s calls and puts are bid slightly in front of the event, but not obscenely so when eyeballing the range implied and statistical values for the past month. With respect to that I’d estimate the at-the-money Feb 85 straddle has about $1.00 of volatility risk embedded in last night’s going price of $4.75 with shares at 84.

Chris Tyler
Senior Staff Writer & Options Strategist
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. 

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