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Market Barometer: October 6, 2011

By Chris Tyler, Optionetics.com | Thu October 6, 2011 7:08PM PT


MARKET ANALYSIS 

A bear on the run and a helpful hoof from bargain hunters establishes a low, but is it “The bottom?” For the four day period the SP-500 (SPY) is up about 3% as bears and bulls await the monthly jobs data to confirm who’s technically employed next.

Key highlights for bulls trying to enjoy a newly established double bottom:            

  • Oversold, double-bottom for Naz’ 100 and “flush” reversal in SP-500 Tuesday.
  • ISM, Construction Spending, ADP and same store sales boost prices on week.
  • Bull-nanke relief as Fed Chief restates the obvious in front of JEC.
  • European bank recapitalization banter receives bulls’ ears Wednesday.
  • Yahoo (YHOO) helps Naz’ to relative strength gains on Microsoft (MSFT) takeover buzz.

Key highlights for bears still smelling grizzly flag and H & S patterns:     

  • Increased early week worries of Greece not meeting debt obligations. 
  • Bankruptcy rumors for AMR (AMR).
  • Weak European PMI data.
  • Moody’s Italy debt downgrade.
  • Technical edge (see below).

Market Outlook

Figure 1: DJ-30 (DIA) Daily

Is it me or is the only resistance in the market right now bulls collective opposition to profit-taking and lower prices? That said, our best technical guesstimate is the bargain-hunting hoof higher and short-covering combination is likely to give way to a grizzlier bear anticipated to go back to work following Friday’s nonfarm payrolls data; and one assisted by some helpful profit-taking from bulls.

Good or bad number, the earmarks of a classic bear market rally have been carved out over the span of three sessions from an equally archetypal oversold low which washed out stops in most major markets before reversing aggressively higher. With market prices now some 8% - 10% higher, key zone resistance upon us with the likes of 50% retracements and numerically pleasing eye candy such as “Dow 11K! and Naz’ 2500!” being tested; this strategist has to give the benefit of the doubt to the bears.

The only missing ingredient for being overtly bearish would be the VIX ($VIX) which hasn’t yet flashed short-term overconfident behavior based on its relationship to its 10SMA. Currently, the differential stands near 8% versus the benchmark 15% or greater reading we like to use as a signal for anticipating a bit of short-term mean reversion of prices. That said, with the VIX off 23% from highs of 47% to our current level of 36% and testing the 50SMA as potential support; it doesn’t seem like a good time to be loose with any long delta positions.  

If our technical assessment is wrong and market prices manage a rousing and supportive response, a bullish intermediate-based FTD or follow-through day could signal, if the reaction is strong enough. While generally this event is good news for growth strategists; short-term the market would likely be overbought and prone to near-term weakness. As much, it wouldn’t represent the best time to set forth on that type of bullish journey.

Finally, another technical tell for bulls to act cautiously is the thin number of properly constructed bases which support solid growth leadership for the market. Instead, the market has been fueled by something akin to a dead cat, umm bull, bounce. Net, net and as the story goes, while all known bull markets known to man maintain a FTD within the first one to two weeks of a corrective low; not all FTD’s lead to successful bull runs.

MARKET LAB
Bullish Technicals

  • Third Year Presidential cycle.
  • First Week Effect.
  • Double bottom Naz’ 100 and flush reversals SPY and DIA with VIX confirmation.

Bearish Technicals

  • 1930 Bear Market Rally repeat states EW Intl.
  • 10-Yr. anniversary mark of ATH top in broader market.
  • “Worst Six” calendar after historic run.
  • H & S weekly top SPY and trendline breakdown.
  • SPY’s -19.70% correction “good enough” for 20% bear market label.
  • Bearish flag pattern SP-500 and H & S continuation pattern DJ-30.
  • Market seasonality.
  • Classic three day bear rally into Fib / numerical resistance.
  • VIX test of 50SMA following 23% pullback.
  • Lack of technically correct growth stock leadership vs. dead cat bounce.

RADAR WATCH

It should come as little surprise, we’d want a market average like the DJ-30 (DIA) as a component. And it is, however, as an addition last Wednesday, the bearish EBOT / continuation H & S set up should have already proved a boon for bears.

While both patterns remain intact, the fact is Friday morning prices stand to be at fairly different levels than Thursday night’s close. As much, we’ll leave it on the radar but under the realization if the market breaks recent highs and signals a FTD; the option to close out favored hedge hog positions like verticals makes sense and likely cents too. 

Finally, we’re doing a little deserved clean up in a volatile market that’s given bulls and bears opportunity, as well as anxiety at times, to be quite sure. In order to make room for some fresh watchlist prospects in the coming week, eBay (EBAY) from the Bulls Radar and Disney (DIS) from the Bears Radar are being dismissed after decent runs and now stale patterns.

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

Company

Symbol

 Sector

Earn.

Tracked

  Pattern

Strategy

Molycorp

(MCP)

Metals

8.11

7.27

Weekly Up

D-Collar

Table 1: Bull Watch list

Non-Directional

Company

Symbol

Sector

Earn.

Tracked

Strategy

NA

NA

NA

NA

NA

NA

Table 2: Basing Watch list

The Bears

Company

Symbol

Sector

Earn.

Tracked

  Pattern

Strategy

Juniper

(JNPR)

Network

10.25

8.16

Lateral

Bear Vert

DJ-30

(DIA)

Market

NA

9.29

H & S

Bear Vert

Table 3: Bear Watch list
 

Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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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