MARKET ANALYSIS 

Ultimately unimpressive “Full Monti” theater and “Fitch-edy” bearish credit market momentum put bulls to the test entering Friday. For the four day period the SP-500 (SPY) is off 3.15% and challenging key support, while more than a few bulls look to have already expired.

Key highlights for bulls buying on the down (but not out) low:            

• New Italian and Greek government’s approving additional and fresh austerity measures.
• Stronger-than-expected retail sales, solid weekly claims, PPI and CPI data, housing starts and surprising jump in building permits.
• Italy’s “Full Monti” address from new Italian PM Mario Monti finds bulls cheering.
• Technical “Best Six” positioning.
• Market loves uncertainty.

Key highlights for bulls “sell-e-brating” the “Best Six”:        

• Failing investor risk appetite turns fearful.
• Fitch’s “nothing new” but fire-stoking warning of credit contagion risks and possible US outlook downgrade.
• Dell’s (DELL) slightly disappointing forecast.
• Weak outlooks from NetApp (NTAP) and Applied Materials (AMAT) on Thursday.

Market Outlook

Figure 1: SP-500 (SPY) Daily

With Wednesday and Thursday’s one-two punch of heightened risk aversion, price action in the likes of the SP-500 (SPY) has taken a turn for the worse and made the first couple weeks of the notorious “Best Six” period less than hospitable to bulls. Technically, with prices closing near 1215, the SP-500 is in a position of key testing which stretches down to the 1190 area. Below this somewhat loose zone of support but one rightfully justified by stiff volatility, there’s going to be the next technical line in the sand to defend, the one after that, etc…

Our view at this point and as has been the case, regardless of your directional bias, trimming those deltas with softer delta strategies and cutting position size appear a smart means to surviving a market with much less rhyme or reason than usual. Buying weakness and selling strength have also worked, but the feeling is that trade is probably closer to being late than early with that trend. It’s why above we hinted at being careful of buying potential support.

Back to that first and nearest area to potentially defend, we’ll be watching the VIX ($VIX) for clues as to whether sentiment is panicked enough in the short-term relative to the 10SMA, as to afford a bottom in the broader market. With the VIX already having failed a handful of times at reclaiming sub 30% and moving into more constructively normalized levels of sentiment conducive to a stronger and longer lasting rally of intermediate notice; we have our doubts about a bullish resolution. That said, we’d be remiss to turn a blind eye to a fast money opportunity when the mad money gets into serious panic mode.   

MARKET LAB

Bullish Technicals

• Third Year Presidential cycle.
• First Week Effect.
• October’s historical record for producing bottoms.
• Bullish breaking of prior flag and continuation H & S patterns.
•  “Best Six” period for market.
• SP-500 testing key 1190 – 1215 area.

Bearish Technicals

• 1930 Bear Market Rally repeat states EW Intl.
• 10-Yr. anniversary mark of ATH top in broader market.
• H & S weekly top SPY and trendline breakdown.
• Bear market time and price labels still in effect for some.
• VIX’ing move back through 30% and three strikes scenario for bulls.

RADAR WATCH

Given what’s been stated above and seeing how our Bulls Radar has three constituents already, there’s no room for improvement there. Further, with both Google (GOOG) and DR Horton (DHI) still “handling” their charts well, all things considered, I’d be hard-pressed to locate stocks in better position technically right now.

As for our third watch list candidate, we haven’t talked much about Molycorp (MCP) in recent weeks. However, what was being tracked for a while as a dynamic collar position in series of Hot Shots articles has continued to offer nice adjustment opportunities with a nice-sized round-turn move over the past month.

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
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.