MARKET ANALYSIS 

“Day 7 Versus the Flag” awaits bulls and bears Thursday with back-and-forth love, hate credit market pulse-taking and corporate confessionals in the spotlight. For the three day period the SP-500 (SPY) is up 1.09% but with the benefit of the doubt still resting with the bear camp after an early and truly “Best Six” run for the market.

Highlights for bulls eyeing a FTD and counting the days:  

• China loosens trading band for yuan currency Monday.
• Retail sales and Housing Permits beat during three day period.
• Easing Spanish 10-Yr Tuesday following strong auction results.
• IMF upward revision from 3.3% to 3.5% for global growth forecast.
• iShares Bull ETF (AAPL) snaps back massive 5.10% after five day correction.
• Upbeat German economic sentiment survey.
• Generally good confessionals (STT, GS, USB, STX, INTC, IBM, ISRG) despite mixed investor reaction.
• “Day 7” of rally attempt / FTD count for SP-500 & Co.

Highlights for quant easing and taxing behavior below “SP-1400!”:  

• Less-than-delicious iShares Bull ETF (AAPL) performance for three day period.
• Empire, Housing Market Index, Housing Starts and Industrial Production miss views for period.
• Reignited sovereign debt concerns led by Spain and its record CDS yields.
• Spain’s financial health concerns rekindled after 13 banks apply for reorganization.
• Technical daily bear flag following weekly butterfly top for SP-500.

Technicals

Figure 1: SP-500 ($SPX) Weekly Chart

Entering Thursday and bulls aren’t caught between a rock and a hard place, but they are squarely caught between key levels of 1370 and 1400. Our technical view continues to give the benefit of the doubt to bears following an “early” Best Six run off the October lows which completed with a weekly butterfly top.

A corrective move from highs which has held a key support zone from 1343 – 1371 isn’t being dismissed. But in order to prove one man’s current bear flag isn’t the real deal and an early trend opportunity back into the bear’s lair, bulls will need to improve upon the recent pivot low with a high-powered follow-through day or FTD signal.

Tuesday’s “day five” gains were sufficient in percentage terms to signal a FTD. However, the price action failed to provide the necessary ingredient of stronger volume in the major cash indices.

In this increasingly arcane world of listed ETFs and all their double and triple rocket-fueled siblings; the volume requirement for a FTD might seem out of touch with today’s markets and how they work. However, as we’re willing to give the benefit of the doubt to a classic bear flag, we’d be remiss if we failed to do the same for another bullish classic as we enter day seven of the count.   

MARKET LAB
Bullish Technicals

• First Week Effect 2012.
• Final weeks of official “Best Six” calendar cycle.
• Recent fearful VIX trifecta signal as SP-500 tests key 1343 – 1371 zone.
• Watching for FTD signal this week for bullish trend change.

Bearish Technicals

• 1930 Bear Market Rally repeat states EW Intl.
• Bear market time and price labels still in effect for some.
• Historically weak FTD.
• Fibonacci-based butterfly into 1400 potentially completes.
• “Early and truly Best Six” period from October lows in place.
• Failure of Transports (IYT) to confirm, as well as small caps (IWM).
• SP-500 bear flag to compliment weekly butterfly top as market approaches seasonal Worst Six period.

RADAR WATCH

We’re adding the iShares Bull ETF (AAPL) to the Bears Radar below. After a 11% correction compared to the market’s own 4% schnitzel, why on earth would we see the need for lower prices? Our view is given the market’s long-in-the-tooth, three year run off a rather infamous March 2009 bottom and one clearly led by Apple with its dizzying 700% gain; if a new bull is to emerge (which we’re clearly skeptical of), new leadership seems much needed and appropriate. With simply outstanding option liquidity, there’s more than a few strategies to consider, but we see limited risk, out-of-the money bear vertical call spreads or bearish modified flies as two strategies of interest with earnings on deck next week.

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.