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Weekly Outlook: July 2, 2012

By Chris Tyler, Optionetics.com | Sun July 1, 2012 6:02PM PT


Will bulls go back to work following a very sunny end to a sometimes gloomy June? With easing credit market concerns, Friday’s monthly jobs report is likely to shed some light on the situation. For the five day period the SP-500 (SPY) is up 2.0% and asking for a second chance at “following through” properly for bullish investors.

THE WEEKLY NUTSHELL

  • “Gloomy June Monday.” SP-500 forges a game-breaker for Friday’s bargain-hunters as bearish gap and continued pressure push the index 1.60% lower and below key 1320 – 1325 support. Motivation is largely ode to Spain’s formal request for 100.0B Euros to recapitalize its banks despite prior week’s stress tests suggesting 52.0B – 62.0B as sufficient. In turn, trader concern sees upcoming EU Summit as unlikely to yield any economic / political inroads with Germany unwilling to budge on requests for largesse from its needy constituents. Intraday word of Greece’s newly-appointed Finance Minister resigning and Cyprus asking the EU for assistance, assist in the day’s bearish turn. Stronger-than-forecast new home sales of 369K versus 350K estimates go largely unnoticed. The VIX ($VIX) tops last Thursday’s highs to close narrowly above 20% with 12.5% jump and wedged between its 10 and 50SMAs.
  • “Just Tuesday.” SP-500 finishes up 0.45% in narrow inside trade despite looming Summit, weak Spanish debt offering and Germany’s Merkel stating Europe will not have shared liability for “as long as she lives.” Tuesday’s relief bid finds Case Shiller report supportive as sale prices drop by milder-than-expected 1.9% versus forecasted dip of 2.5%. “Strategic option” explorations for both News Corp (NWS) and Best Buy (BBY) and strength in the energy complex (XLE) assist bulls as well.
  • “Wins-Day for Bulls.” SP-500 finishes up 0.90% as bulls challenge the EU Summit on a quiet first of two sessions for European policymakers. Repo operation and China Securities Journal noting possible proactive policies by China’s central bank finds bulls wallets on reignited stimulus hopes. Stateside, pending home sales make it three in a row for housing data as May sales climb 5.9% versus 0.5% estimate. Homebuilder Lennar (LEN) also reports strong results. Durable goods see better-than-expected total orders of 1.1% and more than double Street views of 0.5%, but come up short axing transport component with 0.4% increase versus 0.7% forecast.
  • “Gavel & Hammer Thursday.” Ultra-volatile session marked by first half pressure with SP-500 down about 1% is handed guilty verdict based on additional Merkel “not on my watch” comments regarding shared debt liability with EU constituents. US Supreme court upholds “not guilty” constitutionality of Obamacare. Q1 3rd est. GDP matches with flat 1.9% reading and weekly claims dip 6K to 386K and in-line with Street views. Final 90-minutes produce compelling rally with SP-500 hammering out modest 0.20% dip on stronger volume reversal as quick-to-circulate buzz of Italy and Spain potentially obtaining additional short-term financing backed up by cancellation of EU Summit press conference.
  • “Follow-Through Friday.” SP-500 scores unexpected “day 4” 2.49% FTD signal assisted by monthly, end-of-quarter window dressing, short-covering and trigger catalyst of Germany’s bearish rhetoric replaced by bullish end of regulation play EU Summit agreement as European Stability Mechanism is formed, measures to slash Italian and Spanish borrowing costs are provided and allocation of 120.0B euros to the EIB to assist in stabilization of Eurozone banks is quickly agreed upon. Modest but in-the-ballpark “oh and aw!” stateside data on income and spending, Chicago PMI and Michigan sentiment are unsurprisingly given little attention given built-in Euro-surprise bid. Bank sector (KBW) shows relative weakness with 1.0% gainer as JP’s (JPM) Jaime “Pinocchio”  Dimon sees firm’s “Whale size” loss grow larger and Barclay’s (BCS) comes under scrutiny for LIBOR manipulation.  

WEEKLY CALENDAR OF KEY UPCOMING EVENTS

Monday:
Economic: ISM (52.2), Construction Spending (0.2%). Wildcard Eurozone credit markets and mused question of “the world is saved” follow-through versus “long road yet ahead” profit-taking.

Earnings:
Acuity Brands (AYI).

Tuesday:
Economic: Factory Orders (0.4%), Auto & Truck.

Earnings:
NA.

Wednesday: US Holiday
Economic:  US reports NA.

Earnings:
NA.

Thursday:
Economic:  ISM Services (53), ADP (105K), Challenger Report, Weekly Claims (385K), Continuing Claims (3.28M), Weekly Inventories.

Earnings After Hours: Xyratex (XRTX).

Friday:
Economic: BLS Jobs Report (NFP: 100K, NFP Private: 105K, Unemployment 8.2%).

Earnings:
NA.

TECHNICAL OUTLOOK

Figure 1: SP-500 (SPY) Daily Chart

If bear market rallies are defined by fast and furious action, Friday’s 2.50% gain in the SP-500 or the NASDAQ’s 3.0% spike, could certainly qualify. The difference here however, at least according to some market watchers quickly and almost inexplicably shifting gears and declaring an uptrend in the broader market is the point of large volume accompanying the price thrust. But was it really “good, healthy” volume and what about the thrust itself?

Playing devil’s advocate and / or at least allowing investors to consider variables disappointingly overlooked elsewhere, one potential thorn in Friday’s signal is the session marked the end of month and quarterly closing of books. As much, the argument for artificial levels of so-called “institutional support” might come under closer scrutiny. This seems all the more approachable given the very recent FTD / “confirmed rally” on June 15 received just that sort of attention due to the expiration of the June contract and “Quadruple Witching” with its potential artificial impact on volume with that day’s signal.

Questions surrounding Friday’s FTD don’t stop there either. “The count” itself, so instrumental in setting up the signal is also a bit flawed. Used as a way to keep bear market rally reactions out of the mix as prices set new lows, Friday’s count of just three days (NASDAQ, DJ-30, NYSE, Russell 2000) was early compared to the classic Day 4 – 7 window. In fact, only the SP-500 qualified as having been positioned four days into the count off a potential rally attempt low. The last we checked, one against five or more indices isn’t exactly robust confirmation.  

Finally, as the signal comes just four days after the market’s last “confirmed rally” was reversed into “market in correction” and one which carried the stigma of being “suspect” due to the weak record of June and July signals amounting to anything substantive historically, how does an end of June FTD mitigate that increased risk, especially with all our fore-disclosed evidence? Not easily, in our opinion and instead embodies the sort of grayness which deserves extra consideration by investors.

For all the apparent pooh-poohing of the FTD itself, we personally tried to remain bullish in recent days. In fact, as recently as Thursday morning’s Market Barometer column, we laid out the bullish case on the caveat the VIX ($VIX) needed to remain below its highs of 21.36% set on Monday’s signaled “market in correction” trend change. The sentiment gauge did manage to remain below that line in the sand, which if breached in our opinion, would potentially manifest itself into more volatile bearish conditions.

“Kudos, I suppose?” Almost. At the time we also drew the line in the sand for the SP-500 to hold 1320 – 1325 lest bulls wanted to face the increased risk of running into a technically nasty bear. That raises the question of “breach versus a closing break” as Thursday’s first half pressure below zone support certainly made our warning seem like an increasingly real consequence. However, a final 90-minute rally and close back above that same key area offered a more bullish conclusion. At the end of the day, quite literally, bears failed with their own attempt at follow-through and instead helped the SP-500 establish a higher and slightly above average volume bullish hammer.

So, where is it that we stand entering Monday? We’d be cautious about entering afresh despite potential first-of-month inflows and typical bullish pre-holiday bias coupled with a raw look at Friday’s technical damage to the bear case. Likely more important, with the VIX near recent lows and about 10% below its 10SMA; short-term complacency readings could be easily triggered. Such a differential (in excess of 15%) would serve as a warning against entering afresh into the market, with a priority given to reducing long deltas until Friday’s large move is digested through positive-looking or constructive time and / or price feedback. With recent key highs in the majors also close to a full-fledged test, it’s not hard to construct a situation in which bulls challenge those levels with a false breakout and complacency readings in tow, only to find some less gratifying profit-taking take hold until conditions neutralize.  

MARKET LAB
Bullish Technicals

  • First Week Effect 2012.
  • Corrective “closing” low into key 1278 – 1300 support for SPX.
  • 8-week correction with weekly Kings & Queens candle reversal low pattern.
  • Second FTD signal Friday 6.28.12.
  • VIX back into historically “normalized” levels.

Bearish Technicals

  • Fibonacci based butterfly completion around test of 1400.
  • SP-500 daily downtrend established entering Worst Six period.
  • Historically weak June and July FTD signals.

 

Index or Sector Proxy

Ticker Symbol

Support

Resistance

SP-500

($SPX)

1320 – 1325, 1300, 1278

1365, 1387, 1400

 

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. 

 


Recent articles by Chris Tyler, Optionetics.com


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September 20, 2012  -  Wall Street's Thursday Lunch Options
September 19, 2012  -  The Expected Move: Bed Bath & Beyond Earnings
September 19, 2012  -  Wall Street's Wednesday Lunch Options


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