Entering the week, bulls look to labor with profit-taking against technically limited and sterilized upside. For the four day period the SP-500 (SPY) is up 2.21% and at fresh four-year highs, but looking less constructive against key resistance and as sentiment closes in on optimistically fearful behavior once again. 

THE WEEKLY NUTSHELL 

•  “Tricky Tuesday.” SP-500 finishes off 0.12% in decision doji formation after slipping below pattern and key 1400 support in first half. Imbuing bears and more cautious bulls into action, Moody’s cuts EU outlook from “Stable” to “Negative.” Mixed Eurozone PMI data with Germany, France and Italy falling short but Spain and UK topping views. Stateside ISM comes in with narrow miss while remaining in contraction territory with reading of 49.6 vs. prior 49.8 and estimates of 50. Construction spending also surprises with 0.9% decline vs. forecasted increase of 0.5%. Coal group (KOL) pressures energy (XLE) bulls as three year lows are hit following broker cut to Walter Energy (WLT), Peabody (BTU) and Alpha Natural (ANR).
• “Wins-Day for Hedge Hogs.” Narrow 0.12% doji dip candlestick. FedEx (FDX) below views profit warning tries to ground bulls out-the-gate. Report of “unlimited, sterilized” bond buying by ECB finds short-lived bid. Germany’s Dem Party head notes Greece can be assisted if “she does her homework” lifts country ETF (GREK) to leading 5.17% breakout gain. Mixed but mostly weak economic data generally “stimulates” bears, spearheaded by one year low in China’s HSBC PMI, Aussie GDP miss due in part to weaker Chinese commodity demand and dour outlook on China’s export strength from its finance minister. Stateside, revised productivity data jumps 2.2% vs. prior 1.6% reading and forecasts of 1.8%. Airlines (LCC, UAL) take-off following bullish August passenger sales report showing 4% year-over-year increase. Facebook (FB) benefits by nearly 5% on the heels of Jeffries “Buy” initiation, target of $30 and SEC disclosure and release CEO Mark Zuckerberg has no intentions to sell any of his 444 million share stake in next 12 months.
• “Nearly Unlimited & Non-Sterile Bullish Thursday.” Better-than-forecast triple sneak peek on US labor market, despite cutting into QE3 wishes, and ECB delivering on its “unlimited and sterilized” bond program send SP-500 up to a 2% gain and best levels in four years. By the numbers, ADP sees 201K increase in private payrolls vs. 143K estimate, weekly claims dip to 365K vs. 373K views and Challenger Survey cuts just 32,239 jobs, the lightest since December. Also, ISM Services data tops with reading of 53.7 vs. 53.0 and prior 52.4.
• “Technically Laboring, Limited & Sterilized Friday.” Weaker-than-forecast BLS jobs report of 93K vs. 130K forecast and July downward revision puts QE3 back on the table and allowing bullish momentum to technically extend itself into up-channel resistance. China stimulus rumors and pledges receive some confirmation with infrastructure projects announcement by government. And across the other pond, Spain and German import/export data top views, as does an input and output PPI report out of the UK. Keeping a lid on bulls activities, Intel (INTC) cuts its Q3 outlook below Street views. A confident VIX ($VIX) quickly moves towards complacency levels with a 10SMA differential of 13.25% and absolute prices within one point of the August and five-year lows.

WEEKLY CALENDAR OF KEY UPCOMING EVENTS

Monday:
Economic: Consumer Credit ($10.0B). Ongoing Eurozone “updates” remain on radar.

Earnings: Titan (TITN).

After Hours: Casey’s (CASY).

Tuesday:
Economic:  Trade Balance (-$44.0B).

Earnings: United Natural Foods (UNFI).

Wednesday:
Economic:  Import/Export, Wholesale Inventories (0.3%).

Earnings After Hours: Pall (PLL), Weatherford (WFT).

Thursday:
Economic:  Claims (369K, 3.3M), PPI (1.2% & 0.2% Core), FOMC Meeting (0.25%).

Earnings: Pier 1 (PIR).

Friday:
Economic: Retail Sales (0.6% & 0.2% ex-auto), CPI (0.6% & 0.2% Core), IP & CU (-0.2% & 79.2%), Michigan (73.3), Business Inventories (0.4%).

Earnings: NA.

TECHNICAL OUTLOOK

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

Late last week bulls had good reason to technically dismiss September’s historically bearish tendencies due to a double bottom pattern holding the 1400 level and mid-channel support and strong backing from the VIX ($VIX) for higher market prices. Confirmation from the sentiment index amounted to the sometimes euphemistically-called Fear Gauge validating its moniker by establishing three week highs, reclaiming more normalized and less complacent absolute levels in the high teens while finding a fairly staunch 10SMA differential of 14%.

Entering Monday and the described setup having proven its worth as the SP-500 managed a two-day rally of 2.42% to fresh four year highs, profit-taking looks likely to enter the picture. For starters, price action in the SP-500 is now precariously testing the up-channel resistance line. Secondly, the VIX, after aggressively reversing course, is back within one point of its August and five-year lows while showing a fairly tenuous 10SMA differential of 13.25% more closely aligned with complacency than supportive confidence. Net, net and for bulls to more confidently maintain the faith that historic tendencies won’t come home to ruse in 2012, we’d estimate a healthy and constructive pullback of 1% to 2% which holds the prior April closing highs and mid-channel support line would prove key to further upside momentum.

MARKET LAB
Bullish Technicals

• First Week Effect 2012.
• Third FTD signal on Thursday 7.26.12.
• Established 5 point uptrend off 30SMA and Channel line in SP-500.

Bearish Technicals

• Fibonacci based butterfly completion March / April.
• Worst Six period and notoriously bearish September – October period.
• Historically weak June and July FTD signals.
• Channel resistance hit in SP-500, failure of transports (IYT) and semis (SMH) to gain ground.
• VIX back near August and 5-yr. lows with tenuous 13.25% 10SMA differential.

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.