MARKET ANALYSIS

Back-to-back sessions hinting at a market top and bearish follow-through in Thursday's first half leads to yet another successful test of the proverbial "bid beneath the market." For the three day period the S&P500 (SPY) is up 0.43% and continuing to frustrate those Doubting Jones' amongst others.

Key highlights for aiding and abetting those "green shoots" and "buy the pullback" efforts:

• Better-than-expected new homes sales.
• S&P500 test of early August highs as resistance becomes support.
• Latest "reit" by Fed of maintaining rates for foreseeable future.
• Black Gold (USO) and commodity complex (GDX, SLX) and Financials (XLF, AIG) lead Mr. Market during Thursday's reversal on lower Dollar (UUP) and AIG buzz.
• Boeing (BA) spearheads for Dow with its increased visibility for Dreamliner launch.

Key highlights for not buying the latest pullback:

• By and large poor "tired" reactions by bulls to decent but likely discounted economic data (Case/Shiller, durable goods, GDP).
• Still very weak weekly claims data confirming a potential jobless recovery.

Market Snapshot

Figure 1: S&P500 (SPY) Weekly Inverse H & S or 50% "W"

The Dow Industrials (DIA) managed a technical feat not seen since before Art Cashin's time as a floor trader in putting together its eighth straight gainer in a row. Nonetheless, it hasn't exactly been an easy affair to do business as a bull. Three of those giddy "up" sessions sure looked a whole lot like some fancy candlestick concoction worthy of a bearish-sounding name like "Three Doji Bears Top."

After Thursday's upside reversal, we'd be remiss if we didn't add "Meets Goldie" as Mr. Market or as some surmise, Goldman Sachs (GS), doesn't seem to want to give up those green shoots just yet.

At its-not-so worst, the broader market did manage to shed about 2% in the S&P500. That's not much of a correction given where the market's come from the past five plus months. From there, the proverbial "bid beneath the market" showed up with no apparent signs of buyer's remorse and making the pullback a very shallow affair, all things considered.

Entering Friday, the chase is on it seems. In defense of Thursday's reversal and the bulls doing its biding, the lows did match up rather nicely with the early August highs. Hence, what was resistance did become text book support.

For the rest of us that didn't recognize Freeport (FCX) at $62 today as such a screaming buy like Joe T. of Fast Money, the uptrend in Mr. Market, while tenacious, does become increasingly fragile without a base or longer-term moving averages nearby to support the action.

Finally, this market strategist will continue to watch the VIX for a stretch of 15% below its 10-Day MA for a signal the trend has turned too comfy with investors. "Buying the dips", using options to afford a good offense and a stronger defense and not biting too hard on the market's current bullish swagger, makes more sense and likely "cents" than ever for this corner.

The following factors and anecdotal evidence might be considered relevant in determining a suitable, limited-risk strategy in the coming days and weeks ahead.

MARKET LAB
Bullish Technicals

• Historic corrective low.
• Breakout of daily / weekly downtrend from Sept 2008 highs DIA.
• Above the 50 and 200-Day MAs SPY.
• Weekly Inverse H & S being breakout from October lows. "MM" of 113 - 120.
• Broken 5 month / 5 week cycles and 38% retracement SPY.
• No VIX Stretch to suggest the bull has run its course.
• SPY 100 - 102 key support.

Bearish Technicals

• Reality check "Jobless Recovery!" versus green shoots pricing?
• Potential W5 Daily and W4 Weekly in SPY.
• 1930 Bear Market Rally repeat and "W" pattern SPY?
• Weak calendar months of September and October.

RADAR WATCH

Costco (COST) is being removed from the Non-Directional radar after being tracked within its lateral range for the past two months. There were plenty of opportunities for strategies such as neutral calendars to provide decent profits. However, knowing when to "Fold 'em or roll 'em" makes sense at this point. The past three sessions put together a definitive change of character as a high-volume breakout was forged.

From the Bears Radar, Shanda (SNDA) is being discarded as its bear flag below supports has reversed to the upside on accumulation after affording only minimal downside follow through.

McDonalds (MCD) is also being dropped after its symmetrical triangle breakdown failed to deliver on the downside and shares have managed to reclaim both the 50 and 200-Day MAs. And finally, Goldman (GS) is very close to losing its bearish H & S top. However, the name remains on the watch list until and if Mr. Market decides it's time to break another topping pattern.

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 Staff Writer & Options Strategist
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.