MARKET ANALYSIS

A bull long in the tooth is looking a bit less goofy with Monday's profit-taking. For the two-day period, the S&P500 (SPY) is off 0.91% and frustrating those that didn't doubt the Jones' levitation act of eight-straight days.

Key highlights for schnitzeling a little for the two-day period:

• Technical pick-up of speculative small cappers.
• Near parabolic momentum in government-owned zombies (AIG, FNM, FRE) on investor optimism and short-covering.
• Barron's witch hunt on investors' overzealous behavior in AIG.
• Inability of market to hold opening and festive gains Friday on tech (DELL, INTC, MRVL) and retail (TIF, JCG) reports.
• Corrective move in Asian markets underway including "red chutes" China / Shanghai.
• Subdued profit-taking stateside due to end-of-month window-dressing.

Key highlights for buying the latest pullback:

• Chicago PMI hits 50%, besting views and strongest reading since Jan 2008.
• Dell beat and Intel's guidance and margin raise on Friday have bulls delighted about IT business spending prospects.
• A quieted Merger Monday with "Goofy & Co's" Disney (DIS) buying Marvel (MVL) and Baker Hughes (BHI) snapping up BJ Services (BJS) for 29% and 16% premiums.

Market Snapshot


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

At its-not-so worst of the past two sessions, the broader market has given back slightly more than last week's 2% pullback in the S&P500. That being said, not much has changed for this market observer. The expectation for a larger and minimum corrective move of 5% to 10% still remains in focus.

After a fifty-plus percent move over six months in the S&P500 and even everybody's favorite growth miracle i.e. China getting trimmed of its once sprouting green shoots in a market correction, bulls have little to hang their party horns and portfolios on. The one ace in the hole which bulls continue to hold is the VIX.

Levels in the VIX have continued to thwart any signals suggesting short-term overconfidence via the VIX Stretch. If there were true complacency, typically a component of market tops, that wouldn't be the case.

As it stands, that indicator which measures the cash price differential to its 10-day moving average has quickly moved slightly above the slower line and even further away from showing signs of irrational bullish exuberance.

Secondly, implieds overall remain bid above statistical underlying movement, also suggesting a cautious investor and not the type associated with being the last to hold the proverbial bag. Finally, when axing out the past year's historic price swings, premiums near 27% are much closer to past extremes than not.

Does the current VIX dilemma mean the market will continue to rally? I personally like to think those factors do carry some weight. However, given the volatility in the market I don't believe it pre-empts a 5% to 10% corrective move. In the scheme of things, that type of price action would still hardly represent anything but a well-deserved price schnitzel within a market uptrend that would (ultimately) still be intact.

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 98 - 100 first corrective support zone of notice.
• Pre-holiday and "first of month" monies tendency to keep bulls smiling?

Bearish Technicals

• US "Jobless Recovery!" green shoots versus China's "red chutes" of late.
• 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

I've added Sears Holding (SHLD) to the Bears Radar. The department store operator had a negative write up in Barron's last weekend which suggested shares could be cut in half and into the low 30s. As of Monday night, shares of SHLD closed at 63.45.

Over the past week SHLD has consolidated in a bearish flag pattern after gapping substantially lower. The mostly lateral price action has developed with the 50-day moving average acting as resistance. The potentially bearish set-up is also a first consolidation after finding shares breaking a weekly uptrend line due to investor reaction to the article.

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.