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Change of Costume!

Posted By: USCoralSea
Date: Tuesday, 3 November 2009, at 5:19 a.m.

Tom Gentile, ProfitStrategies.com
November 2, 2009

Note: This week's Market Outlook was covered by Optionetics.com's Chris Tyler.

Bargain hunting treats turned into a nasty trick to close the week and month of October. For the five-day period, the SP-500 (SPY) is off 4.18% as bulls make an abrupt costume change on a worrisome firming of the US Dollar.

THE WEEKLY NUTSHELL

A "Moooving Monday" finds "early bulls" reversing in quick, hard-hitting bout of "complacent volatility." Early percentage gains courtesy of confessionals (RSH, GLW, VZ), upgrade of Schlumberger (SLB) and Friday's sell-off yield to fast unwind of the "Funding / Carry Trade" in dollar (UUP). SP-500 slumps two percent in fifteen minute span. Commodity based and multi-national beneficiaries of weak dollar and risk averse green shoots efforts provide bearish leadership. Word of Tier 1 downgrade for Monsanto (MON) aids pressured price action. Financials (XLF) shed 2.55% and break 50-SMA on closing basis for first time since early July with assist from analyst Dick Bove's "Sell" on SunTrust (STI) and Fifth Third (FITB).
"Two Out of Three Tuesday" as broader averages remain "mostly" under pressure. Third straight day of US carry trade unwinding and worse-than-expected consumer confidence data keep bulls underwater in SP-500 and Naz'. Baidu.com (BIDU) spearheads relative weakness for tech with its reduced guidance. For the Jones', across-the-pond assist from oil and gas giant BP (BP) finds sympathy bid in stateside index heavyweights ExxonMobil (XOM) and Chevron (CVX). Intraday buyback and dividend raise at IBM (IBM) aids and assists for DJ-30.
"Wednesday Humper" as fourth straight loss for SP-500 and break of coveted 50SMA weigh heavily on bulls with weak -1.87% finish. "Greenback" continues its run and cause for concern for amongst bulls. Sympathetic "sell the news" or under-the-carpet response to stronger-than-expected durable orders report. New home sales fall short of estimates. Technically oversold conditions as VIX scores stretch differential of 16% and SP-500 breaks 50-SMA on day four of 4.50% corrective move.
"Turnaround Thursday." Reprieve rally of 2.15% in SP-500 mirrors Wednesday's humper as bargain-hunting platform sends bulls gapping back above 50-SMA and trending higher through session. Better-than-expected "recession is over" 3.50% Q3 GDP report headlines for bulls, as does linked dollar profit-taking following four days of worrisome trend reversal price action.
Another "GOOG" Friday for profit-taking. Thursday's treat turns tricky as investors don their bear-wear on more of the same ol' but increasingly meddlesome shtick. Firmer dollar in its traditional spooky role of slayer of corporate profits and green shoots optimism headlines once more for bears. More corporate beats (KLAC and CVX) and in-line income and spending dismissed as percentage dropper puts month of October into loss column and technical breakdown of 50SMA finds VIX soaring nearly 25% to plus 30% reading.

ON TAP THIS WEEK

Another wave of Q3 corporate confessionals and more officially-sanctioned nuggets on the economic front are on tap this week. However, the last time we checked better-than-expected updates from companies and items like the recession being finished and growth roaring back at a stronger than estimated pace-didn't exactly leave a lasting impression with buyers.

In consideration of what's really driving investors, a very full docket (see below) is made much simpler. Cisco (CSCO) reports on Wednesday after the close. Analysts expect a drop of 25% in profits from the year ago period with earnings of $0.31 per share. The report from the world's largest network communications outfit will have traders weighing what its forecast means for IT business spending. Technically, Cisco's tea leaves are highly-correlated with the broader market's up, up, up and now less optimistic red chutes dominating the landscape. It's likely that connection will continue come Thursday.

On the economic side, there's Fed speak throughout the week as well as a bevy of anecdotal reports on how far disconnected the economy remains versus the market's own clunky ways of the past week. Likely garnering the most press is Friday's latest but still far-removed from the action, monthly job(less) data and whose favorably trending ways persist as being woefully weak.

In the interim, the US Dollar (UUP), investor sentiment agonizing over the unwinding of the carry or funding trade and attached green shoots getting uprooted in the process-are what matter most to the still disconnected bull camp

TECHNICAL PICTURE

Figure 1: S&P500 (SPY) Weekly Chart

The "NASDUCK" is back. Led by the technology-laden index, bulls encountered their most sizable losses (Duck!!) since March or July, depending on the instrument. Genuine fear is also back. The CBOE Volatility Index or "VIX" surged Friday to its highest close since early July and back above the historically panicked and storied 30% level.

Entering Monday and getting past the quickly forged losses for the month of October, the bulls still have room to fall on their own weight if we concentrate on the weekly view shown above for the SP-500. On the other hand, that same fast money shift in price and sentiment has pushed the market into an oversold condition short-term-the most severe since the notorious July lows.

"Sell the rip and be careful on the dips?" As much, traders might expect a bounce with Friday's slippery oversold slope in mind. Playing the move however, as a bull, could prove very difficult. That's based on both heightened volatility and the best counter moves occurring more and more these days on gaps, in this trader's observation. In saying that, I wouldn't bother chasing. The use of the now signaling VIX Stretch and plus 30% VIX need to be appreciated as tools, not the end all, say all in finding a playable low in the market of more than one to two sessions.

The fact is that oversold can beget more of the same, particularly after such a historic and disconnected run in the market relative to an economy that's still only clunking along at best. And if redirect our attention back to the weekly view, it's much easier to see any rallies as still being be short-lived affairs and opportunities to either lighten up or short the market until a larger and longer correction worthy of removing the "buy the dip" crowd from the market is in place.

MARKET LAB

Bullish Technicals

Breakout of daily / weekly downtrend from Sept 2008 highs DIA.
Weekly Inverse H & S being breakout from October lows. "MM" of 113 - 120.
Oversold conditions. VIX Stretch signal > 15% and plus 30% reading.
SPY testing lower and flattened Bollinger support.
Bearish Technicals

1930 Bear Market Rally repeat and "W" pattern SPY?
Third time the charm? Potential W5 Daily and W4 Weekly in SPY.
At 65%, market's run has "Come a long ways, baby." Green Shoots priced in.
Mostly long-term overbought market conditions.
Confirmed "Extended" 13-week topping as part of 13-5-15 cycle.
Q3 "Recession is over" data confirmation.
SPY resistance 107.50 - 108.
Oversold begets more oversold after historic rally.
Corrective support zone 99.50 - 102 testing still below Friday close.

Index or Sector Proxy
Ticker Symbol

Support 99.50 - 102
Resistance 105 - 106

Chris Tyler
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site

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