Growth Stock Swing Option: February 24, 2011

Chris Tyler, Optionetics.com
February 24, 2011

MARKET ANALYSIS

Following back-to-back losses and a surging extreme in the VIX, a fast money “buy the dip” play looks imminent. However, don’t expect a long-standing, “business as usual” trend to resume anytime soon. For the two day period and following a technically-extended run on various time frames, the SP-500 (SPY) is off a rather minor -2.65% with an overdue change in character looking to take hold.

Key highlights for bulls buying the dip after more than a few good months:

•VIX Stretch short-term signal and apparent fear-based testing secured.
•Earnings from Lowe’s (LOW), Chesapeake (CHK), Home Depot (HD)
•Bulls snap up better-than-expected three year high in consumer confidence report.
•Existing home sales beat of 2.7% growth and Toll Bros (TOL) upside surprise.
Key highlights for “selling a little sumthin” for slightly less than “the top”:
•Technically long in the tooth and mostly complacent bull entering the week.•Libya threatens bulls where it hurts most, by turning off its oil supply.•Moody’s counter’s Japan’s optimistic central bank call from last week with a “Negative” rating. •Hewlett Packard (HPQ) and Fluor (FLR) issue mixed to below views guidance.Market Outlook

Figure 1: ProShares Ultra SP-500 (SSO)

Following what must be two torturous days of selling for naked longs, is the SP-500’s decline of -2.65% actually enough? By corrective measures, the answer is likely “not really.” And judging by Thursday’s premarket, some confirmation of that point looks apparent as well as the broader market average is set to open down about -0.45%.

The reality is a minimum move of -2.00% to -5.00% over a quick span of 3 to 5 sessions is more normal than not, despite what’s been the standard of late during an atypically strong and tenacious trend. Furthermore, that same long-standing confident behavior generally has a way of technically, biting back hard. During such times, like now, traders are collectively caught ‘long and wrong’ and mentally hardwired for the quick bargain-hunting rebound and subsequent resumption of more good times.

On a more positive note, with Thursday’s opening promise of lower prices, faster money bulls do have short-term overbought extremes and actual fear in the CBOE Volatility Index ($VIX) to support their case with a differential in excess of 25% in comparing the spot to the 10SMA.

Differentials in the VIX over 15% are typically strong signals for imminent short-term reversals in the market and sometimes larger ones as well. However, in considering the market’s devilish run of more than a double off the March 2009 lows of 666 or the more recent and strong in its own right, gains of nearly 28% since September and a still intact and hefty 25%; mean reversion in the VIX looks to be strictly a fast money play and takes a backseat to a long-in-the-tooth intermediate trend long overdue for a likely change in character.

MARKET LAB
Bullish Technicals

•Seasonally strong “Best 2 Plus Months.” •Third Year Presidential cycle.•“First Week Effect” with gainer signaling bullish 2011.•Short-term VIX Stretch signal Monday and Tuesday with 200SMA / Nov testing.Bearish Technicals

•1930 Bear Market Rally repeat states EW Intl.
•10-Yr. anniversary mark of ATH top in broader market.•Current levels in SP-500 in conjunction and weekly RSI.•Investors Intelligence bulls, AAII, NAAIM, Market Vane & Consensus Survey.•Extended 12 to 14 weeks from November pullback, 23 – 24 weeks from September lows.•Trend persistence physics of countering the bull. RADAR WATCH
Last week we emphasized how additional upside in the likes of Bull Radar constituents Qualcomm (QCOM) and RIM (RIMM) were “worthy of paying oneself by adjusting any held long deltas into a more secure profit lock whichever way shares may go from here.” As well, we surmised “fear rather than simply good natured cheer” was appropriate given the bounty delivered and overall technically tenuous circumstances being the end result.

With confirmation of those observations now in hand and positioning that should have more than weathered the market’s technical fallout thus far, it’s time for a little cleaning up of the radar as we wait for oversold conditions to dissipate and anticipate a shift towards a bearish watchlist in the coming week.

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

Company
Symbol
Sector
Earn.
Tracked

Pattern
Strategy

Netlogic
(NETL)
Semis
2.2
1.5.11
C-w-H
Bull Vert

Rare Element
(REE)
Metals

1.27.11
W4 Pullback
Married put

Table 1: Bull Watch list

Non-Directional

Company
Symbol
Sector
Earn.
Tracked
Strategy

NA
NA
NA
NA
NA
NA

Table 2: Basing Watch list
The Bears

Company
Symbol
Sector
Earn.
Tracked

Pattern
Strategy

Cisco
(CSCO)
Network
5.10
2.23
Bear Channel
ATM Put

Table 3: Bear Watch list

Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
Optionetics.com ~ Your Options Education Site