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TFC Commodity Trading Forum

Wall Street's Friday Lunch Options

Chris Tyler, Optionetics.com
February 25, 2011

With sentiment rather than the VIX on the rise, investors are on the prowl for bargains after a slightly larger than normal price dip. As of 11:10 ET the SP-500 (SPY) is up 0.90% as bulls go shopping from a now simpler-to-handle three day pullback off one notorious, but far from the last, layer of technical support.

For Friday’s bulls, the session's first half grazing isn’t entirely lacking support. Technically, the SP-500’s “1300” level held after a brief intraday shakeout Thursday and which made a fine “tail end” to a now easier to point out three-day simple pullback.

Secondly and as advertised on these pages the past two days in detail, there’s the CBOE Volatility Index ($VIX). After a long period of more complacent than not price behavior, the VIX could actually be embraced as a fear gauge once more.

During Wednesday’s and Thursday’s sessions the VIX flashed a market buy signal with its short-term “+25% VIX differential or stretch” relative to its 10SMA. As the price action was also testing its extreme November highs and 200SMA, faster money, contrarian bulls had good support to revel in.

There’s also the technical drilling in black gold (USO) that bulls are more than a bit happy to see. After a sharp three day price spike on Libya’s spigot threats, oil reversed hard to the downside during Thursday’s second half. The purported catalyst of Libya’s Khadafy being shot proved a well-placed rumor, but nonetheless price relief in the futures market has still acted to improve investor sentiment from panic highs focused on hyperinflation and rampant “$5.00 a gallon” trader talk.

Friday has doled out a couple of its own supports as well. Intraday, investors already bent on shopping received a boost from a report on consumer confidence for February. A reading of 77.5 not only bested views of 75.1but also reflected the index’s strongest levels since prior to the Lehman fallout and ensuing and not entirely cleaned up financial crisis.

In the sector spotlight, the heavily-weighted and influential financial sector (XLF, BAC, MS, STI and MA) has acted as another bullish underpinning. The XLF is up 1.35% on general bargain-hunting jollity, sans AIG (AIG), and courtesy of a Goldman (GS) upgrade to Wells Fargo (WFC).

Shares of WFC were placed on Goldie's esteemed Conviction Buy List this morning. That action has been good for a haughty little gap above 50SMA resistance and gains of nearly 4%.

Elsewhere on the corporate side, some well-paid adulation for earnings has mostly benefitted market bulls. In the spotlight, Naz’ 100 software outfits Salesforce.com (CRM) and Autodesk (ADSK) are up 3.00% and 6.50% respectively.

For its part, “cloud computing” and CRM specialist Salesforce.com managed a top and bottom-line beat but issued mixed to slightly below views guidance. Trader reaction, while still showing decent-sized gains, has made a hard turn for the worse. Some “technical cloud cover” could be developing due to a slightly ill-formed “W” or high-level double bottom base.

Fellow Naz’ constituent First Solar (FSLR) has gone down in flames following its mixed report. The company beat by $0.04 on earnings of $1.80 per share but saw softer sales of $610M compared to estimates of $648M and representing a year-over-year drop of -4.8%.

Looking forward, for its fiscal year management sees above views earnings of $9.25 - $9.75 vs. $9.12 per share on in-line sales. Intraday, FSLR is off -5.00% and nearing a test of key technical support of prior highs in and around the 152.50 – 153.50 area.

Finally and in those sometimes accurate heat-seeking option markets, option traders are kinda, sorta tagging along with AIG’s (AIG) bearish breakdown. Shares are off by about -5.50% following its unbelievable, yes “unbelievable” beat of $33.58 on profits of $16.60 per share; which according to analysts “may not be comparable” to other bean counting standards. “Duh.”

Looking forward, AIG management guided FY10 earnings and sales “in-line” with Street views in a still far-from-simple report to read. Despite Friday’s bearish reaction in shares; call activity has been favored by a 1.50-to-1.0 margin over puts. However, implieds in the 40s remain indicative of investors yearning for protective strategies as the promise of a confident volatility crush and low-lying lateral support for shares have fallen to the wayside.

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