Chris Tyler, Optionetics.com
March 16, 2011
Caution prevails in oversold conditions Wednesday on an ever-growing nuclear threat and its potential impact on global economies. As of 11:10 ET the SP-500 (SPY) is contained but intraday fallout of -1.30% is quickly building as bears look for a full court press of yesterday’s March Madness lows.
An excessive differential or “stretch” in the CBOE Volatility Index’ ($VIX) of more than 25% yesterday and retest of the January 1 year-to-date lows proved enough reason for bulls to mount a bargain-hunting campaign during Tuesday’s reversal campaign off an opening loss of nearly -3% in the SP-500 to log a closing loss of just more than -1.00%.
Unfortunately, the same appetite for bargain-hunting can’t be found (well, just yet at least) during Wednesday’s trading session. In fact, following a brief blip into positive territory and in less than the time it takes to build two five-minute chart candlesticks, the broader market plunged into a full-fledged retest of Tuesday’s lows and then recouped more than 50% of those losses in a similar showing by the ultra-fast money.
The volatile intraday dump and pump follows comments from an EU energy official citing the “possibility of catastrophic events” but minutes later; learned to be more of an investor update from yesterday’s color commentary, according to Briefing.com.
In those intertwined markets of notice, extreme investor risk aversion has put a flight-to-safety bid into the US treasury market. The 20-Year (TLT) is up 1.00% with yields at year-to-date lows.
Technically, Wednesday’s price action in TLT is confirming a weekly double bottom of ten months completed in early February and a now developing, nascent uptrend off pattern lows.
Black gold (USO), traders’ global currency of choice during these still uncertain times in the Middle East, is up 1.00%. Today’s bid follows a plunge of nearly -3.75% into a riskier-looking, gravestone doji reversal pattern—and as part of an admittedly, complex and ever-volatile uptrend.
The headline price driver in black gold is attributed to escalations by the Saudis in Bahrain, while a weekly inventory report which saw supplies build by a larger than expected 1.74M barrels compared to forecasts of 1.30M, has rightfully received a bit less attention and respect than is usual.
The historic safe haven of gold (GLD) has also proven slightly more precious Wednesday. Shares of GLD are up 0.45% following the metal’s own failure to provide safety in the midst of investor panic—and one unlike the run-of-the-mill geopolitical kind, typically conducive to hoarding.
And the CBOE Volatility Index ($VIX) has beefed up its status as a fear gauge. With the described intraday attack of Tuesday’s lows in place, the sentiment tool is up 8.50% after hitting 27% and a fresh six month high while eclipsing yesterday’s high of 25.72%.
As noted prior and still the case, the well-watched and historic, “overly fearful” 30% level in the VIX hasn’t been tested but the short-term stretch between the cash and 10SMA remain at extreme levels typically pleasing for fast money bulls looking to play a higher probability bounce.
In stateside and officially-sanctioned economic news, data has once again proven quite secondary but also disappointing this time around. February housing starts saw a startling -22.5% drop to 479,000 annualized units compared to Street views of 575,000.
The slip in housing starts is the most severe month-over-month in more than 25 years and marks the index’ weakest pace in two years. At the same time, building permits fell for a second straight month by -8.2% and following January’s -10.2% decline.
Separately, producer prices for February rose by 1.6% and their sharpest in almost two years. However, axing the little things such as food and gas, analysts were pleased to learn forecasts of 0.2% matched today’s actual data.
Finally and in those sometimes accurate heat-seeking option markets, “It’s clean, it’s ours and it’s our bridge from oil dependence.” That once popular promotion for natural gas from T. Boone Pickens may be gaining traction in the likes of Chesapeake Energy (CHK).
Shares are up nearly 4.00% and climbing higher within a loose four-week consolidation pattern which found support off its 50SMA as bulls continue to embrace safe and abundant, alternative fuel sources beyond nuclear and of course, oil.
Option bulls in CHK are acting sympathetic towards that end as calls outpace put activity by a margin of more than six-to-one on above-average volume of 30,000 contracts. Most popular are the slightly out-of-the-money March 35 call with roughly 3,300 contracts changing hands.
Priced for $0.50 with shares of CHK at 34.50, a bull would need an additional 4% of upside in order for the contract to double in price to $1.00 by expiration. While that might sound approachable for something that could prove to be the US’ bridge to the future; with just two days to construct those gains, I’m thinking more educated bulls are rolling out or exiting in today’s most active, less-than-hot spot.
Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
Optionetics.com ~ Your Options Education Site
