Chris Tyler, Optionetics.com
April 10, 2011

A handful of market heavyweights reporting Q1 results should help resolve how investors “handle” a lower high consolidation in the SP-500 this week. For the five day period the SP-500 (SPY) is off -0.32% with some likely stronger technical closure on its way, either one way or the other.

THE WEEKLY NUTSHELL

•“Harami Monday.” Bulls try and keep up appearances in tight inside pattern with 0.03% fractional finish with sights set on technical slam dunk of Feb highs while bears defend double top formation. Mostly mixed and lighter consequence reports on day. For the bears, the semis (SMH, INTC, and BRCM) see continued weakness on SIA report of -1.1% February sales decline and NVIDIA (NVDA) target reduction and “Neutral” reiteration. For hedge hogs, Britain’s matching PMI Construction data, Eurozone producer prices climb 0.8% and strong 60.2 PMI reading from China could spell additional monetary tightening. For the bulls, modest M&A related stake interests from Molycorp (MCP) and Vivendi’s $11.3B, 44% claim of French telco SFR from Vodafone (VOD).
•“Terri-bear and Terri-bull Tuesday.” SP-500 settles for another tight contraction doji (hangman) with loss of -0.02%, making for terrible pin action for bears and the majority bulls. Premarket pressure courtesy of China’s fourth hike to its lending and borrowing rate and momentary musing of impact on global growth by bulls. Out-the-gate drop in Apple (AAPL) as Naz’100 announces rebalancing of the No. 2 market cap’s 20% weight to 12.2% also weighs in early on. For the bulls, Texas Instruments’ (TXN) $6.5B / 74% premium bid for peer National Semi (NSM). ISM Services miss of 57.3 versus views of 59.5 nonetheless receives investors’ support after quick dip to session lows. Afternoon Fed minutes disappoints as officials pay closer attention to inflation data and some members favored tapering existing QE2 program on evidence of a stronger economic recovery.
•“Wednesday Humper for Bulls and Bears.” Another ingratiating and indecisive 0.22% doji makes it three in a row for SP-500. For the optimistically-inclined seeing a breakout to fresh highs, Portugal enjoys a successful debt auction, Cisco (CSCO) claims the leader board with its 4.94% gainer on bullish interpretation of “we messed up” internal memo suggesting change is on its way and pair of upgrades for Broadcom (BRCM) lifts ailing and influential semis (SMH) to recapture its 50SMA. For hedge hogs, Eurozone’s Q4 GDP unchanged at 0.3% growth and China’s PMI Services Index retreats modestly to 51.7. For the bears, Monsanto (MON) reaffirms its still slightly below views FY11 outlook, resulting in “hard-to-handle” technical profit-taking of -6.0% within “now” ill-formed cup base.
•“Dump, Jump and Doji Thursday.” Mixed catalysts work bulls and bears into a near-engulfing and non-too-fun fourth doji of -0.25% in SP-500 on the week. Second magnitude 7.1 quake rattles stateside bulls in first half but calamity spares nuclear facilities and Tokyo. Late Wednesday request by Portugal for financial aid gets digested, ECB raises rates 25bps as expected but first since 2008, weekly claims drop by slightly better 10K and same-store sales (COST, M, JCP) for March come in with 19th straight and stronger-than-expected 2.2% increase. Bed Bath & Beyond (BBBY) soars to fresh highs on above-views outlook for FY12, while tech bulls use Lam Research (LRCX) as a sacrificial lamb after Citi adds it to Top Picks List as a “Sell” recommendation. Black Gold (USO) hits fresh intermediate highs.
•“Bears Wake Up and Stretch Friday.” Lighter and mixed economic data in front of proposed US government shutdown and next week’s Q1 earnings kickoff finds bears putting together -0.40% engulfing candle into key weekly support. Wholesale inventories 1.0% increase matches views, German trade balance beats and Bank of France trims Q1 by one-tenth of a percent to 0.7% while country’s business sentiment is unchanged. US Oil Fund (USO) hits fresh highs with 2.64% gain on continued and unresolved Middle East conflict, weak dollar (UUP) and bulls still expectant of increased economic demand. Seagate (STX) reinstates dividend and points at upper range of outlook for Q3 sales, sending shares up 7.83% to retest seven month double top highs. And Expedia (EXPE) books 12.95% flight north to fill bearish gap after announcing TripAdvisor spin-off.
WEEKLY CALENDAR OF KEY UPCOMING EVENTS

Monday:
Economic: N/A.

Earnings: Nuclear-entangled engineering outfit Shaw Group (SHAW) reports. Analysts expect profits of $0.49 per share versus prior year’s $0.48, while bulls yearn for no additional hints of future fallout.

After Hours: Dow component and aluminum heavyweight Alcoa (AA) officially kicks off the Q1 earnings season. The company is slated to turn a profit of $0.27 per share versus the prior year’s $0.10. Technically, shares are attempting to successfully breakout of a multi-week cup base formed at its prior intermediate highs set in January 2010.

Tuesday:
Economic: Trade Balance (-$45.7B), Import / Export, Treasury Budget ($189.0B).

Earnings: Fastenal (FAST), ADTRAN (ADTN).

Wednesday:
Economic: Weekly Crude, Mortgage Apps, Business Inventories (0.8% vs. prior 0.9%), Beige Book.

Earnings: Dow component and financial giant JP Morgan Chase (JPM) reports. Analysts see profits of $1.15 vs. last year’s $0.74 per share. Technically, shares are developing cup-shaped base of several weeks which lines up with last April’s intermediate highs.

Other AM: ASML Holding (ASML).

Thursday:
Economic: Weekly Claims (385K vs. 382K prior), Continuing (3.70M vs. 3.72M), PPI & Core (1.0% & 0.2% vs. prior 1.6% & 0.2%).

Earnings: Check Point (CHKP), Fairchild (FCS), Hasbro (HAS), Progressive (PGR), Supervalu (SVU).

After Hours: Internet giant Google (GOOG) reports. Analysts expect profits of $8.13 compared to $6.76 in 2010. The April contract which expires the next session is priced around 41% IV and in effect pricing a 68% likelihood that shares of GOOG will remain within 6.50% of its current stock price.

Friday:
Economic: CPI & Core (0.5% & 0.2% vs. prior 0.5% & 0.2%), Empire (15.0 vs. 17.5), IP & CU (0.6% & 77.4%), Michigan (66.0 vs. 67.5).

Earnings: Technically dragging of late Bank of America (BAC) is expected to show flat profits of $0.28 per share. For the bulls, which this strategist favors currently, shares of BAC could be developing a three-month long double bottom base in and around 200SMA and Golden Cross support. For the bears, the same chart can be spied as having a series of lower highs.

Others: Genuine Parts (GPC), Infosys (INFY), Mattel (MAT).

TECHNICAL OUTLOOK

Figure 1: ProShares Ultra SP500 (SSO) Weekly

Entering Monday investors will be watching to see whether some bears reawakened Friday will come out for a bit more playing time. Friday’s price action established a weak, engulfing candle close into range supports of the past several sessions following a handful of indecisive dojis.

If the bears are able to follow-through with their efforts, the question of whether the market has been shaping a V-shaped base with handle or a lower high, double top pattern, will be confirmed.

As the market gets ever closer to finishing its “Best Six Months” in top form and as part of a two year historic run from 2009’s devilish lows of 666, I personally suspect the bears will be back. First and foremost though, I’d choose the softer delta option to attack, rather than hard-to-handle short stock when wagering against the bull.

MARKET LAB
Bullish Technicals

•Seasonally strong “Best One Month” remaining within “Best Six.”
•Year Three of Presidential cycle.
•First Week Effect.•Retro FTD on 3/24/11.•Cup or V-shaped base for SP-500 and still neutral short-term VIX Stretch.Bearish Technicals

•1930 Bear Market Rally repeat states EW Intl.
•10-Yr. anniversary mark of ATH top in broader market.•Trend persistence physics.•Two-year devilish double in SP-500 from March 2009 bottom.•Broken weekly uptrend in SP-500.•Potential double topping with VIX near nominally cheap / confident levels.

Index or Sector Proxy
Ticker Symbol
Support
Resistance

S&P500
(SSO)
52, 50, 48
53.50 - 55

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