With the DOW threatening to break some very long-term support and the S&P 500 threatening to break last week's low, the blue chips aren't looking so chipper. But there are a lot of people still believing in a year-end rally and are not willing to give up the idea that it's better to be in the higher-performing, high-beta stocks for the anticipated run up. The techs and small caps continue to outperform to the upside and today's rally was no exception. The Nasdaq-100 (NDX) was out in front today with a +1.6% gain. It's good to see the generals out in front but sooner or later the troops need to be willing to follow. The Nasdaq (COMP) did well (+1.3%) but was a little less willing to challenge Tuesday's high as NDX did today.
Even the RUT is willing to let the tech generals lead this charge. Seems they're waiting to see if they got shot before venturing out onto the battlefield. In the meantime we had the DOW gaining a measly 34 points (+0.3%) while SPX didn't do that much better (+0.37%). The banks have been getting pummeled this week and that has dragged the DOW lower. Energy stocks sold off today and that anchored SPX. The techs, followed by the small caps, will need the blue chips to join up with them otherwise the bifurcated market is not a healthy market. We all learned that lesson 8 years ago. There is no new era that says the blue chips can be ignored.
You can also see there is a lack of market breadth even on an up day. The new 52-week lows continue to stomp all over new highs. The advance/decline has been generally weak but slightly in favor of the bulls today. Where this market is headed next is difficult to tell with so many mixed messages that we're currently getting. Opex week only confuses the picture a little more since we don't know how much of this week's price activity is related to squaring/protection of positions rather than betting on a direction. I will of course review the key levels on the charts to help us determine where to next.
It was a quiet day for economic reports today (and even quieter tomorrow--as in no economic reports). There were no great surprises and nothing for the bulls to get excited about (or the bears for that matter).
A chart of the Leading Indicators shows the continuation of a disturbing trend:
Leading and Coincident Indicators, 1992-2008, courtesy briefing.com
The Leading Index peaked in early 2004 and has been heading sharply lower since that time. It's now getting close to the level back in 2001. The Coincident Index has been lagging but has also rolled over from a lower high than the highs prior to 2000 (an indication that the economic recovery post 2002 was not as strong as the period prior to the 2001-2002 recession. These point to a continuation of the slowdown in the economy and a stock market that will very likely follow.
The Philly Fed Index, one of the better gauges of economic activity (this one and the Chicago Purchasing Managers Index, PMI), is showing a dangerous split:
Philadelphia Fed Index, 1992-2008, courtesy briefing.com
Picture yourself standing on a dock with one leg on a boat that is pushing away from the dock. We all know what happens next and I suspect the economy will suffer the same consequences. Spiking prices while manufacturing activity slows down is not a healthy combination.
We'll show you exactly when to buy and sell stocks with a proven method used by professional traders to manage risk, nail short-term gains, and pile up amazing profits. Master short-term trading with our expert analysis, detailed technical charts, and precise trade setups including specific entry, stop, and target prices. Now Completely FREE for 30 Days!
We knew this could be a tough week because of the big banks reporting and in that respect it hasn't been too much of a surprise to see the market struggling. The banks (BIX) have been making new lows below the 2000 lows so the only thing that's surprising is how well the broader market is holding up. If the banks can find a bottom soon, and I think they could, there is the possibility for a market rally. But at this point I think we're right on the edge--a faster decline could kick in if nearby support gives way, which we'll review in the charts.
SPX chart, Daily
I've kept the bold trend lines from last week on the chart as these outline a rising wedge pattern that I think still has a chance to play out into July/August. But it needs to get started to the upside now otherwise the shorter term price pattern turns more bearish. So the bulls need to do their thing here and not let go tomorrow and certainly start some serious buying next week. The DOW has already broken below its key level (last week's low) so that's a warning sign. If SPX joins the DOW by breaking below 1331, and staying below it, I'd feel much less comfortable being long any stocks.
Key Levels for SPX:
SPX chart, 60-min
Right now the 60-min chart looks like a successful retest of last week's low with bullish divergence. The next hurdle is the downtrend line from June 5th, currently near 1350. There is also a Fib projection for the current leg up that matches the 1350 level. If the bulls can drive it higher than that then the broken downtrend line from October 2007 near 1358 and the downtrend line from May 19th near 1370 would be the next upside targets/resistance. But if price rolls back over after the current bounce finishes and makes a new low below today's we could see some acceleration of the selling which would take the market much lower.
I wanted to show the weekly chart of the DOW again because of the important of the long-term uptrend line from 1974, which is where the DOW is currently trading:
DOW chart, Weekly
This uptrend line is a very important one, especially since the previous uptrend line from 1982 is where the April and May highs found resistance (and did a kiss goodbye). The DOW is currently slightly below the line (I have it near 12080) but it's the weekly close that's important--so tomorrow the bulls need to see the DOW close above 12080. If 12K gives way then a retest of the March low (and probably a break of it) at 11730 will be next, as shown on the daily chart (dark red):
DOW chart, Daily
The DOW is approaching the bottom of a shallow up-channel from January which is near 11950. That's why I have the key level located there--it's the last line of defense before the DOW heads for its March low of 11730, its January low of 11630 and then probably a little lower before bouncing back up to those lows for a resistance check. That's the bearish potential with the price pattern set up the way it is. If the bulls can get some serious buying going again and get the DOW back above 12323, Tuesday's high, then there's a much better chance for another leg up that's similar to the one shown on the SPX daily chart (in pink on the SPX chart).
Key Levels for DOW:
DOW chart, 60-min
The downtrend line from May 19th is near 12170. A 50% retracement of this week's decline is at 12159 and the 62% is at 12197. So I think we have an upside target zone of 12160-12200 if we see a little more rally on Friday. As with SPX, if this bounce is followed by a break of today's low then the wave pattern suggests a very bearish outcome as the selling really kicks into high gear. Do not be looking to play a bounce until much lower levels if that happens.
I also wanted to look at a weekly chart of the NDX since the techs have been holding relatively well.
NDX chart, Weekly
There is a large parallel up-channel from the 2002 low and last year's top was at the top of the channel. If you'll recall I showed how price and time came together to make a market top call up there. Price then dropped hard to the bottom of the channel. Actually it dropped slightly lower and found support at the 200-week moving average. It's common for price to then bounce back up to the mid line of the channel which is what NDX did at its double top in May and then dropped away. That's bearish. But so far it's struggling to find support at its 50-week moving average which is currently near 1960. It closed above it today so the bulls would like to see that moving average continue to support price.
A weekly close below that level would be bearish confirmation that we'll likely see the techs start back down with the blue chips (in fact it's likely they'll start to lead the way back down). But if the bulls can get this market pushed back up then I think there's a good chance we'll see NDX up to 2100 next.
Nasdaq-100 (NDX) chart, Daily
NDX 2100 would be a retest of the its broken uptrend line from March if it gets up there by early July. That would be another place to watch for the rally to fail but I'll worry about that setup if and when we get there. In the meantime, as with the DOW and SPX, a drop below today's low would likely mean the bounce off the June 12th low, near 1913, is finished. That June 12th low is the key level to the downside.
Key Levels for NDX:
Nasdaq-100 (NDX) chart, 60-min
A little more rally tomorrow could have NDX tagging the price projection at 2015.57 for two equal legs up from June 12th. If it pushes higher then watch for resistance at the June 5th high (2056) and a retest of the broken uptrend line from March, possibly as high as the Fib projection at 2064. Any higher than that and it would likely mean a trip up to at least 2100. But as depicted in dark red, a turn back down from here, or 2015, would likely see some very strong selling kicking in.
Russell-2000 (RUT) chart, Daily
The RUT is a little stronger than the blue chips and a little weaker than the techs so it's not likely to give us an indication for the market before one of the others does. If the bulls can push this higher then watch for resistance at a retest of its broken uptrend line from March, currently near 750 and the 50% retracement of the October-January decline at 751. It takes a break below 717 to put the bears back in the driver's seat.
Key Levels for RUT:
Russell-2000 (RUT) chart, 60-min
As with NDX, a rally that achieves two equal legs up from the June 12th low would have it hitting 751.53. "Magically" this is also the same level where it could find resistance at its broken uptrend line from March (next week) and the 50% retracement level shown on the daily chart. Could be a very interesting short play there if that were to set up. Otherwise a drop back down below the June 12th low would be immediately bearish.
BIX banking index, Daily chart
The banks have now achieved a 5-wave move down from the high on May 1st. It might not be quite done yet but it is a warning for those who are short the banks to now be careful. This sector is due a bounce and it could be a big one (green) or one that only makes it up to the 220 area by the end of August in a sideways/up consolidation before heading lower again. But tacking on even 40 points to 180 would be good for a +22% (rally and lots of calls for a bottom in the banks). At the same time it's looking like the decline from May 1st should be completing it is achieving some downside Fib targets (178-180) and is near the bottom of a parallel down-channel from January (I deleted the shallow descending wedge because I don't think it fits any longer).
U.S. Home Construction Index chart, DJUSHB, Daily
I created a parallel line to the one across the February and April highs and attached it to the January low. Sure enough that's where the latest decline found support. Parallel channels can be one of your most effective tools. Today's rally brought the home builders index back up to the downtrend line from February 2007 but there could be a little more upside to 317 before either turning back down or entering a longer sideway/up consolidation. But like the banks, this index completed a 5-wave move down from April 1st and therefore is due a bounce. It could even lead to a much stronger bounce shown in pink.
The weekly chart of the home builders (to keep things in perspective), shows why it's possible we'll see another rally leg back up to the top of its shallow up-channel from January.
U.S. Home Construction Index chart, DJUSHB, Weekly
On the weekly chart, what looks like a wide shallow channel on the daily chart is just a small bear flag. Another leg up within the flag pattern could have price tagging the downtrend line from 2005. At this point it's a bit of a coin toss but a break below the June 11th low (277.43), whether next week or next month, would indicate the next leg down is already underway (dark red). The next leg down will be the last one. I don't know where it will finally bottom but I see a final bottom for this sector this year. I can't say the same thing about the broader market.
Transportation Index chart, TRAN, Daily
The TRAN is cycling around its broken uptrend line from March 2003 and I can't quite figure out which way it's going to go. Until it breaks back below 5032 I see the potential for another new high and a rally up to about 5700 by early/mid July (shown in green). Note that that would have it achieving its upside price objective out of the inverse H&S pattern (January's low is the upside down head and the March low is the right (left?) shoulder). But a little more rally could run into the broken uptrend line from March, just below 5400, for a potential kiss goodbye.
U.S. Dollar chart, Daily
The US dollar is holding in a short term up-channel (bear flag?) since the March low that is within a longer-term down-channel from 2002. If it is a flag pattern it could whack around inside this for a while longer. Longer term bets on the dollar really can't be made until it breaks one of the channels that it's in.
Oil chart, Oil Fund (USO), Daily
Since the June high oil has been chopping sideways. That's typically bullish and until I see a break below its uptrend line from April, currently near 103, that's the way I'm leaning on this one. But I'm not comfortable enough with that opinion to recommend a long play. It's just a likely that what looks like a flag pattern is in fact a topping pattern. Need more price action before we can determine the next move.
Oil Index chart, Daily
While I might be leaning long oil I'm leaning short the oil stocks. Not quite yet since the 50-dma is holding but if it breaks then look out below. And if the oil stocks break down then oil will likely follow soon. If oil stocks manage another rally leg then I see upside potential to 1082.60 where the 5th wave of the move up from January will equal the 1st wave.
Gold chart, Gold Fund (GLD), Daily
Gold seems to be forming a sideways triangle and like oil I'm not quite sure now whether it's bullish or bearish. My first guess is that it's bearish based on the initial drop from the March high which is now being followed by the triangle. This typically means a continuation pattern for the move preceding the triangle, down in this case. That means another leg down to match the one from March to the April 1st low and the $79-80 continues to look like a good downside target in that case (maybe a little lower to about $76). If gold rallies out of this pattern and gets above 93.71 then we will likely have a very decent gold rally ahead of us (and the US dollar will probably be confirming it with a breakdown from its bear flag).
Summary and Key Trading Levels
Because it's opex week we have to be careful in judging market direction by what prices do this week. In fact prices haven't done a whole lot. Opex Fridays, especially in the summer, are typically very boring days to sit in front of the computer and make believe you're trading. It's make believe because generally there's nothing to trade (in the indexes anyway--there's always a stock or two that's moving). Many stocks and their indexes simply get pinned by final opex squaring/protection. So be careful about forcing trades.
The bearish setups in the market are very clear and a break back below this week's, and certainly last week's lows, could trigger an acceleration of selling since the price pattern turns very bearish in that case. As I depicted on the DOW's daily chart, we could see the DOW down to 10500 by August. That would have the DOW back down to lows not seen since 2005 before we'd be due a bigger bounce into September/October. Only you can decide where to place protective stops for your own portfolio.
If I've got the longer term pattern correct then we're at the start of the next larger bear market leg down. To me it's a matter of whether we start declining from here or after another rally leg into August first. I could of course be very wrong about this (that's actually happened a time or two, wink) but until the credit crisis is resolved (we've got a long way to go on that) and we see some end to the continually worsening news about home foreclosures (which will be followed by general credit account defaults), the consumer mood will continue to sour and that has always led to a slowdown in the economy (as they stop spending and start conserving). A slowing economy and booming stock market just doesn't add up.
But we'll let price lead the way. Opinions are good for discussions but not for making money. Only price moving in your favor makes you money. So keep an eye on the key levels and trade this market in the direction she wants to go.
Good luck and I'll be back with you on Thursday.
Key Levels for SPX:
Key Levels for DOW:
Key Levels for NDX:
Key Levels for RUT:
Play Editor's Note: The coal stocks may have just produced a short-term top. However, options are expensive because the stocks have been so volatile lately. Aggressive traders might want to gamble on some out of the money puts. Keep in mind that we're long-term bullish on the coal sector and a lot of people want to buy the dip. Example coal stock: ANR has produced a bearish engulfing (reversal) candlestick pattern.
Bucyrus - BUCY - close: 76.05 change: -1.67 stop: 71.65
Our early gains in BUCY are fading fast. Shares have pulled back toward short-term technical support at the rising 10-dma. More conservative traders will want to consider raising their stops toward $74 or maybe $75. We're not suggesting new positions at this time. We have two targets. Our first target is $79.85. Our second target is $83.50. The Point & Figure chart is bullish with a $92 target.
Picked on June 15 at $ 75.41
Research In Motion - RIMM - cls: 147.55 chg: +3.10 stop: 137.40*new*
RIMM continues to show impressive relative strength. The stock added another 2.1% and closed at a new all-time high. We're not suggesting new positions at this time. RIMM has already exceeded our first target at $144.00. Our second target is $154.50. Remember, we do not want to hold over RIMM's earnings next Wednesday. Please note that we are raising our stop loss to $137.40.
Picked on June 16 at $136.05 *1st target exceeded $144
Emerging Markets 50 ADR - ADRE - cls: 52.48 chg: -0.11 stop: 55.01
The ADRE didn't see much action today. Shares just slid sideways. We're not suggesting new put positions at this time. More conservative traders may want to tighten their stops. Our target is the $51.00-50.00 zone.
Picked on June 03 at $ 54.69
Caterpillar - CAT - close: 79.48 change: -0.22 stop: 82.75 *new*
CAT dipped to its June lows and bounce but the bounce failed midday. The trend still looks bearish given the failed rally near $82 a few days ago. However, the bounce may not be over yet. Readers could wait for another failed rally in the $81.00-81.50 zone as a new entry point. We're adjusting our stop loss to $82.75. Our target is the $75.25 mark. The stock "should" see some technical support at its 200-dma near $75.00.
Picked on June 11 at $ 79.45 *triggered
Capital One - COF - close: 41.88 change: -0.48 stop: 46.05 *new*
COF almost hit our first target today. Shares dipped to $40.50 before bouncing. We had set our first target at $40.25. The afternoon bounce and the dip close to $40 looks good enough that COF is now poised to bounce. Expect a rebound back to the $44.50-45.00 zone. We're adjusting the stop loss to $46.05. We have two targets. Our first target is $40.25. Our second target is $37.75. The Point & Figure chart has a $36 target.
Picked on June 17 at $ 43.87
Deere & Co. - DE - close: 77.68 change: -0.38 stop: 82.55
The major indices managed to eke out a bounce today. DE failed to participate. We are going to lower our stop loss to $82.05. If DE provides another failed rally near $80 we'd use it as a new entry point for puts. Our target is the $70.50 mark. The Point & Figure chart is forecasting a $72 target.
Picked on June 12 at $ 78.49 *triggered
DaVita Inc. - DVA - close: 51.04 chg: +1.57 stop: 52.01
Uh-oh! The tone in DVA just changed today. The stock soared higher throughout the session to a 3.1% gain. DVA managed to close just above its simple 50-dma. We could not find any specific news to account for the move. This should put the bears on the defensive. More conservative traders may want to consider a slightly tighter stop around $51.75. On the other hand a failed rally under $52.00 would be another entry point to buy puts. We have two targets. Our first target is 47.75-47.50. Our second target is the $45.15-45.00 zone. The P&F chart is bearish with a $45 target. FYI: Last month DVA announced a $250 million stock buy back program. At $50 a share that's about 5 million shares. DVA has about 104 million shares outstanding.
Picked on June 17 at $ 50.26
Electronic Arts - ERTS - close: 48.44 chg: +1.48 stop: 49.05
We didn't see any direct news today that may have fueled the 3% rally in ERTS. There were a couple of headlines about Take-Two Interactive and some agreement being reached with the FTC. ERTS is trying to buy TTWO for $2 billion but TTWO says the offer is too low. The FTC wanted to see more details on the bid and it seems that TTWO wasn't cooperating. It seems a little odd that the FTC, who normally reviews mergers for possible anti-trust issues, would spend time talking to TTWO when there is no deal yet. At any rate shares of ERTS have broken through what should have been resistance at $48.00. More conservative traders will want to strongly consider an early exit right here to cut your losses. We're not suggesting new positions. Our target is the February lows near $44.50-44.00.
Picked on June 06 at $ 47.75 *triggered
E*Trade - ETFC - close: 3.69 change: -0.00 stop: 3.91
It was a quiet day for ETFC and the stock closed unchanged. We don't see any changes from our previous comments. The stock could see another bounce back toward $3.80 before it rolls over again. Wait for the failed rally before initiating new put positions. The options we suggested were the July $4.00 and $3.00 puts. We have two targets. Our first target is $3.25. Our second target is $3.05. FYI: In the news today ETFC released its monthly activity report for May. The company added 21,000 retail accounts. Customer assets were up almost 4%.
Picked on June 17 at $ 3.68
3M Co. - MMM - close: 74.12 chg: -0.18 stop: 77.05
MMM slowly faded to another new relative low. We remain bearish but remain frustrated at the rate of movement in MMM, which is too slow. We have two targets. Our first target is the $70.25-70.00 zone. Our secondary target is the $67.00-65.00 range. The P&F chart is bearish with a $69 target. FYI: If you are aiming for the $67 target then you might want to consider the October puts.
Picked on June 06 at $ 74.95 *triggered
PowerShares QQQ - QQQQ - close: 48.77 change: +0.75 stop: 49.26
Strength in tech stocks, specifically internet-related and semiconductors, helped lift the NASDAQ to a 1.3% gain. The NDX index did even better with a 1.6% gain. The QQQQ tracks the NDX and shares have rallied back above the 50-dma and 200-dma. Wait for this rally to roll over before considering new positions. Our target is $46.10. The $46.00 level and its 100-dma might be support.
Picked on June 17 at $ 48.54
S&P 500 SPDR - SPY - close: 134.24 change: -1.32 stop: 137.26
We would like to claim a victory here but we can't. Most quote services are putting today's intraday low on the SPY at $132.00. Our target is $132.40. Unfortunately $132.00 is a bad tick. The SPY never traded under $133.50 today. The trend is still bearish but the bounce may not be over yet.
Picked on June 17 at $135.57
(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)
Amgen Inc. - AMGN - close: 44.86 chg: +0.64 stop: n/a
AMGN rallied back to the $45 level. Unfortunately, we expect the market makers to pin AMGN to the $45 level tomorrow for option expiration. That means the June strangle is dead but if AMGN can trade around $45.50 we can probably exit the June $45 calls (AMQ-FI) for close to our cost. Try to salvage what you can from the June strangle. We are not suggesting new positions at this time. We have suggested a July strangle and a more aggressive June strangle. The options in the July strangle are the July $45 calls (AMQ-GI) and the July $40 puts (AMQ-SH). Our estimated cost for the July strangle was $1.65. We want to sell if either option hits $3.50. The options in the June strangle are the June $45.00 calls (AMQ-FI) and the June $40.00 puts (AMQ-RH). Our estimated cost on the June strangle was $0.56.
Picked on May 22 at $ 42.77
Alpha Nat. Res. - ANR - close: 94.32 chg: -5.73 stop: n/a
The trend in ANR is still bullish but we feel like yelling, "look out below". The stock has painted a huge bearish reversal with today's bearish engulfing candlestick pattern. We are not suggesting new strangle positions at this time. This is a higher-risk strangle play with the options so expensive. The options we suggested were the July $105 calls (ANR-GA) and the July $85 puts (ANR-SQ). Our estimated cost was $9.40. We want to sell if either option hits $14.50.
Picked on June 15 at $ 94.25
Fording Cand. Coal - FDG - close: 88.64 chg: -2.20 stop: n/a
FDG, another coal stock, also looks like it may have peaked or at least put in a short-term top. We're not suggesting new strangle positions at this time. We were suggesting the July $90 calls (FDG-GR) and the July $75 puts (FDG-SO). Our estimated cost was $5.45. We want to sell if either option hits $ 8.00 or higher. FYI: The July $90 calls hit $6.00 intraday today.
Picked on June 15 at $ 82.91
Garmin Ltd. - GRMN - close: 44.47 chg: +1.38 stop: n/a
If GRMN moves back into the $44.75-45.25 zone readers could open new strangle positions. The options we listed were the July $50 calls (GQR-GJ) and the July $40 puts (GQR-SH). Our estimated cost was $2.55. We want to sell if either option hits $ 4.75 or higher.
Picked on June 15 at $ 44.91
Holly Corp. - HOC - close: 40.10 chg: +0.32 stop: n/a
The refiners didn't move much in the face of a $4.75 drop for crude oil. The back and forth across the $40.00 mark does offer new entries for strangle positions. The options we listed were the July $45 calls (HOC-GI) and the July $35 puts (HOC-SG). Our estimated cost was $2.00. We want to sell if either option hits $ 3.00 or higher.
Picked on June 15 at $ 41.25
McDonald's - MCD - close: 58.59 chg: +0.38 stop: n/a
Tomorrow is our last day for the MCD June strangle. The options we suggested were the June $62.50 calls (MCD-FZ) and the June $57.50 puts (MCD-RY). Our estimated cost was $1.10.
Picked on May 18 at $ 60.53
Tyco Intl. - TYC - close: 43.77 change: +0.83 stop: n/a
Hmm... TYC may have produced a bullish reversal today. Shares dipped to the 200-dma and bounced. The rebound looks like a bullish engulfing candlestick. We are not suggesting new strangle positions in TYC at this time. The options we suggested were the July $47.50 calls (TYC-GW) and the July $42.50 puts (TYC-SV). Our estimated cost was $1.30. We want to sell if either option hits $1.95 (50% gain).
Picked on June 03 at $ 44.89
Valero - VLO - close: 44.17 change: +0.11 stop: n/a
VLO is another refiner that didn't move much even through crude oil had a big day (lower). At this time we're not suggesting new positions. The options we suggested were the July $50 calls (VLO-GJ) and the July $40 puts (VLO-SH). Our estimated cost is $1.89. We want to sell if either option hits $2.75 or higher.
Picked on June 15 at $ 44.844
Alliant Tech - ATK - close: 105.57 change: +2.21 stop: 102.95
So what happened in ATK today? The DFI defense sector index spiked lower this morning and ATK followed with a sharp drop to $102.80. That was enough to hit our stop loss at $102.95 and close the play. What makes this so frustrating was that ATK immediately rebounded. The stock rallied throughout the session to close up more than 2%. The move has produced a bullish engulfing candlestick pattern, which is typically seen as a bullish reversal, especially at the end of a downtrend. Now add that ATK is bouncing from its trendline of support and this looks like a new entry point for bullish positions. Keep an eye on ATK for some follow through higher especially if it can rise through the $106.50 region.
Picked on June 12 at $105.28 /stopped 102.95
Peabody Energy - BTU - close: 82.19 change: -0.87 stop: 76.95
Target exceeded! It looks like the coal stocks may have just set a short-term top. The whole group spiked higher this morning and then reversed. Shares of BTU opened at $84.00 and traded to $86.24 before changing course. Our target was the $84.00-85.00 zone.
Picked on June 01 at $ 73.92 /2nd target exceeded 84.00
United States Oil - USO - close: 106.91 chg: -3.98 stop: 106.95
Crude oil was bruised today by the unexpected news that China, who's fuel prices are set by the government, will raise prices by 16% on gasoline and 18% on diesel. This is expected to decrease fuel demand and crude oil fell almost $5 on the day. The USO dipped to $106.90, which was enough to hit our stop loss at $106.95 and close the play.
Picked on June 12 at $111.27 /stopped 106.95
Just to review, contrarian methodology filters for peaks in bullishness of overall market sentiment to place bearish trades. While contrarians look for lows in bearishness of overall market sentiment to place bullish trades. A high level of call trading represents that option investors are bullish where a high level of put trading represent that option investors are bearish. Extremes in put volume generally suggest that the vast majority of option speculators and portfolio managers have made their downside speculative position or portfolio protection strategy.
Over the last few days the equity markets have tried to break out to the upside but have run into some resistance. On Tuesday the 10 day moving average of the CBOE Equity Put/Call ratio dipped to 0.769 from the previous days recent high of 0.774. What this indicates is that there has been a slight shift in investor sentiment. Option traders have been buying collectively more puts than calls than normal. I have mentioned that there is always a skew to higher volume in the Calls. The signal normally reverses to Neutral when the 10 day MA reaches 0.80 and then reverses. A decline of the 10 day MA below the 20 day MA would signal a Positive (Bullish) bias signal. As of the Wednesdays close the 20 day moving average is at 0.737 and the 10 day moving average is 0.791.
As mentioned before, just like Tuesdays slight tick down, there was a small blip in the 10 day on June 5th that could have been a reversion to Neutral. However, the MA wasnt even above 0.70. It would be nice to get the 10 day MA at 0.80 or slightly higher prior to a Positive bias signal. Last week I wrote The signal will remain Negative until the 10 day Moving Average peaks near 0.80 or it declines toward the 20 day Moving Average. Should the 10 day MA cross below the 20 day MA, the signal will become Positive again.
The Signal: We are on a still on a Negative Bias signal still because, at 0.791, the 10 day hasnt peaked yet and/or declined decidedly toward the 20 day MA. However, you should be prepared for this signal to move to Neutral within the next few days. At that point, the notice will be to shift ones portfolio from a more bearish stance to a delta neutral portfolio. To lean the portfolio more neutral, I reduce short calls and/or add short puts. SIGNAL: NEGATIVE BIAS
The CBOE Volatility Index ($VIX)
So far this week has been volatile with strong moves in either direction. The market gave up some of Thursday and Fridays ground on Tuesday and Wednesday as more negative news from the Financial sector added more fears of recession. Since the bias is still Negative Wednesdays move was comforting. As the chart above shows the 10 day moving average has slowed its up trend slope. This slowing is due to the $VIX peaking at 24.47 and declining to a recent low of 20.95. The 10 day moving average continues to trend upward to close at 22.44 and the 20 day moving average is 20.81. A low well below the 20 day moving average may provide better timing to negatively bias ones portfolio. The $VIX usually moves inversely to the S&P 500, the equity index that the Implied Volatility is measured from. Note that the $VXO is the implied volatility measure of the S&P 100 or $OEX. The CBOE has begun offering options on the NASDAQ 100s $VXN and the Russell 2000s $RVX. Trading the actual options or futures on the $VIX can either be a directional play or a volatility hedge. Until the $VIXs 10 day moving average declines or it reaches resistance at about 25 the signal remains Negatively biased.
The signal: The 10 DMA closed up 0.29 to 22.44 while the 20 day moving average closed at 20.81 or 0.15 higher. The 10 day MA has been outpacing the 20 day MA over the last couple of days. We are still on a Negative (sell/short) signal. SIGNAL: NEGATIVE BIAS
The Investors Intelligence Polls
About the Indicator: The Investors Intelligence polls do not actually poll individual investors. It polls investment newsletter writers all vying for individual investors subscription dollars. Therefore, there is a bias integrated into their writings set to attract subscribers. Since more people flock to the newsletters that make them feel good about their long portfolios there is a bias toward bullish investors in each weeks readings. That should explain why the peak reading for a bearish signal (55%+ for bulls) is greater than that of the bullish signal (45% bears). We normally look for bearish triggers when the Bullish % peaks and bullish triggers when the Bearish % peaks. I like to see confirmation after the peaks. But there is usually a lag because this poll comes out once a week.
Investors Intelligence polls show that the bearish trend of investment
newsletter writers is intact. After last weeks reversal in sentiment the decline
in optimism really accelerated downward. Another perspective is that those that
were already bearish remained so and those that were hanging onto their bullish
stance switched teams this week. The number of bullish newsletter
writers/advisors polled decreased 6.7% to 36.3% from 43%. The percent of bearish
polled increased almost five percent to 37.4% from
32.6%. The spread declined 11.5% from 10.4% to a negative 1.1%. Usually negative
spreads indicate extremes in bearish sentiment and therefore call for a bullish
signal. However, even with a lethargic indicator that only updates once per week
the proper method is to wait for a confirmation before changing the signal. We
will still wait for a confirmation to change to a Positive bias unless the
spread declines to around the previous low
of -13.8% on 3/19/2008. The signal is
still on a Negative Bias which may become Neutral because the spread between the
bulls and bears negative. SIGNAL: NEGATIVE BIAS
Today's Newsletter Notes: Market Wrap by Keene H. Little, The Contrarian by
Robert Ogilvie, and all other plays and content by the Option Investor staff.
Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.
Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.
To ensure you continue to receive email from Option Investor please add "firstname.lastname@example.org"
Option Investor Inc