MARKET ANALYSIS

A market under-correction continues to grind lower and press the nerves of both bulls and bears in volatile trade. However, with two-day decliners of -2.07% to -2.64% for the S&P500 ($SPX) and NASDAQ Composite ($COMPQ), a crucial step in the bottoming process is upon investors as we enter Tuesday's session.

During the past two sessions, it's been more of the same for the market. Volatility has prevailed to the downside and negative sentiment has been accentuated by further Asian-related and stateside sub and prime (NEW, MTG, CFC, NFI, JPM, BAC) lending concerns. Increased chatter of a recession and/or economic pains such as decelerating corporate profits has also fueled the market's travails into a deeply oversold corrective condition.

Will today's session be known as another Turnaround Tuesday? Entering the day, some much needed relief does appear underway. Asian and overseas markets rebounded sharply overnight and are setting US equities up for a strong open. In part, the reaction is being helped along by Secretary Paulsen's positive comments on the economy and the housing market, as well as key merger news. The top story on that front is Citigroup's (C) $10.8 billion bid for Nikko Cordio, Japan's third-largest securities firm, which is certainly a driver for many investors, here and overseas.

Market Snapshot

Figure 1: S&P500 ($SPX) Daily

Whether investors get their somewhat infamous Turnaround Tuesday won't be known for several more hours, but the action is potentially a good start for intermediate strategists. In our last report the market-based concept of the FTD or Follow-Through-Day was reintroduced. It's been a while, several months in fact, since we've had the opportunity to use this method designed to locate an intermediate bottom of notice. If Tuesday's positive price action holds up, it will mark the first step in this process, as we could define the session as an Attempted Rally Day. From there, a time window starting on Friday begins for an event known as the Follow-Through-Day and described quite well in our last report, for those in need of quick review.

Technically, directional strategists might also be interested in the quality of strength, for the market, in the interim. While we can anticipate the FTD, a move that's too severe and / or into potential overhead resistance, could represent a bear market rally, and hence an opportunity to locate strategic shorting opportunities. In fact, looking at the above daily view of the S&P500 ($SPX) we can see just how oversold the market was based upon Bollinger and RSI analysis, and why the bulls shouldn't get too excited beyond seeing "a bounce" just yet. The observation is that until a corrective low is established, the bears will attempt to have some staying power, particularly so, when conditions like the fore mentioned are in place. And after a very persistent eight-month rally to cap off a four-plus and twenty-year bullish cycle, that means the burden of proof is still on the bulls' shoulders.  

The following factors and anecdotal evidence might be considered relevant in determining a suitable, limited-risk strategy in the coming days and weeks ahead.

MARKET LAB

Bullish Technicals

• January Effect positive finish
• Correction underway with -3.5% to -6.7% tallies in both majors
• Extreme readings such as record breaking VIX percentage spike and NYSE TRIN
• ETF Liquidity Premium relative to cash index trading
• Monday marks potential pivot for FTD count and intermediate trend reversal

Bearish Technicals

• ‘Extended' 4 / 20-year bearish cycle convergence
• No FTD signal or count underway as of Monday evening
• 30% [versus highs of 19.8%] in VIX has historically marked fear in the marketplace
• Potential overhead resistance and three months worth of traders looking to ‘breakeven'
• Corrective periods up to 10%

GROWTH STOCK ANALYSIS

With further oversold conditions in many and most products now (Tuesday premarket) setting up for some version of a relief rally off a hard opening gap, there's not much to do to the existing watchlists, except peel off a couple of stocks from the Bears Screen that are now in very oversold territories. While that's a good thing of course, names such as Goldman (GS) and American Eagle (AEOS) are more in position in the short-term to haunt fresh short initiations than not.

At the same time, of course, monitored longs from the Bull Screen have mostly pulled lower too. However, oversold in those stocks is viewed as being a potentially benevolent technical situation. It almost goes without saying, but I will anyway, that with so many stocks in the listed universe demonstrating similar extended patterns of investor panic, no changes have been made. Traders could always try to switch gears and look for a few issues that showed relative strength over the last two sessions, while the market forged fresh lows. However, that's by no means a guarantee that those stocks, the few that exist, will demonstrate the same tenacity when traders are performing functions such as scrambling to ‘snap up bargains.'

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

Table 1: Bull Watch list

The Bears

Table 2: Bear Watch list

Chris Tyler
Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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The information offered here is based upon Christopher Tyler's observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.