MARKET ANALYSIS

With expiration and not-so-interesting pin action behind us, Monday's solid rally puts the broader market closer to the "Buy, Buy, Buy!" kind popularized elsewhere. For the two days since our last report, the NASDAQ Composite ($COMPQ) and S&P500 ($SPX) are up .66% to .70% and looking suited to more than just the mad money crowd.

Entering Tuesday's session, the week started off on a mostly very solid note. Merger mania spearheaded by Barclays (BCS) purported negotiations with Dutch banker ABN Amro (ABN) for $156 billion put support into a broad-based rally that's only flaws were slightly sub par volume and a very absent semiconductor sector (SMH, TSM).

During the two-day stretch the news and / or catalysts have been mostly favorable. Oil has continued to be rather silent, but strong secondary support for equities with the April contract trading near $57-a-barrel. Also, core inflation at the consumer level matched estimates for a "just right" situation, while industrial production data suggested that the "R" word is unlikely. Further, the last bit of headline news from the sub prime arena (FMT, LEND, CFC, NFI) was actually a reprieve from the bad, as lenders caught a break from creditors and bargain hunters. Lastly, the Yen carry trade situation has faded during that currency's technical consolidation.

The big question—maybe of the million dollar variety and beyond—is, how will the market react when the next batch of disappointing or negative news arrives? With Monday's lowly reading by the NAHB on housing conditions, we might already be seeing some of the market's ability to climb the proverbial wall of worry, should it need to. The next two days, barring some renewed headlines from the fore mentioned prime suspects, will begin to center on the FOMC Decision slated for Wednesday afternoon.

The rate decision is widely expected to remain unchanged at 5.25% for the fed funds. The interesting part of course will be traders' actions in the market regarding the policy statement. A slightly accommodative lean towards lower rates should be a bullish support for the markets, particularly after its first corrective action in eight months. However, when all is said and done, what's said or isn't said doesn't necessarily mean a bullish or bearish outcome tied together with a cute little ribbon. As such, this market observer will continue to prefer the use of charts for what's really being spoken and the use of options to solidify the trade.

Market Snapshot

Figure 1: S&P500 (SPY) Rally Attempt #3

The question for more than a few technicians is whether the third time will be the charm? With day number four of the FTD count under our belt, conditions so far are decent all told. Monday's 1% nearly across-the-board gainer in the major indices didn't qualify as the increases were slightly below the FTD threshold in percentage terms and volume was lower than Friday's session. Higher volume would have actually been quite literally amazing, as Friday's tally was abnormally high due to the expiration-related machinations of Wall Street's program crowd. That being said, the statistic was still realistically light with its just average levels of interest.

While volume could be seen as a disappointment, there is a positive slant to all of this. With the corrective double bottom in place and the FTD time window still in effect, the market is in position to confirm the intermediate event. In fact, with many talking heads probably gearing up for the usual spiel about how ‘the market' will wait for the Fed, maybe it's doing just that. Or possibly, just maybe, it's going to do its thing while everyone is supposed to be waiting. As traders probably realize, Wall Street isn't known for its RSVPs.

Looking to the chart above, the bulls are in control overall. While the term ‘market under correction' per IBD might give some traders chills, the recent oversold readings, percentage declines and current robust technical low side with the bull, more than not. A FTD would be nice, as would a bit more breakout leadership from qualified weekly bases. Both are lacking right now and shouldn't be forgotten. A rally with neither apparent, doesn't bode well for the longer-term prospects of the market's current low. With that said, though, this corner and Elliott are on the same page and looking at the market with a bullish to neutral gaze for the time being.  

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
• Double Bottom patterns major indices with sentiment extremes retests
• Correction underway with -3.5% to -6.7% tallies in both majors
• Tuesday marks day number five for 3^rd FTD attempt
• Short-term indicators mostly neutral

Bearish Technicals

• ‘extended' 4 / 20-year bearish cycle convergence
• Corrective periods up to 10%

GROWTH STOCK ANALYSIS

The Bulls and Bears Screens below have been trimmed as names such as Hittite (HITT), Apple (AAPL) and Verifone (PAY) have been dropped as each is out of position i.e. on the wrong side apparently or volume and / or secondary confirmation isn't apparent. With that said, the latter two might actually be seen as directional longs in some traders' eyes, my hazel orbs, however, would rather look elsewhere.

Replacing the fore mentioned names, three bullish and two bearish candidates have been posted. Each is showing either discretionary patterns of interest to this market observer and / or Elliott Wave set ups. For instance, Fei Corp (FEIC), a name which has been on the Bulls Screen back in January before its gap breakout to multi-year highs, is back on the watchlist.

Since breaking out FEIC has established a ‘short' ascending base of four to five weeks in length. O'Neil suggests the pattern needs at least nine weeks, hence the word ‘short' being a part of the description. However, the 28% gap thrust which marks the pattern's inception is seen as a powerful catalyst and possibly in the vane of the 5-Minute Success formula. With that said, FEIC appears to be one of those candidates where a discretionary mix and match policy is appropriate.

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.