Testy Tuesday Morning

I love testy Tuesdays!

They are usually great days for giving us direction for the rest of the week.  Of course this being an option expiration week we can't count on anything but we nailed it yesterday so I'm in a fighting mood.  While we made the levels I cited in the morning post over in Europe, we failed at the 2.5% levels which I mentioned to members in the 9:14 alert needed to be broken to keep us bullish.  They were: Dow 7,404, S&P 775, Nas 1,466, NYSE 4,839 and RUT 402.  As you can see from David Fry's chart, we popped right off that 775 line on the S&P at 1:05 and again at 1:45, that gave us a great signal to get bearish into the close.

Of course, we don't need no stinkin' level test to get bearish.  We practice non-greedy exits at PSW and my 11:58 alert to members said: "Gotta flip bearish here.  That was a good run and needs to be protected so naked DIA puts, June $74s at least, they can always be covered back up if we break the highs but I'm not feeling it here."  Sure, a lot of analysts can tell you we failed a level after the fact, but how many can tell you an hour before it happens?

I updated members at 1:15 saying: "So far so good to the upside.  Dow and S&P pulling back to 2% from 2.5% is bullish if they hold 2%.  NYSE still over the 2.5% line and RUT is dragging at 1.25%.  Nas barely holding positive so that’s our big worry and I still think we get a pullback but my bad for chickening out  too early before."  Right after that, we blew those 2% levels and the bottom fell out and did so hard enough for us to get a little more bullish into the close, selling SPY puts and covering our long DIA puts half back up as it seemed the sell-off was as overdone as the run-up.  Overall, we were simply following our trading plan from the 9:14 alert, where I had said: "Consolidation between these lines are OK but we're really looking for breakouts one way or the other."

Will we get our breakouts today?  In addition to the 2.5% levels we were looking for yesterday, we need to beware of those 10% (from the bottom) levels to the downside of Dow 7,150 (yesterday's close 7,216), S&P 748 (753), Nas 1,430 (1,404), NYSE 4,620 (4,728), RUT 380 (386), SOX 209 (212) and Transports 1,375 (1,426 – yay IYT!).  So the Transports were our stars yesterday but the SOX were a disaster, led down by NSM, who fell 6.3% and general weakness in solar stocks as oil fell below $45 and spooked the industry. 

We couldn't resist a hedged entry on SNDK and today I'll be looking as SPWRA at $22.50 as you can buy that one and sell the MARCH (expires Friday) $22.50 puts and calls for $2.55 for a net entry of $19.95, after which we can sell the April $22.50 or $20 puts and calls, currently around $6 so entering a $22.50 stock today and collecting $8+ in option sales by Friday is what I call a nice 3 days of trading, especially on a stock I'm happy to own long-term like SPWRA, who are guiding a rough year but will still earn $1.50-$2 according to the most bearish estimates.

Are we in for another day of consolidation?  Will we flatline into Friday's quadruple-witching expiration?  As it's St. Patrick's day, I went with the picture of the one green witch but we have four of them to contend with this week as the quarter comes to a close.  We've already had fun this morning, day trading the futures in pre-market, a fun thing to do when chat is quiet.  The wild market swings don't confine themselves to market hours as we've already had a 40-point drop in the Dow since 6:30 (now 7:20) and we just added longs on the S&P as 754 seemed to be a good spot to make a stand. 

Europe is holding up well so far, with 1% drops in general.  Asia was up 3% except for India and the Hang Seng, which both dropped about a point even though the Shanghai was also up 3%.  Is there big trouble in little China that is spooking our Western markets?  The Hang Seng was VIOLENTLY rejected from 13,200 – like a witch trying to get ruby slippers – and went from up 224 to down 98 very quickly in the afternoon.  Looking at the chart, however, what do you see?  It's a run from 12,000 last Thursday with a pullback to consolidate at 12,600 on Monday (5%) followed by a run that teminated at 13,200 (10%) after lunch today.  I don't have to connect any more dots than that for my members to know that anything less than a 240-point pullback after a run like that is STILL BULLISH and what is 240 less than 13,200?  12,960.  That become tomorrow's critical number for the Hang Seng (as does 13,200) as our bullish consolidation level (now 12,878). 

If we have a bad day today, FXP (ultra-short China) could be a great play but nothing bad actually happened in Asia and this was simply profit taking after a great run.  "People are just waiting for some excuse to take profit," said Peter Lai, director a DBS Vickers. He added that there was also "too much uncertainty."  "The rally seems to [have been] driven not by good news but by a lack of bad news. The real test — which should help figure out if this is just another false dawn — will be how the market reacts to the next batch of gloomy economic data," said Anthony Grech, IG index market strategist.  

Banks led the rally in Asia with HBC continuing to recover and MTU making strong gains but Europe is being led down by banks, but it also looks like simple profit taking after some very exciting gains last week.  We can't blame them, we took our profits yesterday at lunch, possibly causing the pullback I predicted but better to take profits early than never I always say…   This is something Tim Sykes and I discussed on his TV show last Friday, funds set targets – not at the targets – but slightly below them as it's easier to get out while others are getting excited that new breakouts are coming.  Also hitting Europe this morning is a pullback in miners as today's PPI report sparks renewed fears of deflation and AA's dividend cut freaked out the metals sector.

We had a surprising (not to us, to "experts") jump in Building Permits (583K, 500K expected) and Housing Starts (547K, 445K expected) as investors and economists are once again shocked that builders would begin to build homes after the winter.  I know, it's scary they give these guys degrees but what can you do?  The market got a nice pop and we took the money and ran on the futures at 756 as there's nothing recovery-like about these numbers as you can see from this chart:

So beware celebrations on a "recovery" to 550,000 homes but this is also not a bad thing overall as we still have plenty of inventory to burn off and this indicates builders are not getting irrationally exuberant but have not completely thrown in the towel either.  We also got PPI numbers which came in at 0.1% and 0.2% at the core, indicating that expectations of deflation ("experts" expected a 0% core PPI) are wildly exaggerated.  This makes gold futures a good buy at 914 (9:00) with a stop at 913, looking for 920 at the moment as gold is really down on deflation fears and nothing more. 

It should be a fun day ahead, hopefully we can test our bottoms and then break through our tops but things rarely work out that perfectly so we'll take a consolidation day if we have to but, if we can't break our Dow 7,450 target we set over the weekend, that will certainly turn us much more bearish.