Testy Tuesday: Can We Hold Our Weak Bounce Levels?

Includes: HPQ, SPY, USO
by: Philip Davis

That was nice!

In one day, we erased all of last week's losses and cleared the 200 dma before it had a chance to bend lower but, as you can see from Doug Short's chart, the 50 dma is already in decline and we have to do MUCH better than this to get back over that line and turn that frowning average upside down before we are able to say we're back on a long-term bullish path.

What we have so far is a 30-point, 2-day bounce on the S&P after a 16-day 105-point drop or, we could look at the post election day dip of 80 points over the previous 7 sessions and then 30 points back up is almost exactly that magical 40% retraces we'd be looking for and the short time-frame makes more sense that way.

UUP WEEKLY Overall, we're looking for follow-through on this move, hopefully back to at least 1,400, which will take another 50% of yesterday's move to complete. As we noted yesterday, we were looking to make weak bounces to Dow 12,720, S&P 1,375, Nasdaq 2,900, NYSE 8,000 and Russell 790 and we made all of those targets so now we just need to hold them as we attack our strong bounce levels at Dow 12,950, S&P 1,400, Nasdaq 3,000, NYSE 8,100 and Russell 805. If we can't do that - it's not a real rally.

Dave Fry's Dollar chart shows how close the inverse relationship between stocks and the Dollar has been this Summer and Fall and we finally got the Dollar back below the 81 line yesterday, so of course we are rallying. It's not about the one-day rally but about what sticks once the variables calm down - and that remains to be seen.

Shorting oil off the $89 line (/CL) is working well this morning and we never quite got to $90 yesterday, which was a good sign for our bearish bets. The constant parade of "experts" on CNBC who say oil will fly back over $100 because Israel and Gaza are shooting at each other makes it hard to hold conviction on these bets but the bottom line is there is an insane amount of product in storage and very little demand - until and unless the supply is somehow actually disrupted (and this little skirmish simply won't do it) - our premise for an end of year sell-off in oil remains intact.

Last Thanksgiving, they ran oil up to $102 into Thanksgiving but we were back at $92 for the December contract expiration two weeks later. This year, we have much larger inventory builds and less optimism re. future demand - no reason to think we shouldn't at least see $85 before December 19th and the USO Dec $32.50 puts at $1 are a good way to play for that move.

Oil makes a good hedge against Global Weakness taking down the markets. The crisis in Europe continues with no end in site, Corporate Earnings were TERRIBLE and guidance wasn't too exciting and we're going to come back from a long weekend with only a holiday-shortened month to go until we get smacked around by earnings yet again.

NYMOEven if we do manage to get technically bullish - it certainly isn't time to throw caution to the wind. Look how fast we worked off our oversold conditions on this bounce - that's not a good sign as another couple of days like this and we're overbought again.

Hewlett Packard (NYSE:HPQ) is getting slammed this morning on $8.8Bn accounting charge from the $11.7Bn purchase of Autonomy. Total disaster! To some extent, they already took a hit on this deal (and replaced the CEO who made it) but, meanwhile, their earnings suck too with revenues down 6.7%. Without Autonomy, they are making $1.16 a share in a quarter so not bad for a $12 stock but won't stop it from going down on this news for now.

We are long HPQ in our Income Portfolio and will be taking advantage of this opportunity to press our bet. This is not NEW news and HPQ is already down 60% from the close of that deal in August of last year, in large part because the street did not like that deal. At the time, their market cap was more like $75Bn and that $12Bn purchase (among other things) has cost them $50Bn in market cap - at some point, you do have to say the bad news is baked in. A fun way to play this morning's over-reaction will be to sell the Jan $12 puts for about $1.50 for a net $10.50 entry on the stock.

Other than some fun plays like that - we're just going to sit back today and let the markets happen. We have our levels to watch and we bottom-fished all last week so no need to chase a rally. If we can just hold these weak bounce levels through tomorrow's close - we're really going to be upping the odds that we close November on a good note next week.

Disclosure: I am long AAPL, XLF, TZA, HPQ, HOV, BBY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Positions as indicated but subject to change (fairly bullish mix of long and short positions - see previous posts for other trade ideas).