S&P 500 Index
Since last Tuesday, equities have experienced a solid move off the successful retest of the 1040 level in the SPX 500. Several short-term guides have moved into overbought territory suggesting the market could use a rest/pullback before attempting to make any further gains. The 50 day EMA lies just ahead at 1120.
1. Breadth Oscillators such as the McClellan Oscillator have cycled into overbought territory
2. Yesterday, the CBOE Volatility Index (VIX) close 1.67 standard deviations below its 10 day moving average. VIX spikes above the 2.0 std dev threshold can be common place during a sharp market sell-off, but moves of greater than 1.5 std dev below the 10 day on rallies are less common and signal short-term complacency.
3. My proprietary Cumulative Tick model has extended up to a level which often coincides with pullbacks and consolidations at best.
A pullback from these levels could create a very well shaped Inverse-head-and-shoulders pattern from which another leg up could begin.
The Euro (EURUSD)
On Monday, I made a suggestion that if the Euro could cause a failure in the bearish breakdown from a descending wedge that it would be a bullish signal and a short covering rally could commence. Well indeed, that failure was created this week and we should see further upside over the next few weeks as the "Johnny-come-lately" short sellers run for cover to pare losses.
British Petroleum (NYSE:BP)
I don't normally trade or discuss a lot about individual stocks but this opportunity looks compelling. British Petroleum (BP) looks like a high percent "buy the big bad news" play. The stock has been trounced for 50% since late April and today Obama slapped them with a $20 billion bill to clean up the mess. Stock gapped lower, closed higher....I like it.
The least risky way to get involved is through the options market. Implied volatility has absolutely exploded as it has risen approximately 80 clicks from 20% to 100% (1 click = 1% vol). If the stock rallies, vol is sure to crater, so implementing strategies such as buy-writes or call spreads are more ideal than naked call buying. Nothing will suck more than if you buy some calls and nail the move only to watch the vega portion of the premium (volatility) collapse in your grill. BP closed around 32 today, I don't see why a move up to 38-40 couldn't happen in fairly short order. If the low breaks, then all bets are off and it will be time to abandon ship...pretty simple....that low is 29.
Plans For The Short-TermThe next couple of days could be tricky as quadruple options expiration can cause the market to do some unnatural things. Even though the market is overbought and I would normally expect a pullback to commence almost immediately, I must respect the options market and so I am prepared for the market to stay propped up through Friday with a pullback beginning early next week. I am not particularly interested in selling the market too aggressively, but rather looking for a possible high percentage long set-up should the Inverse H&S pattern come to fruition.
Looking at the big picture I see the market biding time right now before another whoosh lower. The peak before the next wave down may come as soon as July. I have mentioned on a couple of occasions that I am putting together a research piece and I have set a deadline for June 30th. So stay tuned.......
Disclosure: "No Positions"