GROWTH STOCK SWING OPTION: August 17, 2007

Spooked bulls and further scary credit woes sent the broader indices to fresh corrective lows over the past three days. Entering Friday’s session, though, leadership from the most unlikely of areas has the S&P500 () establishing a rally attempt on bargain-hunting still of undetermined value. For the three-day period the market as represented by the fore mentioned and equally guilty NASDAQ 100 () is off -2.16% to -4.52% on options and “mad money” related maneuverings.

There’s not much too add about the “whys” behind the broader indices precipitous slide. It’s an established fact that the details have already been explored in gory excess in many other financial rags across cyberspace, television and in newsprint now likely staining one’s trousers. Further credit wobbles (), a couple of disappointing retail reports from Wal-Mart (), Macy’s () and Home Depot () and one from semi-giant Applied Materials () is one batch of bad news with which to point fingers at. From there, toss in a Street apparently unsatisfied with just temporary financial bandages from the Fed and increasingly prone to fear-driven / risk-averse decision-making…and voila, a nasty sell-off, the likes of which not seen in years is the end result.

Market Snapshot

Figure 1: S&P500 ETF () Daily Bottoming

“136.75 to 137.60.” That awareness / support zone may have seemed like a pricing impossibility less than two days ago. However, in yesterday’s HOT SHOTS that same price area was tested in very deep, but supportive fashion. I certainly can’t claim it was the easiest of “maulbacks” to purchase by any stretch of the imagination. Volatility was obscenely high and investor awareness even more grotesque as evidenced by a fresh multi-year high of 37.50% in the CBOE Volatility Index ().

But, in conjunction with intraday assistance courtesy of the lesser minute time frames, also talked about in that report, it may have worked for a few traders.

As it turns out, the zone not only held, but due to a substantial last hour rally, a reversal was forged which took the proxy up by nearly an astonishing 3%. Further, the price action also established a Rally Attempt for the S&P500. For intermediate-minded bulls, that of course, is a good first step for the market. Maybe next week produces a Follow-Through Day, which would be the second and more important confirmation for those traders.

More to the point, entering Friday’s session the bias is up for shorter-term strategists as the market is realistically still well oversold after testing levels of panic not seen in more than four years. However, it nearly goes without saying that price volatility likely comes with the territory, if in fact we rally further at all. There are no guarantees here. All that I can do is give my best technical guesstimates based on my knowledge of market behavior, which is made more difficult when the environment is of the really, really “mad money” variety.

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

Bearish Technicals

GROWTH STOCK ANALYSIS

What constitutes being in an oversold condition? That’s largely up to the individual trader. However, one illustration that describes some of the technical criteria which I rely upon comes courtesy of Dow Component Home Depot ().

Figure 2: Home Depot () Weekly

Now approaching its fifth full week of lower lows and lower highs, Home Depot () is aligned with a potential time-based Fibonacci cycle low. On a price basis, the action is just as severe as shares of HD have systematically moved from an upper Bollinger Band breakout attempt, to its current position of moving through the lower and expanding band. At the same time, price has pierced last summer’s lows, potentially stopping out many longs in the process.

Heavy, distributive volume is also a good sign (not shown) as capitulation is a more likely reality. Further, the hard decliner has now entered zone support less than 10% wide, which helps in assessing initial risk. Accompanying the move, secondary RSI readings are into oversold territory. With the latest weekly candle being in excess of 10% wide, drilling down the action to the daily time frame, which shows similar oversold characteristics from the RSI and Bollinger Band, acts not only as confirmation, but also a tool with which to attempt further risk reduction.

As traders might realize, the Bulls Radar for the three day period was chock full of casualties. Many could rightfully be attributed to the market’s fury and disdain for nearly any and everything with a ticker symbol. With that said and in an effort to clean up the list, I’ve dropped a handful of the more volatile situations, including Banco SA (), Gollinhas (), Agnico () and Suntech ().

Not too surprisingly, a few from the Bears Radar did produce an equal amount of pressure on any would-be bulls. Alleghany Tech () with its continued three-day and seventeen point descent led the group. As such and with similar properties to the described oversold situation afflicting Home Depot, ATI is now removed from the radar.

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

Non-Directional Coilers

Table 2: Basing Watch list

The Bears

Table 3: 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.