Growth Stock Swing Option: Nov 13

MARKET ANALYSIS

Continued oversold conditions and the market’s worst multiday decliner in more than five years keeps November a bone-chilling wake-up call for most investors. For the two-day period, the S&P 500 () and NASDAQ 100 () are off an additional and nasty 2.35% to an outright bone-chilling 5.80%.

It’s an environment where continued and escalating price volatility mean being directionally early or late to the intraday hysterics can be very likely, potentially costly endeavors. While the closing edge has gone out decisively to the bears for the period, that too has been something other than an easy financial commitment. A torn but shattered tape that’s produced two consecutive percentage declines in the final thirty minutes of trade has been, in reality, much more difficult to truly appreciate. For those in need of finger pointing, traders can look at margin call machinations as being largely responsible. Additionally, with Expiration Week being upon us and Delta swings taking on increased significance, the existing volatility isn’t likely to fade over the next couple of days.

For the bulls looking to graze below sea level and during the current icy plunge, there has been some evidence that all is not as bad as the financial rags love to report. While the stories emanating from the credit markets continue to “SPOOk” headline writers into motion, the reaction outside of the accused has been much closer to an “Enough already” or “Buy the news” response. In fact, the last two day’s have found technical leadership spearheaded by none other than the financials ().

Also supporting the idea of a very real overreaction, while the market star formerly known as “PE” has been derailed, some corporate-sponsored bargain hunting efforts in the form of M & A activity has perked up slightly. On Monday for instance, more than three different deals were announced, with IBM’s () all-cash $5B deal for Canadian software concern Cognos () highlighting the small crop of positive market supports. Further, BHP Billiton () has continued to sweeten the terms of its hostile bid for Rio Tinto (). Since the effort by the Aussie mining giant represents the second-largest takeover ever, traders might appreciate that some very big money isn’t as quick to back away from the global economic story, unlike the media and most bulls currently enjoying their fill of bull stew with Goldilocks nowhere in sight.

Market Snapshot

Figure 1: Dow Industrials () Daily

With further unwinding of prior excesses and a risk premium or discount built into a market obviously bracing for the worst, yet another cool-looking and third reversal Hammer failed to inspire the bulls this past Friday. Personally, the interpretation was the reversal candle looked rather attractive considering its volatile wide range development, intraday breaking of classic moving average supports and a technical condition which already as oversold as any during 2007.

The morality tale of the ensuing action and dismissal of all things technical is simply a reminder that the market is going to do what it’s going to do. Typically as well, it’s going to do the seemingly impossible until the last towel has been tossed. All told, the damage done was amazing. In fact, it was the worst four-day decliner since 2001 for the broader averages with the “SPYder” and “Cubes” sliding 5.50% to 10.88% respectively. As for the Dow Industrials shown above, a less severe, but all the same punishing 4.93% was doled out.

So, what next? Well, coming in Tuesday’s premarket courtesy of Wal-Mart (), we’ve got one of those CNBC style “Folks, we’ve got a rally!” moments. Hopefully and likely, this particular moment should last beyond the sound of the Opening Bell. In fact, aside from the oversold and record-breaking technicals offered here and elsewhere, to be certain, traders might also appreciate a couple of other factors.

First, since the market is under correction (8.5% for the Dow), the first step for growth-oriented traders is for one or more of the broader averages to find its technical footing with an Attempted Rally Day. For that too occur, the majors need only to close in the green today, although higher volume and perhaps price strength might also be considered relevant. More important, once an “ARD” is scored, a strong percentage thrust on increased and above-average volume in the next three to six sessions is needed. That’s called the Follow-Through Day and a technical event of great importance in signaling major market bottoms. In fact, while the “time window” isn’t perfect, the price and volume confirmation of a FTD type session has occurred like clockwork and incidentally, enjoyed by bulls as a very powerful tool.

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

With conditions in the last two days of the record-breaking variety, it’s not surprising that Friday’s “oversold” additions to the Bulls Radar haven’t done so well. In fact, the pin action has been somewhat brutal as technical lines in the sand and any prior pattern ideas have for the most part been systematically dismantled. For instance, the high beta selection of Wuxi (), a Chinese Pharma IPO, destroyed this corner’s anticipated higher low double bottom test of its 50-Day moving average like neither condition even existed. Hmm, maybe the ‘borgs in charge don’t use the same indicators?

Fortunately and much like the other watchlist candidates, aside from making this market observer look either early or silly or both, Wuxi never feigned strength in Friday’s session. As such it’s thought to be one of those “No harm, no foul” situations. Heading into Tuesday’s session, with a lower-low double bottom, what some traders call a “Kings & Queens” pattern (two Candle reversal equal bodies roughly) and an Elliott Wave 4 EBOT developing: WX gets the benefit of the doubt that a technical low is in place.

Similar descriptive bottoms of an enticing nature can be found in the other stocks on the watchlist, to be quite sure. That’s the upside for any would-be bulls. At the same time though and as Tuesday’s early gapper is a testament too, volatility remains extremely high and makes even the best intentioned set up, quite often difficult to position for in a reasonable manner. With that said and in appreciating recent scribed words, traders should realize conditions are for “the quick and the dead” and the only safe haven one’s ability to manage risk; which of course, is made stronger through the use of spreads.

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 “Coiled Springs”

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.