Hot Option Plays: Pressure

Selling pressure intensified on Wall Street Thursday amid ongoing concerns about economic weakness at home and abroad. Stock benchmarks moved sharply lower across Europe on fears Italy or Spain might be the next countries to ask the EU for financial help. Indexes fell more than 3 percent in Italy, France, Germany and England. The euro is trading down 1 percent against the buck and the dollar surged 2.5 percent against the yen on talk of intervention into the currency markets from Japanese monetary officials. A stronger dollar hurts US exporters because it makes their goods relatively more expensive abroad. Meanwhile, the day’s economic news included a report on jobless claims, which fell by 1,000 to 400,000 last week. Economists were looking for an increase of 5,000. The data did little to move the market. Instead, the focus is on the debt crisis and worries that a slowing global economy will negatively impact earnings and share prices. The Dow Jones Industrial Average is down 270 points and the tech-heavy NASDAQ lost 70.CBOE Volatility Index (.VIX) jumped 2.76 to 26.14. Trading in the options market is very heavy today and reflects the bearish underlying sentiment with 7.6 million calls and 9.7million puts traded through 12:30pm ET.

Bullish Flow is a bright spot today. Shares are up 90 cents to $35.20 and the only component of the Dow Jones Industrial Average to hold gains after the company posted earnings that beat Street estimates. Kraft also announced plans to spin off its North American grocery business. Shares are up 2.6 percent on the news and touching new 52-week highs today. Options volume in KFT is 14,000 calls and 12,000 puts. Typical volume through midday is about 3,600 contracts. January 34 calls, which are now 3.5 percent in-the-money, are the most actives. 2,480 traded. January 30 puts, August 36 calls, August 35 puts, and January 30 calls on Kraft are actively traded as well.

Daily Stock Market News – Market Should Keep Going Up Until Jobs ...

 After seven straight days of losses, the S&P 500 finally reversed on the highest volume seen in over a month. The NYSE traded 1.35 billion shares with advancers leading decliners by a slim margin on the NYSE, but by a larger margin on the Nasdaq (1.5 to 1). The rally followed a better-than-expected ADP employment change for July, along with a factory orders number that fell less than expected.

The bulls will welcome the turnaround, but if it is the result of a knee-jerk reaction of short sellers covering following the stronger ADP number, the reversal may have limited value. The mid-week ADP numbers have had little predictive value to the final jobs numbers on Friday. In fact three of the last four ADP reports showed job strength when in fact payrolls decreased and the unemployment rate actually increased when Friday’s Labor Department numbers were announced.

In order to completely reverse Tuesday’s breakdown, the S&P 500 will have to close above its 200-day moving average, now at 1,287 — a very tall order.

The demolition of the 200-day moving average with down volume of 16-to-1 on the NYSE and 15-to-1 on Nasdaq is a serious development. And the failure of the CBOE Volatility Index (VIX) to exceed last week’s high of 25.94 means that “fear” has not yet reached a final peak, and so the chances are high that we have not yet seen the ultimate low of the current breakdown. The VIX is just too complacent, and that is bearish.

However, after seven days down and all of our internal indicators oversold, a modest rebound could continue for several days — perhaps until Friday’s jobs numbers. Thus, buyers of precious metals could see a mild correction and should hold off on purchases while holders of stocks with broken charts may get an opportunity to sell at better prices.

For those with a technical bent, yesterday’s discussion in the Daily Market Outlook provided some interesting numbers. To have a fully confirmed head-and-shoulders breakdown, the S&P 500 must close under 1,223. The minimum target of a break is 1,143 with ultimate support at last summer’s trading range, which approximates 1,040 to 1,130.

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