Wednesday, October 19, 2011 at 09:19PM
Equities The structure in the equity markets deteriorated today, despite another low volume chop fest on the day. Apple's earnings miss put pressure on the heavily weighted Nasdaq, but Small Caps still led to the downside with the Russell 200 posting a 2.1% decline on the day. Speaking of the Russell, it has been holding above its 50 day moving average, after gapping above this level last week. It's likely we'll see a test of this tomorrow, and it will be an important metric to follow, to see if the bulls come out to buy weakness tomorrow. Going forward, equities remain on edge, and very news/headline driven. Without another rumor, or a positive development out of Europe, indicators and structure is starting to suggest more downside. Option Activity We saw significant call option activity in the following names today... NGDNov 11 Calls (54,729 x's) TOLOct 16 Calls (13,037 x's) DHIOct 9 Calls (13.527 x's) DHINov 11 Calls (14,010 x's) We saw significant put option activity in the following names today... MPEL Nov 8 Puts (5,909 x's) Commodities The bearish plays we've been discussing in the metals continue to look good. However, the most concerning of the metals is Copper, which is trading significantly lower this evening. As we discussed earlier today, this ought to be a leading indicator to equities, and the lows at $3 should be the reference point to use to determine a bigger breakdown in equities. The action in Copper was one of the red flags we discussed during TA Live. Emerging Markets The EEM has been bouncing around its 50 day moving average, and has rejected it in its last 6 trading sessions. This could be a great spot to locate a bearish positions using EEM puts, or the EDZ, which is a leveraged play against Emerging Markets. Indicators The McClellan printed a bearish divergence this week, as yesterdays late rally set up a new high in the S&P, but a lower high in the McClellan. Today's reading printed 34. Of the bullish percent indicators, the $BPGDM, and $BPHEAL are the lowest current readings. The highest are $BPUTIL and $BPINDY. Sector Rotations The banks are an important catalyst here. Given the current backdrop, and the negativity directed towards Wall Street, the main focus should be on financials into earnings. We discussed the current technical set-up in the $BXK, and with a few upbeat earnings reports, this index might be able to break free from its multi-month trading range. Specifically, we'll be watching how the BKX holds up at its 50 day moving average. If the banks give up their recent strength here, it should send equities into a deeper correction. The market took on a more defensive tone today, as the XLU, XLV, and XLP were of the top performing sectors. This has typically taken place at each of the last several peaks in this range. Strategy We remain in a range, plain and simple. The upper end of this range was defended, and the overbought signal in the $NYMO acted as a great warning sign. Stay hedged at these levels, but over the next few sessions, we'll be trying to locate the next dip-buying opportunity. Trade Ideas For the Bullish Watchlist, CLICK HERE. For the Bearish Watchlist, CLICK HERE. For the $10 Bangers Watchlist, CLICK HERE.