Watch Key Support Levels 11-30-2010

Cusick's Corner
The data flow over the next 24 hours has the potential to add some additional volatility into these markets. Watching key support levels will be essential. Since the bulls are in control any tip below 1170 in the S&P would indicate that a temporary shift in momentum is upon the market. As I have discussed in past Corners, spread trades are the route for positioning at this stage. Keep an eye on the productivity and labor cost data points due out at 8:30am ET. See you Midday.

Stocks slumped amid ongoing worries about ongoing problems across the Atlantic. The domestic news wasn't so bad. Data released at 9:45am ET showed the Chicago PMI, a gauge of regional manufacturing activity, at 62.5 in November; which was up from 60.6 in October and significantly better than the 59.6 reading that economists had expected. A separate report released 15 minutes later showed the Conference Board's Consumer Sentiment Index up to 54.1 in November, from 49.9 last month and better than the 52.0 that economists had predicted. But with the euro falling below 1.30 on the buck and uncertainty about the spreading of the European Debt Crisis, the tone of trading remained decidedly cautious Tuesday. The Dow Jones Industrial Average lost 46 points. The tech-heavy NASDAQ gave up 27 points after Google (GOOG) shares fell on news of an EU investigation into anti-trust complaints against the internet giant. For the month of November, the Dow lost 112 points and the NASDAQ gave up 9.

Bullish Flow
General Motors (GM) options (newly listed yesterday) have been seeing brisk trading since their launch. Shares added 40 cents to $34.20 today, but are down 80 cents the automaker's first day of trading on November 18. Meanwhile, options traders are showing a lot of interest in GM. 48,000 calls and 17,000 puts traded on General Motors today. February 35 calls were the most actives. 9,595 traded and some investors were possibly taking new positions on hopes for a move beyond $35 by mid-February. January 35 and 36 calls were very busy as well. 52,000 calls and 14,000 puts traded on GM the day before.

Bullish options action was also seen in Supervalue (SVU), Safeway (SWY), and Kroger (KR).

Bearish Flow
An interesting spread in Fortune Brands (FO) Tuesday. Shares hit a midday high of $59.87, but slipped in afternoon action and finished down 16 cents to $59.09. Meanwhile, options volume rose to 6X the normal levels, driven by a January 55 – 50 put spread at $1.20. In this spread, the strategist apparently bought 3450 Jan 55 puts at $1.71 and sold 3450 Jan 50 puts at 51 cents. It is very similar to a spread highlighted in the midday report in JCP. In that put spread, the strategist apparently bought 2000 December 33 puts at $1.18 and sold 2000 December 30 puts at 27 cents (correcting midday numbers). Both of these spreads are bearish plays that will pay-off nicely if shares move lower (and implied volatility moves higher) through the expiration.

Bearish flow also picked up in Shuffle Master (SHFL), Collective Brands (PSS), and Align Technology (ALGN).

Index Trading
CBOE Volatility Index (.VIX) added 2.01 points to 23.54 and finished very near session highs Tuesday. VIX options were busy as well and the action seems to reflect the investor uncertainty about the short-term outlook for the equity market and volatility. It was a near even split, with 194,000 calls and 198,000 puts traded on the volatility index. While December and January 22.5 puts were among the most actively traded, the top trade of the day was an interesting ratio spread in VIX calls. In this spread, the strategist initiated a January 27.5 – 35 (1X2) call ratio spread at a dime (credit), 10000X. They sold 10,000 27.5s at $2.20 to buy 20,000 Jan 35s at $1.05. While they keep the 10-cent credit (X10000 X100) if VIX settles below 27.5 at the expiration, they stand to make better money if VIX sees a substantial rally between now and then.

ETF Trading
Options volume picked up in the Technology Select Sector Fund (XLK). It was a day of relative weakness in the sector after Google (GOOG) lost $26.40, or 4.5 percent, to $555.71 per share on news EU regulators have launched an anti-trust probe into the internet company. The tech-heavy NASDAQ lost 27 points Tuesday and XLK, which is an exchange-traded fund that holds all of the technology names from the S&P 500, gave up 24 cents to $23.95. Meanwhile, options volume in the tech fund hit 3X the recent average daily after 76,000 XLK puts and 3,220 XLK calls traded on the session. December 24 puts were the most actives. 47000 traded. It appears that some investors were selling these puts and possibly rolling out to January 23s, which traded 26000X. If so, these spread traders might be extending bearish trades or hedges an additional month. December options expire two weeks from this coming Friday.