Head and Shoulders 04-20-2011

Cusick's Corner
The markets into the afternoon could not muster much of a push after today's impressive open. The S&P did chop along in a tight range, this is notable because I do not want to see a market that makes a move and then starts to look over its shoulders. I use the term shoulders because in the S&P there is an interesting pattern in the making, head and shoulders, with the right shoulder in the making, head established in March, and the left shoulder formed in Feb lows. This will be confirmed on the SPY if the market can break 134. AAPL earnings will be watched closely After Hours and then we have to prepare for the Claims data out tomorrow pre market. See you After Hours.

Stocks are broadly higher with help from earnings and housing data Wednesday. Intel (INTC) closed up 7.8 percent and the best gainer in the Dow Jones Industrial Average after the chipmaker said late-Tuesday that its quarterly profit was 59 cents per shares, which easily topped Street estimates of 46 cents. Freeport McMoran (FCX), Wynn Resorts (WYNN), and United Technologies (UTX) are among the others rallying around earnings. Meanwhile, the day's economic news included a report on Existing Homes Sales that showed an increase to an annual rate of 5.1 million in March, from 4.92 million in February and better than the 5 million that economists were expecting. Some of the commodities are seeing notable strength today as well -- Crude oil gained $3.13 to close $111.41 on bullish inventory data.

Bullish
An interesting three-way spread trades in Bank of America (BAC) Wednesday morning. Shares are off 7 cents to $12.27 and have now suffered a 7-day 9.3 percent drop. Meanwhile, in early options action, one investor sold 18,000 July 11 puts at 21 cents each and bought the July 13 - 14 call spread at 25 cents, 40000X. In the call spread, they bought 40,000 July 13s and sold 40,000 July 14s. The spread pays off well if shares rebound beyond $14 through the July expiration. If shares remain week and fall below $11 instead, the strategist will face assignment on the puts and be asked to buy the stock at $11 per share.

Bullish trading was also seen in Verizon (VZ), Prudential (PRU), and Williams Companies (WMB).

Bearish
BHP Billiton (BHP) sees increasing put activity today. Shares closed up $2.70 to $101.12 and the focus is on the June puts. The top trade is a spread, in which the investor apparently bought 2,550 June 90 puts at $1.10 and sold 2,550 June 80 puts at 31 cents. The spread, for a net debit of 79 cents, is a bearish play, as it offers a maximum pay-off if shares fall to $80 or less by the June expiration, which represents a decline of about 20 percent. The breakeven at expiration is $79.21. The spread has now traded 7,500X.

Bearish flow also surfaced in Ariad Pharmaceuticals (ARIA), and L-Identity Solutions (ID).

Index Trading
The CBOE Volatility Index (.VIX) plummeted to its lowest levels since July 2007 today. The market's "fear gauge" hit morning low of 14.30 and was recently down .59 to 15.24. VIX is down 51.2 percent from the multi-month highs of 31.28 set on March 16, but one investor seems to be expecting a rebound. In morning trading, a noteworthy spread went off in VIX. In the trade, the investor bought 10,000 May 22.5 calls and sold 20,000 May 25 calls. They paid 30 cents for the 1X2 and are possibly looking for the VIX to rally to 25 through the May expiration. There's additional upside risk because only half of the VIX May 25 calls, which were sold, are covered by the May 22.5s, which were bought.

ETF Action
iShares Long-Term Bond Fund (TLT), which is an ETF that holds a basket of longer-dated Treasury securities, is down 36 cents to $92.92 and a noteworthy call spread traded in the TLT today. An investor sold 50,000 June 101 calls at 14 cents and bought the September 98 -101 call spread at 46 cents. In this three-way, the investor paid 32 cents and is probably rolling a position in the June calls to a new position in the September call spread. If so, it's a bullish play that offers a max payout if shares rally to $101 and beyond by the September expiration.