Support Held - Harami Confirmed 06-14-2011

Cusick's Corner
Support held. The Harami that formed on yesterday's close was confirmed and the market turned up. (You can get more info about the Harami pattern on the Educate Center > Stocks > Level 2 > Bullish Candlesticks.) Will the bullishness last? As I said earlier, shorts are getting squeezed and longs are now looking for momentum but that might be difficult after the distribution that we have seen particularly over the last two sessions. The sector that will come under some longer term scrutiny is Consumer Discretionary, XLY. If there is a pullback in the habits of the consumer due to continued weather, personal credit issues, or high commodity prices, then companies like TWX, HD, DIS, MCD, and TGT may start feeling the pressure. Keep an eye on the CPI data to see if inflation (I take the Chinese CPI with a grain of salt) is closer than expected, and if this will signal the next moves by the Fed. See you Midday.

Stock market averages rallied around news retail sales fell just .2 percent in May. Economists were expecting the report, which was released before the opening bell on Wall Street Tuesday, to show a decline of .7 percent. The better-than-expected headline number seemed to overshadow the day's other news and triggered a technical bounce in the beaten down market averages. Separate data showed the Producer Price Index [PPI], a gauge of inflation at the wholesale level, up .2 percent in May, which was twice as much as expected. A third piece of data released later was Business Inventories at +.8 percent in April and .2 percent less than expected. However, the better-than-expected retail sales data and upbeat earnings from Best Buy (BBY) seemed to ease some of the recent concern about the slowing domestic economy. Crude oil also rose, gaining $2.09 to $99.39 per barrel. Gold gained $10 to $1,525.60 an ounce. Meanwhile, on Wall Street, the Dow Jones Industrial Average added 123 points and the tech-heavy NASDAQ gained 39.

Bullish
Kroger (KR) is a name worth watching in the days ahead. The grocery chain releases its earnings Thursday morning and analysts expect the company to post a 63-cent per share quarterly profit, up from 58 cents a year ago. Options action is picking up ahead of the results. 4,445 calls and 935 puts traded in Kroger options today. Shares lost 19 cents to $23.22 and June 24 calls were the most actives. 3,272 contracts traded and, with 77 percent hitting at the ask and open interest of 1,172, it appears that buyers were driving the volume. If so, it's a bold move, as the contract will expire the day after KR reports earnings. If shares hold below $24 during that time, the contract expires worthless.

Bullish trading was also seen in JC Penney (JCP), Green Mountain Coffee Roasters (GMCR), and Crown Castle (CCK).

Bearish
Community Healthcare (CYH), a Franklin, TN operator of hospitals, saw 6.5X the average daily options volume after 17,000 puts and 15,000 calls traded in the name Tuesday. Most of the action was due to four-way spread trading, in which the strategist was selling June 25 puts and buying June 29 calls. They also bought July 22 puts and sold July 25 calls. It looks like they rolled a bearish position from June to July and down in strike prices. In other words, they exited a June 25 - 29 bearish risk-reversal to open a new July 22 - 25 combo. They did this 7500X and are possibly hedging shares with the risk-reversal. If so, today's four-way play is an adjustment to a collar strategy and comes as shares try to rebound from a 36.1 percent slide suffered since April 8. The stock added 43 cents to $26.19 on the session.

Bearish flow also surfaced in Safeway (SWY), Xilinx (XLNX), and USEC (USU).

Index Trading
Trading is picking up in the index market heading into the expiration. It's a quarterly expiration. So, not only are stock, index and ETF options expiring this week, but so are futures, single stock futures, and futures options. It's likely to be very busy Thursday and Friday. Volume picked up noticeably today, with 820,000 calls and 983,000 puts traded across the S&P 500 Index (.SPX), S&P 100 (.OEX) and other cash indexes, which is about 1.5X the recent average daily volume, according to Trade Alert data. The S&P 500 gained 16.04 points to 1,287.87 and the CBOE Volatility Index (.VIX), which tracks the expected volatility priced into SPX options, came off Monday's two-month closing high and finished down 1.35 to 18.26.

ETF Action
The Financials Select Sector ETF (XLF), which holds all of the financial-related names from the S&P 500, saw a second day of interesting options action. We highlighted an XLF Sep 15 - 16 put ratio spread in yesterday's closing report. Today, shares added 7 cents to $15.05 today and a noteworthy trade was a 25,000-contract block of Jan 16 calls at 59 cents on the ISE. Two more blocks of 10,000 each also traded at 59 cents. These 45,000 contracts were opening customer buyers, according to data from the ISE. If so, the investor in question paid $2.655 million plus transaction costs to lock in the right to buy 4.5 million shares of the fund at $16 each. It's a bullish play with a breakeven at $16.59 at the January expiration, which represents a 10.2 percent rally from current levels.