Look for Dojis 05-26-2010

Cusick’s Corner
The market pulled back late in the day which correlates with the pullback in the Euro. Keep an eye on this relationship -- it has been helpful recently in spotting near-term moves of the market. The market has the potential for some more volatility, with the Claims data due out pre-market at 8:30 ET. Watch stocks that are nearing key moving averages like the 20, 50, and 200 simple moving averages [SMA]. Also monitor stocks that closed at, or very close to their opening price, technically referred to as a doji. The key to trading this environment is to ratchet in your parameters and while you embrace the volatility in the market, be very aware that it can be equally as vicious. See you Midday.

Upbeat economic news failed to lift stocks out of the bearish funk. The Dow Jones Industrial Average rose as much as 135 points Wednesday morning after a report on Durable Goods, released pre-market, showed an increase of 2.9 percent for April, which was significantly better than the 1.5 percent increase that economists had expected. A separate report, released thirty minutes into trading, showed New Home Sales up to an annualized rate of 504K in April, from 439K in March and much better than the 425K that economists had predicted. However, by late afternoon, the focus had shifted back to the problems overseas and the Dow had given up most of its gains. Then, in the final hour, the industrial average fell into the red. The catalyst for the decline appears to be a Financial Times article that mentioned China was evaluating its eurozone bond holdings, which helped send the euro back towards 4-year lows, below 1.22 against the buck. The Dow Jones Industrial Average finished another volatile day down 70 points and below the 10,000 “psyche” level. The NASDAQ lost 15.

Bullish Flow
Textron (TXT) added 75 cents to $20.27 and options volume rose to 6X the recent average daily after takeover chatter made the rounds early Wednesday. The talk is unsubstantiated and dubious, but it did trigger a noticeable reaction in the shares, which bucked the bearish trend. Meanwhile, more than 21,000 call options traded on the Providence, RI aerospace and industrials company. June 22 calls were the most actives and 6,730 traded. Short-term speculators were also focused on the June 21 and 23 call options.

Morgan (JPM), Prudential (PRU), and AMR also had bullish order flow.

Bearish Flow
Skyworks Solutions (SWKS), a Woburn, MA semiconductor company, added 11 cents to $15.02 and defensive trading picked up in SWKS July 15 put options Wednesday. 5,084 contracts traded, including multiple blocks at 95 cents per contract in afternoon trading on ISE. According to ISEE data, investors were buying puts to open despite the gains in the stock Wednesday. Shares hit a high of $18.14 on earnings April 30, but SWKS has been trending lower since. The at-the-money put buying appears to be in anticipation of additional losses in the weeks ahead.

Bearish flow also picked up in Cheesecake Factory (CAKE), Checkpoint Software (CHKP), and Sempra Energy (SRE).

Index Trading
The CBOE Volatility Index (.VIX) had an interesting day. After closing at 34.61 Tuesday, VIX fell towards 29.5 in early trading Wednesday. The volatility index moved mostly sideways into midday before turning up in afternoon action. Then, as the S&P faltered in late day trading, VIX made a decisive run higher and finished the day flat at 34.61. Options action picked up in VIX as well. 235K puts and 110K calls traded on the index. The top trade was a block of 14,293 VIX July 25 puts on the $1.10 bid, which might be a player closing out a position in bearish puts given the high levels of volatility seen in the market these days.

ETF Trading
Large options blocks traded in the SPDR Oil and Gas Exploration and Production Fund (XOP) Wednesday. Shares finished the day up 31 cents to $39.04 and it appears that an investor sold 20,000 June 39 puts to possibly liquidate a position and then bought 20,000 bearish June 42 call – July 38 put risk-reversals to open a new bearish position. That is, they sold the June 42 calls at 45 cents each and used the proceeds to help pay for July 38 puts at $1.70 apiece. They might expect the fund to remain weak through the June expiration and then continue to slide through the July expiration.