Reverse Head & Shoulders Pattern 08-26-2010

Cusick’s Corner
The day started with an opening pullback and now it’s a slow grind. The market is trading around the technical and psychological support level of 1050 on the S&Ps, plus there’s a notable bullish technical pattern, a reverse head and shoulders looking to form in the ETF SPY. Now these patterns can break apart quickly and the market is continuing the parade of bad to subpar data, so this choppy action could continue into the After Hours. Strength is in the Base Metals, DBB, and Grains, JJG, but there needs to be more follow through in Small Caps, IWM, Finance, XLF, and Tech, XLK, if this move to the upside doesn’t meet more formidable resistance. See you After Hours.

The major averages are modestly lower on a slow news day. The table was set for steady trading at the opening bell after the Labor Department reported that filings for jobless benefits fell by 31,000 to 473,000 in the week ended August 21. Economists were looking for a smaller decline of 19,000. However, the early gains were lost after the Federal Reserve Bank of Kansas City reported sluggish manufacturing activity in its district. Walmart (WMT) is down 1 percent and 19 other Dow stocks are also under water. The Dow Jones Industrial Average is down 22 points and the NASDAQ lost 7. The CBOE Volatility Index (.VIX) hit a high of 26.76, but was recently down .21 to 26.49. Trading is slower than in recent days, with about 3.2 million calls and 2.65 million puts traded through 12:30 ET.

Bullish
Principal Financial Group (PFG) is up 16 cents to $22.18 and notable action is being seen in the October 25 call options. More than 17,600 have changed hands so far. It includes a morning buyer of 17,000 contracts at an average of 37.5 cents apiece. Shares of the Des Moines, IA asset management company are down more than 30 percent since mid-May and this call buyer might be anticipating a rebound. Rather than buying shares, they’re taking a position in calls, which assures the right to buy the stock at $25 through the October expiration.

Bristol Myers (BMY) shares are off 20 cents to $25.88 and options action is picking up in the New York-based drug manufacturer. The focus is on the September 27 calls, which have traded 10,400X through midday. Most of the action has been in smaller sizes. The top trade is lot of 787 at 25 cents on the ISE and it’s an opening customer buyer, according to ISEE data. Implied volatility is up 4 percent to 26 as it appears that some investors are bracing for BMY to move beyond $27 through the September expiration (22 days).

Bearish
Coach (COH), the New York maker of premium handbags, is down 72 cents to $37.13 and options activity is picking up in the September 38 puts with 2,022 puts traded by midday and 99 percent traded at the Ask. Another 1,620 October 35 puts also changed hands with 100 percent trading at the Ask. The fact that the volume is trading predominantly at the ask, indicates that premium buyers are initiating the trades. In other words, they’re buying puts.

CVB Financial (CVBF) is seeing bearish order flow as well. Shares of the Ontario-based regional bank lost 30 cents to $6.88 and the focus is on the October 5 puts with 34,700 contracts traded. October 7.5, December 5, and December 7.5 puts are seeing interest as well. About 40,000 puts traded total, compared to just 140 calls.

Unusual Volume Movers
Financial Select Sector ETF (XLF) options volume is running 3X the usual, with 464,000 contracts traded and put volume accounting for about 59 percent of the activity.

3Par (PAR) options activity is running 8X the usual, with 42,000 contracts traded and call volume representing 58 percent of the volume.
Williams Companies (WMB) options volume is running 4X the usual, with 27,000 traded and call volume representing 52 percent of the activity.

Unusual volume is also being seen in McMoran (MMR), Burger King (BKC), and Charles Schwab (SCHW).

Implied Volatility Movers
Charles Schwab (SCHW) implied volatility is moving higher amid increasing put volume Thursday. Shares touched a new 52-week low and are down 20 cents to $13.29 after Morgan Stanley cut the stock to Equal Weight from Over Weight. Options volume is running 10X the usual, with 19,000 puts and 1290 calls traded. Implied volatility rose 6 percent to 36.5.