Two market scenarios: One bearish, one bullish
The market remains in an intermediate-term uptrend, but the overall trend picture has turned mixed. The sentiment picture has also further deteriorated. I’m watching for a couple of possible scenarios from here:
- A move up to or through the significant upside resistance (i.e., ~1440 on the S&P 500), convincing the majority of market participants that the market is headed back to its highs – thus creating an intermediate-term market top, or
- Downside corrective action – perhaps back to lower support levels (i.e., 1330-1350 on the S&P 500) – convincing the majority of market participants that the market is headed back to the lows, and thus setting the stage for another uptrend.
New positions
Ameren (AEE) – On Monday I sold June 45-strike puts on AEE as the stock pulled back after a recent rally to the 48-49 resistance level:
Although in a short-term downtrend, AEE remains in an intermediate-term uptrend, although a pullback here to the 44 level would not be surprising. A break below 43 1/2 to 44 would change this view.
Allstate (ALL) – On Wednesday I sold some June 47.5-strike puts on ALL on weakness in the stock:
Although in a short-term downtrend, ALL remains in an intermediate-term uptrend, although continued weakness from current levels (i.e., 48 1/2 to 49) will likely change that to neutral. Near-term support is at 47 1/2 to 48, while significant upside resistance is at 50-51.
Countrywide Financial (CFC) – On Wednesday I sold out of my long position in CFC (purchased 3/22/08) at about breakeven or a small loss:
I didn’t like the stock’s performance recently with all the chatter on whether BAC would renegotiate or try to pull out of its buyout deal with CFC, and felt the risk in holding the position outweighed the potential reward at this point.
Frontline (FRO) – On Thursday I sold some June 50-strike puts on FRO during an intraday pullback:
FRO is clearly in a strong short- and intermediate-term uptrend and is approaching multi-year highs at the 63-64 level. Near-term downside support appears to be at the 58 and 55 levels. A break below 52-53 would change this picture.
Sunoco (SUN) – On Thursday I sold some June 40-strike puts on SUN as the stock continued to decline along with other refiners in the face of rising crude oil prices and analysts’ predictions of lower margins:
The short- and intermediate-term trend of SUN is clearly down, but oversold, and the stock appears likely to test support in the low 40s. Below that, the 39-40 level should offer support. Fundamentally the stock appears to be a reasonable value at these levels.
Watchlists
Stocks of interest showing up on this week’s “upside strength” scans include Ashland (ASH), Barnes Group (B), Chevron (CVX), ConocoPhillips (COP), Emerson Electric (EMR), Estee Lauder (EL), and ONEOK (OKE).
“Oversold” candidates of interest this week include Coca Cola (KO), Fifth Third Bancorp (FITB), Hospitality Properties Trust (HPT), and Tesoro (TSO).
