Resistance 10-05-2011

Cusick's Corner
Resistance -- there's been an impressive bounce but there is a ton of upside resistance at the 1141 level on the S&Ps, and I want to see this level broken before I position to the upside with any conviction. I would call this prudence or respect. I did like the ADP report, but there is just too much fog around the EU's next actions concerning the bailouts (aka TARP EU). Watch the Claims data out pre-market, if they come in below the psychological 400K level, the market might garner some steam potentially to the upside and especially if the under invested gets nervous. See you Midday.

Stock market averages finished higher for a second day. The day after the Dow Jones Industrials rallied 154 points and finished more than 400 points off session lows, benchmarks moved sharply higher across the Eurozone. A 4.9 percent rally in Germany's DAX paced the advance and strength overseas helped set a positive tone for early trading in the US. On the economic front, ADP reported that 91,000 private sector jobs were created last month. Economists were expecting the ADP report to show an increase of 45,000 and the strong number comes two days before the Labor Department releases its key jobs data. The ISM Services Index was released this morning as well. The gauge of nationwide economic activity outside of manufacturing slipped to 53 in September, but that was not as bad as the 52.8 that was expected. The gains overseas and better-than-expected economic data helped send stocks higher early. The Dow then drifted into negative territory at midday, but moved higher again in afternoon action. At the closing bell, the Dow had added another 131 points and the tech-heavy NASDAQ was up 55.7.

Bullish
Yahoo (YHOO) shares rallied Wednesday. In the midday update, we noted that shares were up in morning action after the company said it was sending financial information to private equity firms and other potential bidders. Buyout hopes had helped send shares up 43 cents to $14.89 amid a flurry of options activity. The rally in shares gathered additional momentum in afternoon action after Reuters reported that Microsoft (MSFT) might bid for the Internet giant. At the end of the day, shares were up $1.46 to $15.92. Options volume in Yahoo had surged to 560,000 contracts and 3.5X the daily average. 447,000 calls traded on the Internet company, including heavy trading in October and November 15, 16 and 17 calls.

Bullish trading was also seen in Corinthian Colleges (COCO), Steel Dynamics (STLD), and Cemex (CX).

Bearish
Nabors Industries (NBR) shares rallied $1.10 to $13.42 on a good day for the drillers after crude tallied its best one-day gain since May. With help from bullish weekly inventory data, crude gained $4.23 to $79.90 per barrel. Meanwhile, NBR is now up 21.5 percent from a 52-week low of $11.05 set intraday yesterday. Today's options volume on the Bermudian oil and gas driller rose to 2.5X the daily average after 14,000 puts and 5,200 calls traded on the stock. The top trades were part of a spread, in which the strategist sold 4,200 Jan13 $10 puts at $2.20 and bought 8,400 Jan13 $5 puts at 59 cents. In other words, $1.02 was collected on this Jan13 10 - 5 (2X1) put ratio backspread. If this is a new position, the strategist keeps the credit if shares hold above $10 through the January 2013 expiration and all the options expire worthless. Profits from the backspread are also possible if shares make a substantial move below the $5 strike. However, the 1X2 might also be rolling - or closing out a position in the Jan13 10 puts after a 56.2 percent plunge in shares since April. A new position is being bought-to-open in the Jan13 $5 puts.

Bearish trading was also seen in El Paso (EP), American Axle (AXL) and Cigna (CI).

Index Trading
S&P 500 PM Settled Index (.SPXPM) options are beginning to see some interest. Options on the index started trading this week and, in contrast to pit-traded S&P 500 index (.SPX) options, which have a settlement value computed on Friday morning before the expiration, the all-electronic SPXPM has an afternoon settlement. SPXPM options are based off the S&P 500 Index, which rallied 20.08 points to 1,144.03 today. Meanwhile, 1,673 contracts traded on the SPXPM Index today. October 1,200 calls were the most actives. 1,017 traded and some investors seemed to be selling the contract, possibly betting that SPX won't recover beyond 1,200 through the October expiration - which is in 16 days for the PM settled index and 15 days for the S&P 500 Index (SPX) options.

ETF Action
SPDR Energy Fund (XLE), which is an exchange-traded fund that holds all of the energy-related names from the S&P 500, added $2.15 to $60.52 after crude oil rose more than $4 and had its best one-day gain since May. Options volume in XLE hit 2X the daily average, with 132,000 calls and 36,000 puts traded in the product. The top trades were part of a ratio spread, in which the strategist sold 28,000 October 63 calls at 92 cents and bought 18,000 October 60 calls at $2.19. It's probably a roll. That is, the investor is selling the Oct 63 calls and giving up hopes for rally beyond $63 through the October expiration - 16 days. However, they are maintaining a bullish position in the sector by purchasing a smaller position of at-the-money October calls.