Resistance 10-07-2011

Cusick's Corner
There's a healthy dose of skepticism into the Midday. The data was in-line this morning, some longs are cashing out especially with finance pulling back due to continued stress from the EU. There is also weight on the Small Caps, IWM/RUT, and this weakness is again showing that resistance is strong at this stage. The pullback after this move in the S&Ps, up 8.6% in 3 days, makes some sense going into the weekend -- headline risk may increase going into earnings next week. I will be watching this 1150 level going into the close. See you After Hours.

Stock market averages have given up early gains and are trading modestly lower midday. The table was set for morning strength on Wall Street after the Labor Department reported that the US economy added 137,000 jobs in September, which was about 55,000 more than economists had predicted. As expected, average hourly earnings rose .2 percent and the unemployment rate held steady at 9.1 percent. Stocks moved higher on the headline number, but then fell into the red after three days of solid gains. A Fitch downgrade of Spain and Italy seemed to weigh on sentiment as well. However, the decline has been orderly and without much volatility so far. In the commodities market, gold lost $10.8 to $1,642.4 an ounce and crude slipped 25 cents to $82.34. The Dow Jones Industrial Average is now off 50 points and the tech-heavy NASDAQ lost 35. CBOE Volatility Index (.VIX) added 1.24 to 37.51. Overall options volume is active and will probably slow ahead of the Columbus Day holiday (bond market is closed Monday). 5.4 million calls and 5.5 million puts traded across the exchanges through 1:00pm ET.

Bullish Flow
Eli Lilly (LLY) shares are seeing relative strength and options on the drug maker are actively traded after the FDA approved the company's Cialis for the treatment of benign BPH. Shares gained 80 cents to $38.03 on the headline. Meanwhile, options volume is running 3.5X the daily average. 21,000 calls and 4,415 puts traded on Lilly so far. The top trade is a 5,250-contract block of April 40 calls at $1.58 when the market was $1.53 to $1.60. It traded on the International Securities Exchange, where data indicate an investor bought-to-open a new position. More than 10,000 contacts now traded. October 38 and 39 calls on the stock are actively traded as well.

Sprint Nextel (S) rallied to a high of $3.39 early after CNBC highlighted the company and said the addition of iPhones in the product line up will create hefty cash flow for the company. However, the stock came under fire mid-morning after Reuters reported the company might need to tap capital markets to raise cash. The stock was halted and then fell to a low of $2.65. The stock is now down 25 cents to $2.76. Meanwhile, Sprint options are very heavily traded today. 82,000 calls and 22,000 puts traded on the stock. The morning flow included opening buyers of January 3.5 calls, which were trading at the offer before negative headline hit the wires.

Bearish Flow
Safeway (SWY) loses 56 cents to $17.38 and options volume on the grocery store chain is running 7X the daily average. 17,000 puts and 660 calls traded on the stock so far. The action is focused on October 27 puts. 15,780 traded and, with 74 percent of the volume trading at the ask, it appears that buyers are initiating the trades. Open interest is 4,452 and so the flow looks like opening activity. SWY Oct 17 puts are now 2.2 percent out-of-the-money and expiring in two weeks. Some players might be taking positions ahead of earnings, which are due out the morning of October 13.

Illumina (ILMN) shares are reeling today after the San Diego-based biotech lowered its third quarter revenue outlook. A number of analysts downgraded the stock on the news. Shares tumbled $13 to $12.93. Options volume is running 12X the daily average. 15,000 puts and 6,840 calls changed hands in ILMN options. The top trade is a 2,331-contract block of November 25 puts at $2.20, which looks like an opening put buyer bracing for additional losses in ILMN in the weeks ahead.

Unusual Volume
Sprint Nextel (S) options volume is running 2.5X the (22-day) average, with 99,000 contracts traded and call activity accounting for 79 percent of the volume.

CREE options volume is 2.5X the average daily, with 66,000 contracts traded and call volume representing 81 percent of the activity.

Eli Lilly (LLY) options volume is running 3.5X the average daily, with 25,000 contracts traded and call volume representing 82 percent of the total volume.

Increasing options activity is also being seen in Johnson Controls (JCI), Safeway (SWY), and Clearwire (CLWR).

Implied Volatility Mover
Clearwire (CLWR) implied volatility is sharply higher after Sprint announced that it will stop selling Clearwire compatible devices. CLWR is off 68 cents to $1.37 on the news. Options volume is running 4X the daily average. 9,250 puts and 8,000 calls traded on the stock so far. October 1 puts and January 1 calls are the most actives. Meanwhile, implied volatility in the options on the stock surged 43 percent and is very elevated at more than 250.