The economic calender picks up pace Tuesday with retail sales results for and the producer price index (PPI) for may. The markets will also digest the government’s report on business inventories for April. Of these three key data points, we likely need at least two of them to surprise to the upside in order for the markets to attempt any kind of bounce higher. Watch Mondays session lows for potential support, with resistance at last weeks highs.
We’d like to bring your attention to the VIX. The VIX managed to do something Monday that it has only been able to do four other times this year, close above its 200 day simple moving average. In our @ the bell update on 6/10/2011 we noted:
The VIX has hard a time staying above $18 and going below $16 the last week or so while the market has been in a steady decline. These areas coincide with a channel for the index between its 50 day simple moving average ($16.86) and its 200 day simple moving average ($19.01). A significant break below or above this channel could be a leading indicator as to the next move for the overall markets.
With the VIX now closing above this key level for the first time since March will it indeed act as a leading indicator of further market weakness? With a dreary technical back drop, recent economic data that suggest the recovery has hit a “soft patch,” and ongoing debt trouble overseas as well as here at home, our hunch is that it will.
We think a good way to play a potential move higher in the VIX is by purchasing calls. Specifically, we’ve noticed a significant amount of open interest on the JUL 20 ’11 22.50, 25.00, & 27.50 call strikes. We also saw heavy volume trade on the JUL 20 ’11 20.00 call strike on Monday with over 65,000 contracts changing hands. Such action indicates to us that “smart money” is placing their bullish bets on a move higher in the VIX. With all of these strikes trading for less than $2.25 on the high side, and $0.85 on the low side, and expiration 7 weeks away, we think there is a good chance traders can make 100% or more with these calls should the market continue to trend lower.
We’ll get earnings from Best Buy (BBY), FactSet Research Systems (FDS), and Capstone Turbine (CPST). We’re watching JCOF for a break of $0.70 to signal further upside. Other stocks we’re watching are RPC, ORS, GPLH, RPTP, OXIS, C, SPCK, FLTT, IFRS, RYUN, CSOC, COOL, AIS, F, SOHU, BIDU, & SINA.
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