It was a volatile week that ended with the Dow Jones Industrial Average (DJIA) scoring a healthy TKO — thanks largely to Monday’s 400-point relief rally. The CBOE Market Volatility Index (VIX) reflected that volatility. Although it settled down from its readings in the low 40s the previous week, the VIX still ended the week at an elevated 31.24.

Mirroring the price action of the 1997 “Asian Contagion,” the S&P 500 Index (SPX) rallied powerfully from its 200-day moving average early last week, in response to a loan package from the European Union and the International Monetary Fund to the euro zone’s most heavily indebted nations. The rally pushed the SPX back above its 160-day moving average, situated at 1,120, and the January highs in the 1,150 area. But after an unsuccessful attempt to overtake its 50-day moving average in the 1,175 area, the SPX retreated 3.1% on Thursday and Friday. The SPX closed the week at 1,135 – below its January highs, but above the 160-day moving average, in a slight technical improvement relative to last week.

Levels of importance on the SPX include the round 1,100 level, which is not only the SPX’s 200-day moving average, but also represents about a 10% correction from the recent highs. Bernie also mentioned that we are keeping a close eye on the 1,167 level, as this is the site of the 160-month moving average, a trendline that acted as support at the bear-market bottom in 2002-2003. Moreover, when this moving average was breached in October 2008, it was a major sell signal. A month-end close above this level would support the notion that the SPX is in bull mode.

With the euro hitting fresh lows on Friday, it is evident that European worries continue to weigh negatively on investors in the U.S. market. The sell-off that began late Thursday and through Friday indicates there is a lot of fear about negative financial developments over the weekend. But a possibility this weekend would be government officials looking to implement a plan specifically designed to stabilize the euro, and this would be most effective if they can get U.S. cooperation. It is our belief that such cooperation is very plausible, as we don’t think Washington wants to see the dollar get overly strong from here.

Last week’s rescue package did nothing to stabilize the euro, and such stabilization is of very high priority over the short term. If in fact officials do something over the weekend to prop up the euro, we could see a huge equity rally on Monday. In the absence of such a plan, there could be follow-through selling.

Another potential catalyst this week is the expiration of May options. There is massive out-of-the-money put open interest on various indexes and exchange-traded funds that is getting set to expire. Should the market find any type of stability, whether technical or news-based, the unwinding of short positions related to the expiration of the out-of-the-money puts could create a tailwind for the stock market.

We are equally hedged in our portfolio as the early part of this week should bring quite a bit of volatility.  Sell into strength.  Investors have to be nimble in this market until a clear direction is revealed.

Weekly Economic Calendar:

Monday

  • Lowe’s Companies Inc. (LOW), Agilent Technologies Inc. (A), and SINA Corp. (SINA) will report their quarterly earnings figures.

Tuesday

  • April’s building permits, producer price index (PPI), core PPI, and housing starts will arrive on Tuesday. On the earnings front, Abercrombie & Fitch Co. (ANF), Ambac Financial Group Inc. (ABK), The Home Depot Inc. (HD), Wal-Mart Stores Inc. (WMT), Analog Devices Inc. (ADI), and Hewlett-Packard Co. (HPQ) are scheduled to release their quarterly reports.

Wednesday

  • Wednesday brings the weekly report on U.S. petroleum supplies, as well as the April consumer price index (CPI) and core CPI. Taking their turn in the earnings confessional are BJ’s Wholesale Club Inc. (BJ), Deere & Co. (DE), Applied Materials Inc. (AMAT), Hot Topic Inc. (HOTT), and Limited Brands Inc. (LTD).

Thursday

  • Weekly initial jobless claims hit the Street on Thursday, followed by April’s leading economic indicators and May’s Philadelphia Fed manufacturing index. Dollar Tree Inc. (DLTR), GameStop Corp. (GME), Ross Stores Inc. (ROST), Staples Inc. (SPLS), Tidewater Inc. (TDW), Aeropostale Inc. (ARO), Brocade Communications Systems Inc. (BRCD), Dell Inc. (DELL), salesforce.com inc. (CRM), and Marvell Technology Group Ltd. (MRVL) are scheduled to report earnings.

Friday

New Trade Idea:

There are no new trades today until we see how the market opens and acts early this week.  We will look to trade out of our existing plays early this week.  Sell into strength.

Open Positions:

Intercontinental Exchange (ICE) May 125 Calls @ 1.95:

This play was stopped-out on Friday.

Macys (M) May 24 calls @ $0.70:

Retail took a beating on Friday.  Continue to hold.  Use $1.40 for a target with no stop-loss.

Boyd Gaming (BYD) May 12.5 Calls @ $1.05:

We just missed our target prior to the pullback.  Continue to hold and use $1.75 for a target with no stop-loss.

Las Vegas Sands (LVS) May 24 Calls @ $2.35:

The sector sold-off along with the overall market on Friday. Continue to hold.  Use $3.60 for a target with no stop-loss.

PNC Financial (PNC) May 67.5 Calls @ $1.45:

The stock sold off with the overall market late this week.  Continue to hold with $2.40 for a target with no stop-loss.