Not only did the Dow lose 4% last week, it dipped below the psychologically important 10,000 level on an intraday basis on Friday. The Dow is now about 9% below its 2010 high, which was set in late April. Also the VIX is now sitting above 40. Despite Friday’s late strength, the overall technical picture is not a healthy one at the moment.

The key SPX Index did close below 1100 which is not good but perhaps more importantly the index failed to break thorough 1090 on three separate occasions during Friday’s session.  1090 would have marked a 50% retracement of the loss from the previous session.  If we had been able to break above and close above that mark on Friday, we would feel fairly good about this upcoming week.  As it stands we are a bit skeptical of Friday’s rally.  It looked like a healthy dose of short-covering ahead of the weekend that fueled that late rally.

Potential support for the SPX is Friday’s low around 1,055. If this level breaks, another important level would be 1,045, site of the lows in February. Resistance is in the 1,100-1,120 area.

We will continue to proceed with caution and we will be very selective entering into new trades.  Remember, cash is a position.  We remain slightly bearish until we see real buyers step into the market.

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Weekly Economic Calendar:

Monday

  • Monday brings April’s existing home sales, with Campbell Soup Company (CPB), Yingli Green Energy Hold. Co. Ltd. (YGE), and Phillips-Van Heusen Corp. (PVH) reporting earnings.

Tuesday

  • May’s consumer confidence figures will be released. On the earnings front, AutoZone Inc. (AZO), Cracker Barrel Old Country Store Inc. (CBRL), Medtronic Inc. (MDT), Trina Solar Limited (TSL), and TiVo Inc. (TIVO) are scheduled to release their quarterly reports.

Wednesday

  • Wednesday brings the weekly report on U.S. petroleum supplies, as well as April’s durable goods and April’s new home sales. American Eagle Outfitters (AEO), Diana Shipping Inc. (DSX), Solarfun Power Holdings Co. Ltd. (SOLF), Toll Brothers Inc. (TOL), Hoku Corp. (HOKU), Jo-Ann Stores Inc. (JAS), NetApp Inc. (NTAP), and Take-Two Interactive Software Inc. (TTWO) are expected to release earnings.

Thursday

  • Weekly initial jobless claims will be released, followed by a second look at first-quarter gross domestic product (GDP). Big Lots Inc. (BIG), Costco Wholesale Corp. (COST), H.J. Heinz Company (HNZ), Tiffany & Co. (TIF), Guess?, Inc. (GES), J. Crew Group Inc. (JCG), Novell Inc. (NOVL), and OmniVision Technologies Inc. (OVTI) are scheduled to report earnings.

Friday

  • Friday closes the week with April’s personal income and spending reports, the PCE core index for April, the Chicago Business Barometer for May, and the University of Michigan’s consumer sentiment index for May. There are currently no earnings reports scheduled for release on Friday.

New Trade Idea:

Buy Sony (SNE) June 30 puts @ .90 or better:

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We have noticed an unusual patter of put accumulation in the stock last week, even on days of strength.  We expect the stock to trade below the 200-day moving average early this week.  Use $1.80 as a target to the upside and $0.45 as a mental stop-loss.

Open Positions:

JP Morgan Chase June 39 put @ $1.90:

The puts hit our target of $3.10 at the open on Friday for a whopping 63% one-day profit.