While the S&P 500 Index made a new intraday high Friday, it also closed lower making a Key Reversal on high options and futures expiration related volume. Interestingly laggards and initial public offerings are replacing the former sectors leaders. Adding in some evidence of bubble froth leads to the conclusion that the long advance is struggling and may be in trouble.

Market Review

S&P 500 Index?(SPX) The Friday Key Reversal suggests a lower low early this week. Combined with weakness in Cloud, Social and Mobile, the “growth at any price stocks” makes us wonder if rotation into previous laggards like Microsoft (MSFT), Hewlett Packard (HPQ), Intel (INTC) and others will be sufficient along with new IPOs, not included in the indexes, to support the current levels. Further, the?SPDR Dow 30 ETF?(DIA) ?could be making a small Head & Shoulders Top, activated on a close below the neckline, now at 160. If so, the downside-measuring objective would be down at 156. Another concern is the potential large Head & Shoulder Top defined by the former December 31, 2013 high at 165.51.

CBOE Volatility Index??(VIX) ?After a quick round trip up to 18 and back to 14, VIX closed the week 2.82 lower. The VIX Futures premium remained in the yellow cautious zone, under 10% all week, closing at 7.68%.

Calendars & Credits

Calendar spreads offer an opportunity to sell near term high-implied volatility before earnings reports and unless the underlying makes a large move will usually produce gains.

The first one is from “The Best Calendar Spread”, a regular feature in the Rankers & Scanners section of our home page.

Micron Technology Inc.?(MU) scheduled to report earnings on April 3. The implied volatility has risen from 36.30 a month ago to 55.52.

The current?Historical Volatility?is 21.47 and 26.17 using the?Parkinson’s range method, with an?Implied Volatility Index Mean?of 55.52, down from 57.51 the week before. The 52-week high was 64.46 on June 12, 2013 while the low was 33.72 on November 26, 2013. The implied volatility ratio compared to the range historical volatility is 2.12 suggesting options are expensive. Friday’s volume was high at 158,449 contracts traded compared to the 5-day average volume of 119,500 contracts.

Here is the calendar spread idea.

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The plan is to close the spread shortly after the earnings report while the longer dated July option retains more time premium.

While both legs have elevated implied volatility, consider this credit spread alternative.

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Reduce the risk further by closing or unwinding the short leg on a close back above 25.

Lululemon Athletica Inc.?(LULU) scheduled to report earnings Thursday March 27 before the opening, with a consensus estimate of .72 per share and a whisper of .74.

The current?Historical Volatility?is 31.08 and 26.49 using the?Parkinson’s range method, with an?Implied Volatility Index Mean?of 59.40, up from 47.88 the week before. The 52-week high was 59.40 on Friday while the low was 28.33 on September 17, 2013. The implied volatility ratio compared to the range historical volatility is 2.24 suggesting options are expensive. Friday’s volume was 33,392 contracts traded compared to the 5-day average volume of 27, 840 contracts.

Here is the calendar spread.

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More Credit Spreads

Using the model of the credit spreads shown above, here are more ideas from our ranker scan that was set to find stocks in the top 200 by options volume with IV/HV ratios greater than one using the range method to calculate historical volatility.

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The common underlying premise is for lower stock prices. Use any reversal pivots as the?SU?(stop/unwind) points.

The suggestions above use the closing middle price between the Friday bid and ask. Monday option prices will be somewhat different due to the time decay over the long?weekend and any price change.

Summary

Rotation out of sectors that had been working into laggards and IPOs makes the S&P 500 Index look like it is struggling to continue higher while Friday’s Key Reversal suggests a lower low this week. The Dow Jones Industrials Index appears to be making a potential small Head & Shoulder Top, suggesting lower prices. The probability of a long awaited 10% correction is increasing and events in Ukraine could play a role.

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