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Halftime: S&P Like Good Mattress, Has Firm Support

Fears that the crisis in Europe may be spiraling out of control led to a broad sell-off Tuesday with the Dow tumbling by triple digits.

The euro fell to an almost 4 year low against the dollar with investors drawn to the greenback’s safe-haven appeal.

Worries escalated after new data suggested banks were becoming more wary of lending to one another, perhaps due to the Spanish government's rescue of a local bank over the weekend.

Despite all the negative sentiment Oppenheimer's Carter Worth compares levels in the S&P to a mattress - one that may give a little but still has firm support.

What must you know?

Strategy session with the Fast Money traders

Looking at patterns in the S&P I’m watching 1045, says Carter Worth. It’s an important reference point. I see it as the beginning of support .

And when you think of support, think of it not as a board but rather a mattress top. We may sink a little below 1045 – perhaps down to 1020 - but I expect the S&P has found support and will hold in that range. It’s time to cover shorts and realize gains.

True we’re off the lows of the session, but I wouldn’t discount the gravity of what’s going on in the market, counters Patty Edwards of Storehouse. I keep hearing investors say Greece is so small it’s not going to have a big impact. But I think there could be larger ramifications much like small catalysts that started in Thailand led to the Asian crisis years ago.

If you think we're looking at a slowdown domestically, put O’Reilly Automotive and AutoZone on your radar , says Jon Najarian. If the economy gets worse people should hold onto their cars longer.

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THE SELLOFF: FINANCIALS

The traders are closely watching the action in financials with most banks lower except for market bellwether Goldman Sachs, which traded into the green.

What must you know?

$140 is a critical level for Goldman, says Jon Najarian. Considering Goldman is a market bellwether, if it can hold that level I’d consider it a big moral victory and I’d sell the Vix .

But we’re trading below the flash crash low on the XLF, says Jeff Tomasulo. I don’t feel comfortable playing the space right now. I think it’s important to preserve capital.

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THE SELLOFF: CURRENCIES

As we mentioned above the fluctuations in the currency markets are playing a large role in Tuesday’s trading action. The euro fell to an almost 4-year low against the dollar and an 8-year low against the yen intra-day.

What’s the trade?

Patterns in the chart of the euro are so bad they actually look good, says Carter Worth. The euro appears to be stabilizing at the March ’09 lows. I expect the euro to hold at these levels. I’d cover shorts and play for a bounce.

And I’ve spotted an unconventional bullish sign adds Jeff Tomasulo of SMB. The cover story on Newsweek was the death of the euro, he says.. When news magazines do that it’s a sign of the bottom.

When you look at what’s happening overseas, it’s important to understand that there’s both a liquidity crisis and a solvency crisis, explains Brian Kelly of Kanundrum.

It’s the solvency issue that’s so worrisome. For example, Spain has a huge housing problem; they have about 3 years of inventory on the market but housing prices have only dropped by 10%. Unless there’s a turnaround, all the bad debt will come on the balance sheet at the same time they’re reducing their tax base due to austerity measures. As a result, they may not be able to pay their bills.

I’m short and continue to be short, Kelly reveals. I don’t think the solvency issue will be solved anytime soon.

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THE SELL-OFF COMMODITIES

Tuesday’s market action was also largely driven by weakness in commodities, which sold-off across the board. Oil, copper and other metals were all lower on the session.

The only exception was gold, which traded between break-even and higher.

What’s the trade?

I’m holding gold and would not sell it, says Patty Edwards. And I’m nibbling on platinum due to the pullback.

AK Steel is another name that’s so bad it’s good, says Carter Worth. It’s been in a sell-off week after week and now patterns suggest the selling is contained. I’m a buyer.

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THE SELLOFF: TECH

Tech stocks were among Tuesday’s weakest sectors with investors fleeing high beta names to raise cash.

What’s the tech trade?

I have Apple on my radar but I just can’t add to my position right here, says Patty Edwards. And I’m also watching Corning and Hewlett-Packard as value plays.

I’m looking at $230 as an important level for Apple, says Jon Najarian. If you buy the stock at $240 you can sell an at the money call and collect nearly $20 in premium.

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CALL THE CLOSE:

Jon Najarian If Goldman holds $140 sell the Vix.

Patty Edwards: I’d play stock picker but I’m not so big on the market overall

Carter Worth I think the market goes slightly higher

Jeff Tomasulo: I’d protect and trade both sides


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Trader disclosure: On May 25, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Edwards owns (VXX); Tomasulo owns VIX calls; Tomasulo owns (VXX); Tomasulo owns (PCLN) calls; Tomasulo owns (V) calls; Tomasulo owns Gold spot futures; Tomasulo owns Euros

For Patty Edwards
Storehouse Partners owns (VXX)
Storehouse Partners owns (MS)
Storehouse Partners owns (JPM)
Storehouse Partners owns (BAC)
Storehouse Partners owns (AAPL)
Storehouse Partners owns (AMZN)
Storehouse Partners owns (GOOG)
Storehouse Partners owns (MSFT)
Storehouse Partners owns (HPQ)
Storehouse Partners owns (YHOO)
Storehouse Partners owns (INTC)
Storehouse Partners owns (NVDA)
Storehouse Partners owns (CSCO)
Storehouse Partners owns (ORCL)
Storehouse Partners owns (SPY)
Storehouse Partners owns (QQQQ)
Storehouse Partners owns (GLD)
Storehouse Partners owns (PGM)
Storehouse Partners owns (AZO)
Storehouse Partners owns (SLV)?



CNBC.com with wires

Symbol
Price
 
Change
%Change
DJIA
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S&P 500
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AKS
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AZO
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GLW
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GS
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HPQ
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ORLY
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VIX
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SPDR FIN SEL
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SPDR TEC SEL
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AAPL
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