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Monday Follow-Up

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The aspen leaves here in Colorado have donned their fall colors. Meanwhile, a distinct shade of green has made its way across stock prices Monday morning.

Greed, err, green is good. So, let's ask some questions about Monday's green: Is Monday's early rally the very beginnings of a protracted basing period? Or, is Monday's green the start of an extended rally? Or, is Monday's advance merely another short covering rally that will eventually fail?

Let's examine three of Option Investor's current plays as they relate to the three questions.

If the market is beginning to base that means readers will want to look for trading ranges. Buying near support and exiting plays near resistance is the strategy to pursue in the case of bullish plays. Oracle (NASDAQ:ORCL) - a current Option Investor call play - traced somewhat of a base last week. The stock found buyers down around $10.25 last week, and is today trading near the upper-end of its range around the $12 level. If the market is going to trade sideways (Read: Base) in the coming sessions, bullish traders should use Monday's strength to exit open positions taken on last week's weakness.

On the other hand, if a bullish trader believed that the market is going to continue advancing this week, they could employ a momentum-based strategy and buy into Monday's strength. Oracle may be a stock to consider if one has a bullish bias for the rest of the week. General Electric (NYSE:GE) may be another stock worth taking a closer look for a bullish scenario, which is also a current Option Investor call play. The stock, along with the rest of the Dow Jones Industrial Average, was pummeled last week. But, Monday's gap higher in GE smells a little like the beginnings of a V-bottom recovery in the stock over the short-term. Big blocks are going off at the ask this morning, which adds credence to the move. In addition, the company reaffirmed its guidance last week. Therefore, GE could be a target of bottom-fishing buying this week.

Conversely, if, in fact, Monday's rally is no more than another bear market rally like we've witnessed for the last 18 months, then those traders looking for bearish plays will want to look for stocks near resistance. eBay (NASDAQ:EBAY) - a current Option Investor put play - is one stock that sticks out Monday. Sure, the stock has a cult following and is much-loved. But, its multiple is a hindrance in the current market; 100 times this year's earnings doesn't fly. Make any argument you'd like about the company, its stock is very expensive. At a time when multiples are being compressed, EBAY is a worthy stock to consider shorting if one has a bearish stance on the market.

The variable, obviously, in each of the aforementioned scenarios is what the broader market is going to do moving forward. After all, 75 to 80 percent of a stock's move is predicated upon the direction in the overall market.

Eric Utley
Option Investor

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