Option Investor

Daily Newsletter, Wednesday, 11/05/2008

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Table of Contents

  1. Market Wrap
  2. In Play Updates and Reviews

Market Wrap

This is our moment, this is our time!

[Image 1]

While Asian markets finished Wednesday's session higher, European and U.S. equity markets traded lower after a historic presidential election.

It was a moment and a time for bulls to take profits as economic data and earnings remained lackluster.

US Market Watch -

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The closing ticks on the U.S. Market Watch don't tell the entire story, but by the close, when the U.S. voted "blue" (democrat), the markets saw red by the close.

Yes, the Dow Jones U.S. Home Construction Index (DJUSHB) started out fractionally lower, but by mid-session was up better than 4.00%, which gives pause to the thought that market participants were very disappointed in the election outcome.

Pulte Home (NYSE:PHM) $10.66 -5.66% (see last Wednesday's Wrap) participated in the sector's gains early as it neared the $12.50 level with a session best $11.91, but in the recent market environment "be careful my pretty, don't eat it so quick, too much of this cooking, could make you sick," I thought it best to raise bullish stops rather aggressively to the $11.50 level in order to protect such handsome gains.

Pulte Home (PHM) - Daily Intervals (~11:30 AM EST)

[Image 3]

This is the same chart we looked at in PHM last week, but I did add the PINK retracement in recent OptionInvestor.com Market Monitor observations so that we could tie this stock in with the DJUSHB and give technical reason for raising a stop.

It's been a volatile market of late, and when you've got gains of +10%, it's hard to not protect it. I think a lot of market participants are doing the same.

Add in a less than spectacular Mortgage Banker's Association weekly survey, which revealed a weak purchases index, and there was plenty of "reason" to protect gains in the builders.

MBA's Weekly Application Survey Table -

[Image 4]

The MBA said its seasonally adjusted Purchases Index fell 13.9% to a reading of 260.9. The gains in the DJUSHB and PHM in early morning trade seemed almost "too good to be true!"

The MBA said the average contract interest rate for a 30-year fixed-rate mortgage increased to 6.47% from the prior week's average of 6.26%.

The "242.20 +1.4%" was the level the DJUSHB was trading just as I posted the above table in the Market Monitor at 09:37 PM EST this morning. That's when we really started to raise our stop gain in PHM.

All I hope to do with the above commentary is give an example of what I think traders are doing, or should be doing with some of their trade management. It should also instill the "easy come and easy go" for bullish and bearish biased traders.

You don't think there weren't some SHORTS in PHM in early October than saw $12 to $8, then right back to $12 do you?

Anyhow, the MBA purchases data was NOT what I think a bull wanted to see.

Wednesday's Global Economic Calendar -

[Image 5]

In recent week's I've noted that the yen's strength has seemingly coincided with some VERY BEARISH trade in Japan's Nikkei-225 ($NIKK), which actually posted a +4.46% gain today.

Go back up to the U.S. Market Watch and you'll see the Yen CurrencyShares (FXY) $101.57 +1.69% having a strong session today.

I want us to be a bit careful as to what we do read, or do NOT read into today's equity action as to Obama's win.

There were some gains in Asia the last couple of weeks and they didn't get "sold," (Wednesday) and despite today's gain for the yen, the Nikkei-225 held gains.

I'm going to try and show you how I'm tying some of this together with the Pivot Levels, where it sure seems like institutional computers are feeding off this relationship.

As it pertains to economic data here in the U.S., the ADP Non-Farm Employment Change showed U.S. private employers cut 157K jobs in October, suggesting Friday's more comprehensive non-farm payrolls will show weakness.

Consensus for Friday's non-farm is -200K, which would be further weakness from October's -150K.

Stocks did recoup some of the opening session losses at 10:00 AM on the release of the ISM non-manufacturing.

Thirteen (13) industries reported contraction (Arts, Entertainment & Recreation; Real Estate, Rental & Leasing; Management of Companies & Support Services; Accommodation & Food Services; Construction; Retail Trade; Agriculture, Forestry, Fishing & Hunting; Educational Services; Professional, Scientific & Technical Services; Public Administration; Finance & Insurance; Information; and Wholesale Trade).

Only three (3) industries reported growth in October according to the NMI composite index. Listed in order are: Other Services; Health Care & Social Assistance; and Utilities.

The only item I gleaned from the report that seemed positive was that some wholesale trade respondents said they saw a "general pick-up in business in spite of all the bad economic global news."

But no sooner had the S&P 500 Index (SPX.X) rebounded back to its QUARTERLY S2 (996.26) and MONTHLY Pivot (991.86) did we get the weekly EIA Inventory data at 10:30 AM.

S&P 500 (SPX.X) - 15-min intervals

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Hang in here with me. QUARTERLY S2 and MONTHLY Pivot. We'll get to my "tie" with the Yen, and even the Market Volatility Index (VIX.X) in a moment.

Just want to show you a "zoomed in" 15-minute interval chart.

IF McCain had won the election (some believe Republicans a bit more "pro business") then yesterday's close may have hinted of some market bias. Still, HUMANS must have kept the SPX from trading WKLY R1 (1,016.50).

Election results know, economic data revealed, SPX can't get back above QRTRLY S2 (996.25).

I placed the "cursor box" at the 10:30-10:45 interval. That's when the EIA data was released.

EIA Inventory/Refinery Data - Market Monitor Observations

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I'm showing some of my comments/observations from this morning. I should say that there was nothing I saw as "unusual" or notable in the EIA inventory data today. A slight dropoff in demand (crude oil inputs), but that's about it.

You can go back up to the U.S. Market Watch and see how things changed from there.

OK, I've got to get a move on, or I'll miss deadline, but here's the FXY (yen).

Yen CurrencyShares (FXY) - Daily Intervals

[Image 8]

Some analysts are thinking/saying that the STRENGTH in the Yen is a "flight to safety" signal, and it looks like it. I would also note that the BOJ has their key interest rate at 0.30% and they can only cut to 0.00%.

BOJ's Shirakawa had little "positive" to say in regards to economic trends. He also said he thought the BOJ needed to be careful in lowering rates too aggressively.

That's a bit perplexing to me, consider their rates are at 0.30%.

So, perhaps the Yen just so strong as market participants figure rates there can't go too much lower. Often time, currencies move in UNISON with monetary policy.

Again, yen is just above "par" with the U.S. $, but Yen seems to be moving COUNTER-TREND to U.S. stocks.

SPX - 60-minute interval chart

[Image 9]

Keep an eye on the FXY and this chart of the SPX. IF the yen just hanging out, or near $105 and SPX dips back near 880-ish, look LONG the SPX, perhaps all major U.S. equity averages.

Do you see how today, BULLS simply may have wanted to "lock in" what they had? Didn't get the further break higher, so take some profit.

Bears could have pressed the issue to, with a tight stop above the QRTRLY Pivot/MNTHLY Pivot overlap.

We had a nice BULL trade in the DIA on 10/28/08.

Sometimes the MARKET gives us a 2nd shot.

In Play Updates and Reviews

Hopefully No One Was Surprised.

Play Editor's Note: Extremely early this morning in Jim's Intraday Blog he suggested a "sell-the-news" event in the market today. Readers of this column shouldn't be surprised since we have been expecting a pull back. Granted I wasn't expecting a one-day 500-point sell-off. There could be some follow through tomorrow. I'm still thinking we should buy the dips but wait for signs of a bounce first.

CALL Play Updates

Apple Inc. - AAPL - close: 103.30 change: -7.69 stop: 99.45

The widespread sell-off in the market on Wednesday hit shares of AAPL for a 6.9% drop. The stock fell through the bottom of its short-term trading range around $105, which is definitely short-term bearish. We were suggesting a trigger to buy calls on a pull back into the $106-104 zone. The play is now open. Unfortunately, it looks like AAPL is going to retest round-number support near $100 before bouncing. That raises the risk of AAPL hitting our stop at $99.45 on an intraday spike.

Currently our first target is $118.00. Our second target is $124.00. Wait for a bounce from the $100 region before considering new bullish positions. It seems we should have stuck to our original plan to buy dips in the $101-100 range.


Picked on November 05 at $106.00 *triggered     
Change since picked:      - 2.70
Earnings Date           10/21/08 (confirmed)
Average Daily Volume =      48.3 million  

Baker Hughes - BHI - close: 34.52 change: -2.62 stop: 32.30

Yesterday's 10% jump in crude oil quickly reversed into a 7% decline today. This put a lot of pressure on the oil stocks and BHI gave up 7% today. Our plan was to buy calls on a dip into the 34.50-34.00 range, which was hit today so the play is now open. The stock is in our entry zone and while we would consider new positions here readers may want to wait for another dip into the $33.80-33.50 region as an alternative entry zone.

Our first target is $39.75. We are tentatively setting a secondary target at $43.50 but suggest readers take most if not all of their money off the table at $39.75. The Point & Figure chart has a new buy signal with a $46 target.


Picked on November 05 at $ 34.50 *triggered     
Change since picked:      + 0.02
Earnings Date           01/29/09 (unconfirmed)
Average Daily Volume =       8.5 million  

CSX Corp. - CSX - close: 44.51 chg: -2.39 stop: 43.45

CSX was not immune to the sell-off. The DJUSRR railroad index lost 6.3% while CSX gave up about 5.1%. CSX might find some support near $44.00 or its 10-dma also near $44.00. Wait for signs of a bounce before considering new positions. If you entered near $41 or $40 then I would seriously consider some profit taking.

Position #1
Picked on October 23 at $ 40.41 /gap down entry
Change since picked: + 4.10 /originally listed at $43.74

Position #2
Picked on November 03 at $ 44.25
Change since picked: + 0.26

Earnings Date          10/14/08 (confirmed)
Average Daily Volume =      6.5 million  

Lockheed Martin - LMT - close: 84.39 change: -1.52 stop: 78.79

LMT held up relatively well. The stock spiked down to $83.19 this morning and eventually settled with a 1.7% decline. We're still waiting for a dip into the $82.75-82.00 zone. More conservative traders may want to revert back to our original entry suggestion in the $81-80 zone. If triggered at $82.75 Our target is the $89.50 mark.

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           10/21/08 (confirmed)
Average Daily Volume =       3.8 million  

United States Oil (ETF) - USO - close: 53.84 change: -3.54 stop: 51.95

It was a tough day for oil. We were expecting a dip but not a 6% sell-off. The weekly inventory numbers did show a build but that was to be expected. The U.S. dollar didn't move that much so we can't blame the dollar on oil's move. It's possible it was just profit taking after Tuesday's big gain.

Our plan was to buy calls on a dip in the $55.65-54.00 zone. The USO blew right through this area and settled under $54.00 and its simple 10-dma. Our play is now open but we would wait for a new rise over $55.00 before initiating new bullish positions.

Our first target is $59.90. Our second target is $64.50 although I actually see some resistance around $62.50. The Point & Figure chart has produced a triple-top breakout buy signal with a $69 target.


Picked on November 05 at $ 55.65 *triggered     
Change since picked:      - 1.81
Earnings Date           00/00/00
Average Daily Volume =      12.3 million  

Energy SPDR - XLE - close: 50.65 chg: -2.37 stop: 47.75*new*

Ouch! It was a painful day for the XLE bulls. We lost a $4.00 gain in the play as XLE gave up 4.4% thanks to a sharp drop in oil. Currently we're looking for the $50.00-49.00 zone to hold as short-term support but if you don't want to endure a lot of volatility then consider raising your stop loss to the $49.00 level or higher. We're adjusting our stop loss to $47.75. We're not suggesting new bullish positions at this time. Our target is the $56.50 mark.

Picked on October 30 at $ 50.35
Change since picked:     + 0.30
Earnings Date          00/00/00
Average Daily Volume =     47.7 million  

PUT Play Updates

Volatility Index - VIX - cls: 54.56 chg: + 6.83 stop: n/a

We have been warning readers to expect a bounce in the VIX after such a sharp decline. We are not suggesting readers buy puts at this time. However, we would be tempted to sell at-the-money or out-of-the money November calls if the VIX rallied to the 59.00-61.00 zone again. Be sure to play with a stop to buy them back if the market collapses again.

We have about two weeks left before November VIX options expire.

If the VIX is under your call's strike price at expiration (11/19/08) they'll expire at zero ($0.00) and you keep all the premium you sold it for.

Note: The VIX options, which are European style options, have a unique expiration date. November VIX options expire on November 19th, 2008. The last day of trading for these options is the Tuesday before expiration. For more information check this link:

Our September 16th put position (suggested entry at 30.30) has a 25.50 target. In all honesty this position may be dead. We still have plenty of time with these next two. The September 29th position (suggested entry at 46.72) has two targets at 36.00 and 31.00. Our October 8th position (entry 57.53) has two targets at 40.00 and 35.00.

Picked on September 16 at = 30.30 first position
Change since picked:       +24.26
Picked again Sept. 29 at =  46.72 second position
Changed since picked:      + 7.84
Picked again Octo. 08 at =  57.53 third position
Changed since picked:      - 2.97
Earnings Date            00/00/00
Average Daily Volume =        --- million  

Strangle & Spread Play Updates

CBOE Volatility Index - VIX - cls: 54.56 chg: + 6.83 stop: n/a

Again it should not be a surprise to see a spike in the VIX. We've been expecting a drop in the market so the VIX naturally moves higher.

We're not suggesting new spread positions at this time.

We don't see any changes from our prior comments on the VIX spread plays listed below.


Please see the CBOE website or our Sunday, October 12th play description for details on margin requirements for selling VIX options. Link:

Note: VIX options are European style options that settle for cash at expiration. Furthermore VIX options have unique expiration dates. November options expire on Wednesday, November 19, 2008 and will stop trading on Tuesday, November 18th.

VIX spread #1 has been completed.

VIX spread #2 with November options (date Oct. 12th):

We wanted to SELL the November 30 calls (opening price 10/13/08 was $ 8.60) and BUY the November 50 (opening price was $1.61) as a hedge against the VIX remaining elevated.

In a different format the play is:

Monday 10/13/08 open 8.60, high 9.80, closed 8.40
Update 10/15/08 open 10.00, high 13.00, closed 13.00 
Update 10/16/08 open 13.70, high 16.20, closed 13.25
Update 10/17/08 open 15.55, high 17.70, closed 17.50bid
Update 10/20/08 open 16.30, high 17.20, closed 15.00bid
Update 10/21/08 open -----, high 15.50, closed 14.40bid
Update 10/22/08 open 16.40, high 19.20, closed 18.10bid
Update 10/23/08 open 17.50, high 21.40, closed 20.30bid
Update 10/24/08 open 25.00, high 26.50, closed 25.80bid
Update 10/27/08 open 26.32, high 26.45, closed 29.30bid<-high
Update 10/28/08 open 29.00, high 29.00, closed 23.70bid
Update 10/29/08 open 25.60, high 25.60, closed 26.20bid
Update 10/30/08 open 24.06, high 27.32, closed 25.20bid
Update 10/31/08 open 25.20, high 25.20, closed 24.30bid
Update 11/03/08 open 24.50, high 24.50, closed 21.50bid
Update 11/04/08 open 19.00, high 19.00, closed 16.80bid
Update 11/05/08 open 17.56, high 20.60, closed 20.20bid


Monday 10/13/08 open 1.61, high 2.10, closed 1.50
Update 10/15/08 open 2.00, high 3.60, closed 3.60 
Update 10/16/08 open 3.70, high 5.50, closed 3.65
Update 10/17/08 open 4.50, high 5.30, closed 5.50ask
Update 10/20/08 open 3.90, high 5.30, closed 4.40ask
Update 10/21/08 open ----, high 4.70, closed 3.80ask
Update 10/22/08 open 4.30, high 6.60, closed 6.40ask
Update 10/23/08 open 5.70, high 7.70, closed 7.30ask
Update 10/24/08 open 10.10, high 11.00, closed 11.00ask
Update 10/27/08 open 11.43, high 13.80, closed 14.20ask<-high/suggested sell
Update 10/28/08 open 11.00, high 13.30, closed  9.40ask
Update 10/29/08 open  9.23, high 10.70, closed 11.00ask
Update 10/30/08 open  8.69, high 10.90, closed 10.00ask
Update 10/31/08 open 10.30, high 10.30, closed  9.00ask
Update 11/03/08 open  8.34, high 8.34, closed 7.00ask
Update 11/04/08 open  3.50, high 3.70, closed 4.00ask
Update 11/05/08 open  4.20, high 5.90, closed 5.60ask

Picked on October 12 at $ 69.95
Change since picked:     -15.39 


VIX spread #3 with November options (published 10/22/08):

We wanted to SELL the November 35 calls (10/23/08 opening price was $ 14.00) and BUY the November 60 (10/23/08 opening price was $3.00) as a hedge against the VIX remaining elevated. We'll fill in the prices Thursday morning. Our account will be credited with the amount for selling the November 35 calls, while it the price paid for the 60 calls will be deducted.

In a different format the play is:

Wednesday 10/22/08 closed at 14.00 bid
Update 10/23/08 open 14.00, high 17.00, closed 15.30bid
Update 10/24/08 open 19.40, high 21.50, closed 20.60bid
Update 10/27/08 open 23.00, high 23.00, closed 23.90bid <-high
Update 10/28/08 open 22.93, high 24.70, closed 18.60bid
Update 10/29/08 open 19.59, high 21.13, closed 20.90bid
Update 10/30/08 open 18.50, high 22.00, closed 20.30bid
Update 10/31/08 open 21.10, high 21.10, closed 19.20bid
Update 11/03/08 open 19.31, high 19.31, closed 19.10bid
Update 11/04/08 open 14.80, high 14.80, closed 11.80bid
Update 11/05/08 open 13.05, high 14.40, closed 15.30bid

Wednesday 10/22/08 closed at 3.70 ask
Update 10/23/08 open 3.00, high 4.50, closed 4.10ask
Update 10/24/08 open 7.00, high 7.00, closed 6.90ask
Update 10/27/08 open 6.91, high 8.80, closed 9.00ask <-high/suggested sell
Update 10/28/08 open 7.60, high 8.60, closed 5.50ask
Update 10/29/08 open 5.40, high 6.30, closed 6.50ask
Update 10/30/08 open 4.90, high 6.20, closed 5.80ask
Update 10/31/08 open 5.90, high 6.10, closed 4.90ask
Update 11/03/08 open 4.60, high 4.81, closed 3.50ask
Update 11/04/08 open 1.15, high 1.60, closed 1.75ask
Update 11/05/08 open 1.66, high 2.70, closed 2.45ask

Picked on October 12 at $ 69.65
Change since picked:     -15.09 


Amazon.com - AMZN - close: 51.98 change: -6.47 stop: 54.75

It was a very bearish day for AMZN. Not only did the stock under perform the markets with an 11% decline but shares fell through support near $55.00, through support near $52.50, and through its 20 and 10-dma. The big move lower was very unexpected. Our plan was to buy a dip in the $56-55 zone. Thus the drop through $56.00 opened our plan but we were quickly stopped out at $54.75. At this point traders can look for failed rallies under $55.00 as bearish entry points.


Picked on November 05 at $ 56.00 *triggered/stopped 54.75
Change since picked:      - 4.02 
Earnings Date           01/29/09 (unconfirmed)
Average Daily Volume =      11.3 million  

Burlington Northern - BNI - cls: 86.49 chg: -5.11 stop: 86.65

Ouch! It's painful to see a $5.00 gain just vanish. That's what happened with BNI today. The stock gave up more than 5.5% and hit our newly adjusted stop loss at $86.65. Exacerbating today's drop in BNI was an analyst downgrade when UBS removed BNI from their short-term buy list.

We did suggest that readers take profits with BNI above $90 and fortunately, we got that chance to do some profit taking this morning before BNI collapsed under $90.00 midday. The stock could have support near $85.00 so we'd keep it on our watch list.


Picked on October 30 at $ 86.59 /stopped out 86.65
Change since picked:     - 0.10
Earnings Date          10/23/08 (confirmed)
Average Daily Volume =      5.1 million  


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