Option Investor

Daily Newsletter, Wednesday, 12/03/2008

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Guinea Pig Market

[Image 1]

Guinea Pigs are inquisitive, friendly animals. Not unlike the current market environment, they should be treated gently - they can be nervous creatures.

It was a choppy session of trade today as traders digested another round of weak economic data.

Employment data released prior to the opening bell made for a lower open, but after some intra-day volatility, buyers held their ground above key levels of near-term support, driving the major averages higher by the close into tomorrow's key interest rate decisions out of the U.K. and Europe.

Global Economic Calendar -

[Image 2]

Preliminary jobs data from Challenger and ADP ahead of tomorrow's Department of Labor weekly jobless claims had traders spooked at the open.

Economists are forecasting jobless claims to have risen an additional 540,000.

Final nonfarm productivity of +1.3% was slightly better than the initial estimate of +1.1% in the third quarter, but the final figure (a key inflation combatant measure monitored by the Fed) was well off the +3.6% in Q2.

Unit labor costs, a gauge of inflation and profit pressures closely watched by the Federal Reserve, rose a revised 2.8% in Q3 after declining 2.6% in Q2.

Into the close, the Reserve Bank of New Zealand slashed its Official Cash Rate 150 basis points to 5.00% from 6.50%.

Tomorrow morning at 07:00 AM ET, the Bank of England will announce changes in its monetary policy. Economists currently look for the BOE to lower its Official Bank Rate by 100 basis points to 2.00%.

The British Pound CurrencyShares (FXB) $147.66 -0.81% action suggests that market participants fully expect further BOE easing.

Then at 07:45 AM ET, the European Central Bank will announce changes in its monetary policy. Current consensus is for the ECB to lower its Minimum Bid Rate by 50 basis points to 2.75%.

The Euro CurrencyShares (FXE) $127.16 were little changed ahead of tomorrow's announcement.

Crude oil prices did see a knee-jerk reaction higher to $47.95 after the EIA said weekly crude oil stockpiles fell for the first time ten (10) weeks with a draw of 456,000 barrels to 320.37 million barrels.

But buyers of the black gold remained tentative with crude oil inputs falling by 258,000 barrels/day to 14.58 million barrels as refiners cut back capacity to 84.34% from the prior week's 86.16% of operable capacity.

My number of days of crude oil supply remained unchanged at 21.9.

January Crude Oil futures (cl09f) settled down $0.17, or -0.36% at $46.79.

The U.S. Oil Fund (USO) $38.11 -1.01% was off $0.39.

Then at 02:00 PM ET, the Federal Reserve Board released its anecdotal Beige Book report with all districts reporting overall economic activity weakness since the last report.

S&P 500 Index (SPX.X) - 30-minute intervals

[Image 3]

As you can see, the SPX and its volatility measure VIX.X were still stuck between what looks to be some key near-term levels of SPX support/resistance of 818-882 and 60-70 at 02:00 PM ET.

Indeed a sizeable "range" for the SPX, but not unlike a Guinea Pig, that's the range near-term that traders must handle gently and perhaps understand that traders and investors are a bit nervous with the recent volatility.

In some of yesterday's intra-day commentary (see 03:15 PM ET and 05:01 PM ET posts), I began pointing out some rather "small" head/should bottom patterns in the SPX and RUT.X.

Now you're wondering what the Guinea Pigs "dog tag" of D.D.X is all about.

That's a trader's Guinea Pig index and my "chart of the day" of what I think we as traders should begin to monitor.

Can the Disk Drive Index (DDX.X) 50.74 +6.84%, today's second-best upside performer in the U.S. Market Watch be the early sector/index of what is yet to come?

Disk Drive Index (DDX.X) - 60-minute intervals

[Image 4]

Now ... the above chart was one I "found" at today's close. I was clicking down the U.S. Market Watch of charts and noticed that on a Daily Interval chart, the DDX.X had actually closed ABOVE its 21-day SMA (not many indexes/sectors CLOSED above their 21-day SMA), so I thought I'd take a look at the DDX.X and see if it had a reverse h/s pattern like the major averages.

Here I set up the use of retracement, as a technician will with the head/shoulder pattern.

Place the 0% at the "head" and then you fit the 50% at the interpretive "neckline."

The PATTERN OBJECTIVE is the resulting 100%.

Now, the FAILURE of the pattern, using the DDX.X as an example would be a trade back BELOW the LEFT SHOULDER of $43.28.

The "Guinea Pig" can be IMPORTANT if traders are now alert to, and PLAYING other patterns.

I should note, NOT only BULLS are monitoring these type of observations. BEARS are likely doing the same, and if they look to be coming to fruition, BEARS could come in and cover, locking in some gains instead of watching them evaporate.

SPX and SPY - 60-minute intervals

[Image 5]

Using the DDX.X as an example, we can perhaps start to have a plan, or begin to be alert that there's at least one (1) index/sector showing some sign of the h/s bottom pattern underway.

I wanted to turn the VOLUME on for the SPY chart, but it is all messed up.

A strong h/s pattern will see VOLUME in one, sometimes two places. One is the RIGHT shoulder of the pattern; the other is at the NECKLINE.

Be gentle with things.

Closing Internals

[Image 6]

You can really see the "swing of emotion" from today's internals. Just look at the advance/decline line swings, the up and down of the TRIN and TRINQ. The PRICE action of the various equity-based indexes (NYSE Comp to QQQQQ).

New Option Plays

Four new plays and a Watch List

Play Editor's Note: Wednesday's market rally was pretty encouraging. Bears tried to take it down midday but stocks rebounded and closed near their highs for the session. We are still in a bear market but I suspect this rebound may have farther to run. I am cautiously adding new bullish candidates to the newsletter but we need to be defensive here. Keep your positions small. Don't try to trade everything but only the handful that you really like and can stay on top of. If the major market indices can't break out past last Friday's high then we need to be quick to raise stops or hit the eject button. A test of resistance and a minor pull back would be normal but if we don't set a new higher low it will spell trouble.

Note: I have listed three Chinese stocks tonight. I would not play all of them. Try to limit your risk to the Chinese market, which can be even more volatile than our own.

Here are a few stocks I'm watching:

TEF - If I had more time I would have added TEF to the play list. Use a stop under $58.00. My target would be the 100-dma.

MCD - This stock has broken out over technical resistance at its 100-dma and 200-dma. Shares still have round-number resistance at $60.00. This may be a bullish candidate to watch! Next level of resistance would be $65.00.

BDX - I came close to adding BDX as a call candidate tonight. Support near $62.00 has been holding up pretty well. There is some resistance near the 30-dma. A bullish target would be the $70.00 region or the 50-dma.

HBC - This stock has found support again at the $50.00 level. The financials can be tough to play due to the volatility in the sector but this might be an entry point. There is some resistance at $55.00 but the P&F chart is bullish with a $76 target.


Alliant Tech. - ATK - close: 81.05 change: +2.00 stop: 77.99

Why We Like It:
We are increasing our exposure to the defense sector. We already have LMT on the newsletter and now we're adding ATK as a call candidate. The last couple of days have seen ATK find new support at its simple 10-dma. Short-term technical indicators have turned positive and we're seeing some bullish divergences between price and technicals. The Point & Figure chart is already bullish with a $95 target but the P&F chart also shows resistance at $82.00.

We are suggesting readers buy calls now with a stop loss at $77.99. More conservative traders may want to wait for a move over $82.00 first or use a tighter stop (maybe 78.50ish). Our target is the $86.50 mark.

Suggested Options:
We are suggesting the January calls.

BUY CALL JAN 80.00 ATK-AP open interest= 758 current ask $6.20
BUY CALL JAN 85.00 ATK-AQ open interest=  72 current ask $3.70

Annotated Chart:

Picked on December 03 at $ 81.05
Change since picked:      + 0.00
Earnings Date           01/29/09 (unconfirmed)
Average Daily Volume =       424 thousand 

China Mobile Ltd. - CHL - close: 47.85 change: +1.44 stop: 44.24

Why We Like It:
Shares of CHL are breaking out from their year-long bearish trend. It's taken a few days to digest the move but CHL finally looks ready to make a run higher. The Chinese market can be volatile so we're going to use a wide stop loss. More conservative traders will want to consider a tighter stop. We are suggesting readers buy call positions now or on a dip near $46.00. We have two targets. Our first target is $51.75 just under the 100-dma. Our secondary target is $57.00. FYI: The P&F chart is bullish with a $64 target but shows possible resistance near $54.

Note: I was unable to find an earnings date for CHL, which does raise our risk since we prefer to avoid holding over an earnings report.

Suggested Options:
We are suggesting the January calls.

BUY CALL JAN 45.00 CHL-AI open interest=2692 current ask $6.30
BUY CALL JAN 50.00 CHL-AJ open interest=2710 current ask $3.50
BUY CALL JAN 55.00 CHL-AK open interest=2169 current ask $1.65

Annotated Chart:

Picked on December 03 at $ 47.85
Change since picked:      + 0.00
Earnings Date           00/00/08 (unconfirmed)
Average Daily Volume =       3.9 million  

FTSE/Xinhau China Index - FXI - close: 27.25 chg: +0.84 stop: 24.95

Why We Like It:
The FXI is a Chinese market ETF that appears on the verge of a breakout over resistance in the $27.50-28.00 zone. This security rallied right to its 50-dma on Wednesday. If the rally continues it could see some explosive moves higher. Most of the technicals have turned bullish although the P&F chart hasn't reversed higher yet. We're suggesting readers buy calls here or on a dip above the $25.50 level. There is the possibility that Chinese markets will rally tomorrow in response to today's strength in the U.S. markets and that could have the FXI gapping higher. We would not open positions if the FXI gaps open above $30.00. Our target is the $32.50-34.00 zone.

Suggested Options:
We are suggesting the January calls. Strikes are available at $1.00 increments.

BUY CALL JAN 28.00 FXI-AB open interest= 713 current ask $2.90
BUY CALL JAN 30.00 FXI-AD open interest=11220 current ask $2.10
BUY CALL JAN 32.00 FXI-AF open interest=1977 current ask $1.50

Annotated Chart:

Picked on December 03 at $ 27.25
Change since picked:      + 0.00
Earnings Date           00/00/00
Average Daily Volume =      51.2 million  

PetroChina - PTR - close: 83.53 change: +1.93 stop: 78.85

Why We Like It:
PTR is part of the state-run oil and gas industry and shares have broken out from their bearish trend. The recent bounce back above the 50-dma and the $80.00 level is bullish. Short-term and long-term technicals have turned positive. The P&F chart is positive with a $102 target. This looks like a good spot to speculate on a rally back towards the $100 region. I saw speculate because the Chinese market can be so volatile. Keep your position size small. If we're lucky we'll see PTR dip back towards $80.00 and provide a better entry point to buy calls. Our first target is $89.95. Our second target is $97.50.

Suggested Options:
We are suggesting the January calls. Double check your option symbols. Normally a January 85 strike would be -AQ but the CBOE has -AY for PTR.

BUY CALL JAN 85.00 PTR-AY open interest=     current ask $0.00
BUY CALL JAN 90.00 PTR-AR open interest=     current ask $0.00
BUY CALL JAN 95.00 PTR-AS open interest=     current ask $0.00

Annotated Chart:

Picked on December 03 at $ 83.53
Change since picked:      + 0.00
Earnings Date           03/06/09 (unconfirmed)
Average Daily Volume =       1.0 million  

In Play Updates and Reviews

AMZN Hits 1st Target & More

CALL Play Updates

Apple Inc. - AAPL - close: 95.90 change: +3.43 stop: 89.90 *new*

Wednesday ended up being a good day for AAPL and a good day for us. The stock gapped open lower at $89.40, which provided a much better entry point than yesterday's close of $92.47. Shares almost hit our stop loss at $88.45 but found some support near $88.80. AAPL immediately rallied. While shares did pull back intraday the afternoon market bounced lifted AAPL past short-term resistance at $95.00 to close up 3.7%.

Given our new entry point at $89.40, we've got a six-point gain in AAPL. I would strongly suggest readers take some profits here. You don't have to completely exit but book some gains and lighten up. The technical resistance at the 50-dma has fallen to $98.94. Thus we're adjusting our official exit point to $98.00, especially now given our adjusted entry point (89.40). Please note our new stop loss at $89.90.

Picked on December 02 at $ 89.40 *gap down entry point
Change since picked:      + 6.50 /originally listed at $92.47
Earnings Date           01/22/09 (unconfirmed)
Average Daily Volume =        53 million  

Amazon.com - AMZN - close: 45.21 change: +4.02 stop: 39.90 *new*

Target exceeded. AMZN showed a lot of strength this morning. The stock tested round-number support at $40.00 again and when that didn't break AMZN shot higher and traded over $45.00. Our first target to take profits was the $44.50 mark. The afternoon dip slipped to back toward $43.00 but when stocks turned higher again in the last hour AMZN closed above round-number resistance at $45.00 for a 9.7% gain. We are raising our stop loss to $39.90. More conservative traders may want to use a tighter stop loss. We hope readers took some gains today. We still have an aggressive, secondary target at $48.50.


Picked on December 01 at $ 40.50 *triggered     
Change since picked:      + 4.71 /1st target hit 44.50 on 12/03
Earnings Date           01/29/09 (unconfirmed)
Average Daily Volume =      12.7 million  

Apollo Group - APOL - close: 75.34 change: -0.34 stop: 70.95

APOL spent the day trading sideways in close to a $4.00 range. The trend of higher lows is still in place. More conservative traders might want to consider a tighter stop loss. Our target is the $79.75 mark. FYI: The Point & Figure chart is bullish with a $99 target.

Picked on December 01 at $ 73.00 *triggered     
Change since picked:      + 2.34
Earnings Date           01/06/09 (unconfirmed)
Average Daily Volume =       4.0 million  

Axsys Tech. - AXYS - close: 72.75 change: +5.32 stop: 65.95 *new*

It was a very strong day for AXYS. The stock gapped open lower at $66.59, providing us a better entry point and then suddenly shares just exploded higher. AXYS broke through very significant resistance at the $70.00 mark. The midday pull back saw the stock retest broken resistance as new support. Then shares rallied back to close at their highs with a 7.8% gain. Volume was about double the norm, which is bullish.

We currently have a target to exit at $74.85. We are adding a secondary target at $79.00. We still suggest readers take most of their position off the table at $74.85. The P&F chart is bullish with an $89 target and the inverse H&S pattern is suggesting a $90 target. Please note our new stop loss at $65.95.

Picked on December 02 at $ 66.59 /gap down entry 
Change since picked:      + 0.00 /originally listed at $67.43
Earnings Date           02/19/09 (unconfirmed)
Average Daily Volume =       246 thousand 

Costco Wholesale - COST - close: 51.42 change: +1.32 stop: 47.75

It was an eye-opening morning for COST. The stock gapped open lower at $48.93 providing a better entry point for us to open call positions. Shares hovered there for a moment, hit $48.73, and then rallied sharply higher over resistance at $52.00. The stock ended the session up 2.6%. We don't see any changes from our previous comments. Our first target is $54.85.

Picked on December 02 at $ 48.93 /gap down entry point
Change since picked:      + 0.00 /originally listed at $50.10
Earnings Date           12/11/08 (confirmed)
Average Daily Volume =       7.2 million  

Entergy Corp. - ETR - close: 83.86 change: +0.90 stop: 79.99

It has been tough waiting on ETR to finish digesting its breakout but shares are finally starting to move. The stock has found new support at its 50-dma the last few days, which is a positive development. Today's gain, while not big, also produced a bullish engulfing candlestick pattern. This looks like a new bullish entry point to buy calls on ETR.

The P&F chart is bullish with a $104 target. We're setting two targets. Our first target to take profits is $92.50. Our secondary target is $97.50. Keep a wary eye on possible resistance at the 100-dma and exponential 200-dma overhead.

Picked on November 22 at $ 85.76
Change since picked:      - 1.90
Earnings Date           01/29/09 (unconfirmed)
Average Daily Volume =       2.3 million  

Lockheed Martin - LMT - close: 76.91 change: +3.28 stop: 70.90

Wednesday was a strong day for LMT. The stock did see an intraday dip toward $72.00 but the rebound and the afternoon rally was strong. Volume came in above average, which is positive. Shares closed the day up 4.4%. A close above $75.00 is also a bullish development.

We have two targets. Our first target is $78.50. Our second target is $81.50.

Picked on December 01 at $ 73.50 *triggered     
Change since picked:      + 3.41
Earnings Date           01/22/09 (unconfirmed)
Average Daily Volume =       3.6 million  

XTO Energy - XTO - close: 35.61 change: +1.41 stop: 33.49

Oil prices continued to flutter and fade and that put downward pressure on the oil stocks. XTO managed to buck the trend and post a gain but only after retesting short-term support in the $34.00-33.50 zone. I am tempted to buy this bounce but readers may want to wait for a rise over $36.00 before initiating positions. We are listing two targets but strongly suggest that readers exit most of their position at our first target. The $40.00 level remains overhead resistance. Our first target is $39.85. Our second target is $43.50.

Picked on December 02 at $ 35.61
Change since picked:      + 0.00
Earnings Date           02/10/09 (unconfirmed)
Average Daily Volume =      13.3 million  

PUT Play Updates

*Currently we do not have any put play updates*

Strangle & Spread Play Updates

SPDR GOLD Trust - GLD - close: 76.18 change: -0.77 stop: n/a

The U.S. dollar posted another gain and this put pressure on gold prices. The GLD slipped about 1% and dipped toward round-number support near $75.00. We don't see any changes from our previous comments. We are not suggesting new strangle positions. December options expire in less than three weeks.

What is a strangle?
A strangle involves buying both an out-of-the-money call and an out-of-the-money put. We don't care what direction the stock goes as long as it moves one direction. If the stock moves far enough one side of our trade will rise in value and pay for the entire trade and make a profit.

-December Strangle-

We suggested readers buy the December $75 call (GVD-LW) and the December $70 puts (GVD-XR). Our estimated cost was $6.30. We want to sell if either option hits $12.00.

Picked on November 09 at $ 72.50
Change since picked:      + 3.68
Earnings Date           00/00/00
Average Daily Volume =      19.3 million  

Ultra S&P500 ProShares - SSO - close: 24.83 change: +1.28 stop: n/a

The S&P 500 index managed to close the day at its highs, which is bullish for tomorrow's open. If the index can breakout past resistance near 900 it would be very short-term bullish. The SSO delivered a 5.4% gain in response to the S&P 500's move. We're not suggesting new strangles at this time. December options have less than three weeks before they expire.

Note: The SSO is an ultra-long ETF that typically moves twice the daily performance of the S&P 500 index.

What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.

-December Strangle Details-
We suggested readers buy the December $30.00 call (SOJ-LD) and the December $20.00 put (SOJ-XT). Our estimated cost is $3.75. We want to sell if either option hits $6.00.

Picked on November 12 at $ 24.84
Change since picked:      - 0.01
Earnings Date           00/00/00
Average Daily Volume =       126 million  


Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

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