Option Investor

Daily Newsletter, Saturday, 12/06/2008

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Table of Contents

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

Market Wrap

Light In The Tunnel?

Massive job losses and the highest unemployment rate since 1993 drove the Dow to a -257 point loss at Friday's open. The bad news bulls returned with a vengeance at the close to push the Dow to a +259 point gain. Could that be a light just ahead?

Market Statistics
[Image 1]

The big news on Friday was a horrendous employment report for November. The economy lost 533,000 jobs and well more than the consensus estimate of 300,000. That was the largest monthly job loss since Dec-1974. That was not the end of the bad news. September was revised lower to -403,000 jobs from -284,000 and October was revised to -320,000 from -240,000. The net result was a new loss of -732,000 jobs over those previously reported over the last 90 days. Over the last three months the economy has lost 1.256 million jobs. We are finally moving into job losses equivalent to a normal recessionary period. This was the 6th largest monthly job loss since 1939 when records were started.

The unemployment rate rose to 6.7% and a rate not seen since Sept-1993. Building and manufacturing lost 163,000 jobs in November while the retail sector lost 91,000 in a period normally bullish for retail. Losses in service producing industries hit -370,000 and more than doubling the -153,000 loss in October. The average workweek declined to 33.5 hours and the lowest on record. This suggests employers are cutting hours rather than cutting valuable employees. The labor market has fallen to its worst level in decades and much of that drop was in just the last 90 days. This suggests the Q4 GDP could be even worse than the -5% commonly being reported. This was a very ugly report and the market should have fallen much more than the -257 drop at the open. However, some are claiming the sharp 200-point decline on Thursday just before the close was in anticipation of a very bearish jobs number.

Jobs Chart
[Image 2]

The only other economic report of note was the Mortgage Delinquency Rates for Q3. The national delinquency rate on all loans rose to 6.99% and nearly 60 points higher than Q2. For prime mortgages with a fixed rate the delinquency rate rose to 3.3% and prime adjustable rate mortgages rose to 8.2%. Compared to subprime numbers those were great. Subprime fixed rate loan delinquencies rose to 18.0% and adjustable rate mortgage delinquencies rose to 21.3%. The slowing economy, rising job losses and falling home prices are making it impossible to trade out of an underwater mortgage. These are record numbers for delinquencies although foreclosures have slowed slightly with the various government programs. Still nearly 1 of every 10 loans in the U.S. are either delinquent or in foreclosure. Mortgage rates fell -51 basis points this week to 5.5% for a fixed rate making it the largest swing in the last decade. Rates have not been under 5.37% in 45 years. Holders of ARM loans should benefit from the sharp drop in rates. The government is talking about offering 4.5% fixed rate loans for purchases. This will pressure the private sector to lower rates as well. Consumers are racing to take advantage of the lower rates. The weekly application report showed applications more than doubled last week with refinance applications up +200%. Applications to purchase homes rose +38% over the prior week.

Delinquent Mortgage Table
[Image 3]

For next week there are plenty of economic reports but only one of specific interest. That is the Producer Price Index (PPI) for November. Even the PPI is not likely to be market sensitive given the falling price of commodities and prices in general. There is really nothing on next week's schedule that could come close to the bad news the market got on Friday.

Economic Calendar
[Image 4]

On the news front the grilling of the automakers droned on without any resolution. However, Chrysler raised the ante when the WSJ reported they had retained Jones Day to prepare a bankruptcy filing. This could be a well-played bluff or the reality of falling auto sales coming home to roost. It is a well-known assumption that any one automaker falling into bankruptcy would prompt the other two to quickly follow suit. A bankruptcy gives the company the ability to break union contracts, supplier contracts, leases, pensions, etc. It is thought that automakers not going though bankruptcy would have a much harder time competing when their costs would be drastically higher than a company emerging in a streamlined mode from bankruptcy. Friday was the perfect day to play that card because it puts some worry into the lawmakers currently arguing over bailing out the automakers. In a survey taken last week 52% of prospective car buyers would not buy a car from a company in bankruptcy. However, if all three took the plunge at the same time that would remove some of the stigma. Late Friday around 9:PM news sources were reporting that Democratic leaders and the White House reached a deal to provide between $15 billion and $17 billion in aid. That is far less than the $34 billion requested but Democrats believe it is enough to keep them in business until after Obama takes office on Jan 20th. Lawmakers are planning on pitching a new bailout plan to the new president immediately upon him taking office. Evidently the Chrysler news did the trick. Was it a well-played bluff or reality?

Hartford surprised the market with a better than expected forecast for 2008 and said its balance sheet was more than sufficient to withstand any continued market declines. Hartford (HIG) stock soared +102% to $14.59 on the surprise short squeeze. All of the insurers rallied strongly on the news. Also helping was news that regulators were meeting in Texas this weekend and could come up with a plan to ease regulatory guidelines for reserves held to back their variable annuity products. This would help the insurers avoid additional capital raises and would be bullish for the sector. PRU gained +7.80, MET +5.64 and LNC +5.15.

Bank of America and Merrill Lynch shareholders both approved the acquisition of Merrill by BAC. It was a shotgun merger and given the current environment the Merrill shareholders are probably glad they got something besides cat box liner material out of their shares.

The Federal Reserve bought $5 billion in Freddie/Fannie debt on Friday as it began its $600 billion in announced GSE bailouts. The Fed is going to buy $100 billion in debt and $500 billion in mortgage backed securities in an effort to lower mortgage rates. Dealers submitted $12.9 billion of debt into the auction and the Fed bought the lower end of the maturity range from 1 to 2 years in length. As the program expands the Fed is likely to buy across the entire range of debt in order to push rates lower.

The most amazing statistic from last week came from the energy sector. The price of oil closed at $55.19 on Friday before last Saturday's OPEC meeting. This Friday it traded as low as $40.50 for a -26.6% drop. Given the prior $100 drop over the last few months this additional $15 drop in one week is nothing short of amazing. Actually it is incredible. OPEC did not act but made it clear they would in two weeks at the Dec-17th meeting. Unfortunately that is not the problem. We are still seeing massive liquidation by funds and institutions. Complicated hedges are being unwound on a daily basis as analysts talk about $25 oil and $1 gasoline. The world has gone mad as the fear of the recession has surpassed the actual impact of the recession. Just like every bubble is built on irrational expectations and greed, every crash is based on irrational expectations and fear. Every prediction by a major analyst is repeated thousands of times until another analyst jumps in the spotlight with something even more bearish and the actions are repeated. It is a massive game of whispers, gossip and unknowns. Nobody knows what demand will be in six months. Heck, nobody really knows what demand is now. Everyone is afraid the soaring unemployment will result in bread lines around the world and people will be living in their cars not driving them. All of this crap is simply not true. Even if demand temporarily fell another million or even two million barrels a day it is not the end of the world.

All of this hysteria over falling oil prices is doing much more harm than good. Projects are being cancelled or put on hold all over the world because the current price of oil does not support new projects to produce $50, $60 or even $75 oil. Every project that goes inactive adds several years to the date when it will eventually produce oil. We are already talking about projects that total over 3 mbpd of potential production. That production is what would have delayed the onset Peak Oil. By putting them on hold the world is becoming increasingly at risk of even higher oil prices. The recession will be over in 6-9 months and demand will explode at these low prices. Unfortunately when a project is cancelled or mothballed the workers move on to other jobs. The equipment is sent to other locations and pipe and supplies are diverted elsewhere to be used on other projects. When the decision is made to reactivate the project all those assets will need to be acquired again and that could take years in the case of rigs and workers.

The current drop in oil prices is the worst thing that could happen to the energy sector. We are duplicating exactly what happened 10-years ago this month. The price of oil crashed because of a political battle inside OPEC and Saudi Arabia flooded the market and pushed the price down to $10 a barrel to force other OPEC nations to face reality. Around the world rigs were mothballed by the thousands and eventually cut up for scrap steel. Tens of thousands of experienced oil field workers were laid off and either retired or went into other professions. These were experienced workers that could not be replaced. When the price of oil eventually began to rise again those workers were no longer available. The rigs had been scrapped and there was nobody left to man them even if they were still around. This led to a boom in the oil equipment sector where companies ended up with multiyear backlogs for new rigs. Day rates for existing rigs exploded. New workers had to be hired and trained at great expense. The result of the oil crash meant every new rig and crew now cost up to ten times as much to operate as the older rigs and hands. This meant the cost of producing a barrel of oil soared to levels today of $50, $60 or even $75 a barrel. Those fields cannot be produced today because they are not profitable and will eventually be shut in if prices do not change quickly. In 1998 thousands of producing wells were plugged because they were not profitable. Most were not reopened even at $145 a barrel simply because there was no time or money to do it. We lost millions of barrels of production because of low prices. The same thing is happening today. This oil crash will eventually turn around and when it does the moves are going to be dramatic. Enjoy your $1.50 gasoline today because it is not going to last forever.

Crude Oil Chart
[Image 5]

Tired of the winter cold? Wish you had sold your stocks before the July crash? I heard a marketing gimmick today that is sheer genius. Elite Island Resorts came up with a killer marketing ploy. Because of the recession they have about 50% of their rooms in places like Antigua, Grand Cayman, Palm Island, Nevis, St. Lucia and Tortola going empty. Empty rooms still cost the same for debt service and overhead but generate no revenue. Elite hit on the perfect way to fill their rooms and make a profit. A weeklong Christmas vacation for a family of four costs $650 a day all inclusive of literally everything. That equates to $4550 for the week. They are willing to give you a week at one of their resorts in exchange for $5000 of stock at July 17th prices. Google was $534, Goldman $177, Citigroup $17. You give them $5000 of stock at July 17th prices and you get the room. That is 9.3 shares of Google at the July 17th price. That is only $2649 at Google's price today. Get the picture? They are allowing you to trade stock at one third to one half of its July 17th price in exchange for an EMPTY ROOM. For Elite that is a killer marketing deal. They are planning on holding the shares for 18-24 months and the odds of them making a profit are about 100% in most cases. What a deal, trade stock for an empty room and provide a killer vacation for the seller. Kudos to Elite for thinking outside the box. Link to description

This was a crazy week in the markets. Triple digit moves were the norm like Friday's 550-point swing. The biggest move was the -600 point drop on Monday to 8150. That established our support for the week and that support held. The drop on Monday was due to several news factors as well as simply being in a new month after a +1000 point rebound. It was profit taking, sell programs and news events. More importantly it did not establish market direction for the week. The markets actually shook off Monday's drop to trade higher for eight of the last ten days. Thursday's closing drop was a serious sell program, possibly several concurrent programs and now that we know what the jobs report held we can guess why somebody was moving to the sidelines. Friday's opening dip of -259 Dow points produced a temporary dip just below support at 8150 but it was short lived. The bad news bulls raced to buy the market and another short squeeze developed. In the internals table below I think we are seeing continued evidence of rising bullish sentiment. Volume was decent every day and it did not increase on the down days. Actually Monday's 600-point loss was the lowest volume day of the week.

Market Internals Table
[Image 6]

On Tuesday I recommended buying dips to Dow 8150 and that worked well on Friday. The close on Friday was the high of the week after Monday's opening drop. We still have plenty of overhead resistance between our close and 9000 and we are not out of the woods yet. I continue to hear stories about traders leaving for the year. So many people are fed up with the volatility and have decided to move to the sidelines until a trend develops. That may be a good plan for some but I still want to nibble on the dips. By the time a real trend develops we could be a thousand points higher on the Dow and many stocks up +20% from their current levels. Dow 9600 is the real trend breaker level. That was the resistance high back on Nov-4th. Once over that level we should see some additional interest from buyers.

Dow Chart
[Image 7]

Believe it or not the Nasdaq also closed at its high for the week. After being the scapegoat for all the tech warnings we saw firm support at 1400 and a close just over 1500 on Friday. This is far from being bullish but it is far less bearish than we were seeing two weeks ago when it looked like 1300 was just a pause in the downward trend. If the Nasdaq can move over 1500 on heavy volume the retail tech traders should get that wishful gleam in their eyes and start shopping again. We could still see a retest of 1300 but that possibility becomes more remote every day we stay over 1400. More people will start believing the bottom is behind us and begin placing bets. Real resistance is 1800 but that is so far away you can barely see it from here. Let's wish for a few more small steps before we start worrying about the big numbers.

Nasdaq Chart
[Image 8]

The S&P looks like the Dow but there were several important tests of support at 815 that did not waver even a little bit. Strong resistance at 900 but like the Dow and Nasdaq as long as 815 continues to hold we will eventually move higher. The 30-day average is the next resistance challenge. Given our recent volatility just holding within the prior week's range was amazing. The price action was not particularly bullish but closing at the high after a rocky week is never a bad thing. I would look to buy the dip to 815 and go short below that level.

SPX Chart
[Image 9]

The Russell did not exhibit any special characteristics different from the Nasdaq and S&P except it did not close at its high. The Russell only missed by two points and that is close enough in my book. 460 continues to be short term resistance and that is exactly where it closed on Friday. I would look for a move over 480 as a sign funds are buying small caps again. Today I am neutral on that point. There was buying interest a little earlier in the day on the Russell than the other indexes but that could have just been short covering. We have two weeks left on December options and next week could see some pre-expiration settlement pushing the small caps higher. The dip buy level on the Russell is support at 420.

Russell Chart
[Image 10]

Contrary to anything you might have read above I am slightly more bullish overall because buyers seem to be shrugging off the bad news. (No Rodney, I am not on drugs) Since Nov 21st I have been suggesting we bargain shop and begin picking up some good stocks on sale. I specifically said not to back up the truck but be picky about what you buy. You may not be happy 2-3 weeks from now but 12-18 months from now you should be very profitable. I have never seen a bear market this violent and of course a financial crisis this bad. I think both are in the final stages and will soon pass. The Fed meets in 7 trading days and they are likely to cut rates again. Before then the Fed and the Treasury will be spending money like crazy to slow the economic decline. I am hearing -5% to -8% for Q4 GDP but that is just speculation. We will not have a clue until well into 2009 and those numbers are published. If by chance it is not as bad as analysts expect the recovery could come sooner and be led of course by the markets. On Monday the markets will probably be controlled by the bailout of the automakers. As of early Saturday there are still some details to be worked out but it appears it will pass. That could stimulate some relief buying on Monday. The auto industry directly employs 250,000 workers and probably another 250,000 indirectly. They are too big to fail, especially considering the paltry $34 billion they need to survive. The financial stocks have benefited from bailouts in the $1.4 trillion range making the $34 billion automaker bailout chump change.

I am working on the end of year renewal special but there are still some details to be ironed out. Please be patient.

Jim Brown

Index Wrap


THE BOTTOM LINE : In a major decline a retracement as scant as 25% of the last major downswing in the S&P 500 (SPX) can suggest that a rally is done for and it's time to sell again. However, I was also seeing some bullish potential in the chart patterns and given how the market is holding up lately, there could be more upside ahead.

The lead SPX index hasn't yet retraced more of its August to November decline that it did coming into this past week but SPX didn't pierce the prior weekly low either. What else can a 'good technician' think but to be impressed that relentless bad news on the economy has NOT beaten stocks down again in a major way. Is there something else going on here?

What that 'something' is I'm not sure. Some savvy investors are seeing that things aren’t as bad as they could be? The market is too 'oversold' to bring in many more sellers? It doesn't take much buying to lift the major market indexes when sellers have unloaded most or much of what they want to around current levels. It may take higher prices to induce more selling.

My market 'sentiment' indicator is showing an upturn in bullishness as more calls are getting bought in individual equities relative to puts; most put 'hedges' may have been done already by those wanting to hold stock AND have some downside protection. I like to see extreme bearishness continue to hold much in the way of index calls as a contrarian, which I tend to be. Nevertheless, I see the indexes showing a little bullish 'leg' on the charts.

Upside momentum is enough to have gotten the major indexes above their 21-day moving averages although this can reverse like it did on the last instance of it. I also put some stock in prices being above the down trendline that defines the upper line of the declining wedge patterns. A pattern that's rare but a bullish harbinger when seen in stocks as suggesting potential for further gains after a penetration of the upper trendline.

The fact that Nasdaq is doing better technically may be of some cheer to the beaten down bulls. Continuing rebounds above multimonth down trendlines can be seen effectively in longer-term hourly charts of SPX and in NDX.

In the SPX hourly chart seen below it's a bullish plus to see the last pullback low at support implied by the previously broken up trendline as highlighted by the green up arrow. It's all well and good to have some hope that your stocks might rebound a bit more but, if so, SPX still has a 'moment of truth' ahead with key resistance at 900. Stay tuned on that! It would take a further move higher, to around 960, for SPX to achieve a 'minimal' fibonacci 38% percent retracement of the August-November decline.

[Image 1]

On the (close-only) hourly line chart below of the Nasdaq 100 (NDX), support held in the 1100 area on the recent pullback and the Friday close saw NDX pushed above its recently hourly highs and as well, above the hourly down trendline of the past few months.

If prices continue higher, a pivotal overhead resistance is not far overhead at 1185-1192 in NDX. A daily close above 1200, especially one not reversed the next day, would suggest further upside potential such as back to prior (up) swing highs in the 1378-1383 area.

[Image 2]



Key near resistance in the S&P 500 (SPX) remains 900, extending to 915-917 with pivotal resistance at the prior highs in the 1000-1007 area. Showing some resilience like last week, SPX has again managed to close the week above its 21-day moving average.

Key near support remains at the low-800/800 area and next is at the prior 741 low. Major support begins in the 700 area.

As I discuss in my initial 'bottom line' commentary, bullish potential is seen in prices staying above the top of the falling wedge formation; i.e., that upper line of the triangle highlighted on the daily chart below.

We'll see won't we, but I won't be surprised by some further rises in the major indexes, especially since so many expect that the cratering economy must mean ever lower stock prices. Except when it doesn't with some investors buying selectively, anticipating some economic improvement by June-July.

[Image 3]


On a long-term weekly chart basis (not shown), the S&P 100 (OEX) like the other major indices, remains at an oversold extreme. OEX's 13-week RSI fell to a new low reading at 21; this past Friday was a slightly lower weekly close. Also given a long-term weekly/monthly chart view there remains potential of a major 2002-2008 double bottom in the 385 area.

Relevant to index option traders and the daily OEX chart below, although there was a lower close on the week, the chart is mixed to having a slight bullish bias near-term. Short-term bullish actuality depends on the index piercing near resistance in the 433 to 450 area. Next resistance is in the 480-483 area, then at 495-500. A move to 455 would retrace 38% and to 485, 50% percent, of the Aug-Nov decline.

Key near support is in the 400 area, with major support beginning in the 360-350 price zone.

[Image 4]

SENTIMENT: Relative to my sentiment indicator seen above, the current buoyancy in my call to put (CPRATIO) model injects a cautionary note in banking on much of a move higher, irrespective of the charts suggesting some bullish potential. I would have a more bullish overall view if my sentiment indicator stayed closer to 1 rather than popping back up just because the market hasn't continued to tank.


Key support and resistance areas and levels in the Dow 30 Average (INDU) remain unchanged from last week.

Resistances: in the 8830 area, then at 9000, the 9160 area with major resistance beginning at 9500 and extending to 9615-9630. A move to 9127 would be a fibonacci 38% retracement and back up to the 9600 area (9652) a 50% retracement, of the Aug-Nov downswing.

I'm still long some Dow Index (DJX) calls bought in the 75 area (Dow 7500) and would exit on a current 88ntrade objective. No further trade suggestions. I'd like to have a shot of buying puts on a move up to the 9600 area again; and would have a lot of company in that wish no doubt!

Support is at 8170-8200, then at 7760, with fairly major support at 7450-7500.

[Image 5]


The Nasdaq Composite Index (COMP) is showing the potential of breaking out above the upper boundary of the falling price wedge, a pattern having further bullish implications after prices pierce the upper line of the descending triangle. You may notice how Friday's fall seemed to find buying interest on a pullback to support implied by what previously was resistance implied by the down trendline.

COMP finally also managed to pierce and close above its 21-day average; at 1496 currently. Next resistances are in the 1530 area, then 1590-1610, with fairly major resistance at 1770-1785.

Support levels and areas remain mostly unchanged: at 1400, then at 1300, with major support beginning at 1200, extending to 1160.

[Image 6]


The Nasdaq 100 (NDX) is following the same pattern of a potential bullish 'breakout' above resistance implied by its down trendline and 21-day average. A key near resistance, especially on a closing basis, is at 1200; further or next resistance is apparent at 1300, then at 1370-1383, extending on up to 1470.

Two noteworthy retracements: a move in NDX to 1384 represents a 38% retracement of the Aug-Nov decline and to 1497, a 1/2 or 50% recovery of the last big decline. In a major decline, a 50% retracement is a bit of a 'stretch' and unusual.

Technical support remains about the same as discussed last time: at 1090, 1020, with major support beginning at 940 and extending to the 830-800 area. I own some of the NDX tracking stock bought on the NDX dip to near 1000 (QQQQ to 25) and is a trade where I'm unconcerned with call premium erosion occurring in a sideways drift; but without the leverage of options of course!

[Image 7]


The Nasdaq 100 QQQQ tracking stock cleared near resistance at its 21-day moving average. Further overhead resistance is in the 29-29.4 area, then at 32 and finally at a pivotal level at 34 as the last significant rally high.

Technical support is at 26.8, next at 25 and lastly in the 24 area.

I'd continue to say that a close above 30 not reversed the next day, is bullish for a move to 32.

[Image 8]


The chart picture for the Russell 2000 (RUT) is unchanged as RUT remains within a bearish downtrend channel, with key overhead resistance implied by the upper channel line at 487 currently. Next resistance then is at the 55-day average, currently at 529.

Support is at 416, then at 375-370, then at 350.

The low and mid-cap stocks, as a 'size' sector has fallen out of favor as the individual investor has become an endangered species. RUT may be a lagging index for some time to come as RUT stocks lag in institutional 'bottom fishing' interest mostly.

[Image 9]




1. Technical support or areas of likely buying interest that are highlighted with green up arrows.

2. Resistance or areas of likely selling interest and notated by red down arrows.


3. Index price areas where I have a bullish bias or interest in buying index calls, selling puts or other bullish strategies.

4. Price levels where I suggest buying index puts or adopting other bearish option strategies.

5. Bullish or Bearish trader sentiment and display the graph of a CBOE daily call to put volume ratio for equities only (CPRATIO) with the S&P 100 (OEX) chart. However, this indicator pertains to the market as a whole, not just OEX. I divide calls BY puts rather than the reverse (the put/call ratio). In my indicator a LOW reading is bearish and a HIGH reading bearish, consistent with other overbought/oversold indicators.

Trading suggestions are based on Index levels, not a specific option (month and strike price) and entry price for that option. My outlook often focuses on the intermediate-term trend (next few weeks) rather than the next several days of the short-term trend.

Having at least 3-4 weeks to expiration tends to be my guideline for trade entry choice. I attempt to pick only what I consider to be 'high-potential' trades; e.g., a defined risk point would equal in points only 1/3 or less of the index price target.

I favor At The Money (ATM), In The Money (ITM) or only slightly Out of The Money (OTM) strike prices so that premium levels are not as cheap as would otherwise be the case, which helps in not overtrading an account. Exit or stop points, as well as projected profitable index price targets, are based on my technical analysis of the underlying indexes.

New Option Plays

Internet, Burritos, Overnight, and Travel

Play Editor's Note: The market's bounce looks pretty seductive. You probably have a 50/50 chance of throwing darts at a board of stocks and coming up with something that looks bullish. Don't forget the fact that we are still in a bear market. We can have tradable bullish moves in a bear market as evidenced by the last couple of weeks but the prevailing trend is still down. We need to remain on the defensive. Keep our position size and risk small and be ready to take a profit when we get one.


Amazon.com - AMZN - close: 48.26 change: +0.94 stop: 43.25

Why We Like It:
AMZN has been a successful bullish candidate for us this month and we're going to try again. Overall most believe we're still facing a horrible holiday shopping season but AMZN caught a bid on hopes that last week's "cyber Monday" was a winner. The stock bounced sharply from its lows on Friday. Instead of chasing the rebound we are suggesting readers buy calls on a dip into the $46.00-45.00 zone with a stop loss under Friday's low. Our first (short-term) target is $49.95. Our secondary target is the $54.00 mark. The P&F chart is bullish with a $74 target.

Suggested Options:
We are suggesting the January calls. Our entry point is the $46.00-45.00 zone.

BUY CALL JAN 45.00 ZQN-AI open interest=13476 current ask $7.80
BUY CALL JAN 47.50 ZQN-AW open interest= 2136 current ask $6.40
BUY CALL JAN 50.00 ZQN-AJ open interest=11574 current ask $5.15

Annotated Chart:

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           01/28/09 (unconfirmed)
Average Daily Volume =      12.9 million  

Chipotle Mexican Grill - CMG - close: 53.10 chg: +2.34 stop: 44.95

Why We Like It:
CMG has broken out from its long-term bearish channel. More aggressive traders may want to jump in now. We don't want to chase it. Our plan is to buy a dip in the $50.00-48.00 zone with a stop loss under $45.00. We realize that is a wide (aggressive) stop loss but CMG can be somewhat volatile. If triggered at $49.00 we have two targets. Our first target is $54.50, which honestly the stock might hit on Monday before ever being triggered. Our secondary target is $58.50.

Suggested Options:
We are suggesting the January calls. Our entry point is the $50.00-48.00 zone.

BUY CALL JAN 50.00 CJY-AJ open interest= 345 current ask $6.40
BUY CALL JAN 55.00 CMG-AK open interest= 609 current ask $3.60

Annotated Chart:

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           02/12/09 (unconfirmed)
Average Daily Volume =       475 thousand 

Express Scripts - ESRX - close: 58.58 change: +2.20 stop: 54.95

Why We Like It:
A lot of stocks ended the day higher on Friday. The 3.9% rally in ESRX was more than just a gain. It was a bullish breakout over resistance near $58.00 and technical resistance at the 40-dma. The stock has failed near its 40-dma several times in the last month. Now ESRX has broken the trend of lower highs and looks poised to run toward resistance around $65.00. We are suggesting bullish positions now. More conservative traders may want to try and wait for a dip in the $57-56 zone. Our target is $64.00.

Suggested Options:
We are suggesting the January calls.

BUY CALL JAN 60.00 XTQ-AL open interest=1099 current ask $4.40
BUY CALL JAN 65.00 XTQ-AM open interest=4634 current ask $2.35

Annotated Chart:

Picked on December 06 at $ 58.58
Change since picked:      + 0.00
Earnings Date           02/19/09 (unconfirmed)
Average Daily Volume =       3.1 million  

Fedex - FDX - close: 73.71 change: +2.78 stop: 69.45

Why We Like It:
Falling oil prices have been a boon for the transports and the fact that investors didn't let bad economic news spook them could be a good sign for cyclical names. FDX displayed relative strength all week after recovering from the punishing drop from last Monday. The breakout over resistance at $70.00 is bullish and it looks like FDX has produced a bullish double bottom with the lows in October and November. I would consider this an aggressive play because stop loss placement was a challenge. The moves have been so volatile lately and the intraday range on Friday was very big.

I would prefer to buy calls on a dip near $70.00 but we're going to suggest bullish positions now at current levels. We'll try and limit our risk with a stop loss at $69.45. Our target is $79.50.

Suggested Options:
We are suggesting the January calls.

BUY CALL JAN 70.00 FDX-AN open interest=2421 current ask $8.40
BUY CALL JAN 75.00 FDX-AO open interest=4715 current ask $5.60
BUY CALL JAN 80.00 FDX-AP open interest=6220 current ask $3.50

Annotated Chart:

Picked on December 06 at $ 73.71
Change since picked:      + 0.00
Earnings Date           12/18/08 (confirmed)
Average Daily Volume =       3.9 million  

Priceline.com - PCLN - close: 60.46 change: +2.23 stop: 54.99

Why We Like It:
This is an aggressive, higher-risk play on PCLN. The stock broke through significant resistance a couple of weeks ago only to plunge back to the $55.00 level this past Friday. Traders bought the dip and the bounce back looks like a one-day bullish reversal pattern. We're suggesting readers buy calls here at current levels with a stop loss under $55.00. We have two targets. Our first target $64.90. Our second target is $69.90. FYI: The Point & Figure chart is bullish with a $102 target.

Suggested Options:
We are suggesting the January calls.

BUY CALL JAN 60.00 PUZ-AL open interest=3997 current ask $7.00
BUY CALL JAN 65.00 PUZ-AM open interest= 185 current ask $4.70
BUY CALL JAN 70.00 PUZ-AN open interest=6375 current ask $2.85

Annotated Chart:

Picked on December 06 at $ 60.46
Change since picked:      + 0.00
Earnings Date           02/12/09 (unconfirmed)
Average Daily Volume =       1.8 million  

In Play Updates and Reviews

Sliced in Half

Play Editor's Note: Friday's volatile session sliced our portfolio of call candidates in half. Fortunately our stops were relatively tight and COST hit our target to take profits and exit. With only two weeks left before December options expire our current strangle plays are in jeopardy.

CALL Play Updates

Apollo Group - APOL - close: 75.87 change: +1.82 stop: 71.90

APOL temporarily broke down under its 10-dma on Friday morning as investors reacted to the terrible jobs number. It looked like shares were going to hit our stop loss but APOL managed to bounce at $72.31. By the end of the day APOL had completely recovered and ended back near its recent highs. If the market is positive this week I would expect APOL to breakout from the recent consolidation and hit our target at $79.75. FYI: The Point & Figure chart is bullish with a $99 target.

Suggested Options:
We are not suggesting new positions at this time but a dip back toward $74.00 near the 10-dma may be another entry point. We're suggesting the January calls.

Annotated Chart:

Picked on December 01 at $ 73.00 *triggered     
Change since picked:      + 2.87
Earnings Date           01/06/09 (unconfirmed)
Average Daily Volume =       4.0 million  

China Mobile Ltd. - CHL - close: 49.71 change: +2.76 stop: 45.75*new*

Shares of CHL displayed significant relative strength on Friday. The stock didn't see the same amount of selling pressure on Friday morning and actually gapped higher at the open after an analyst upgrade. The stock eventually rallied to new six-week highs and closed up 5.8%. We are raising our stop loss to $45.75. If you're looking for a new entry point consider waiting for another pull back into the $48.00-47.00 region.

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:
If CHL provides another entry point we would use the January calls.

Annotated Chart:

Picked on December 03 at $ 47.11 /gap down entry
Change since picked:      + 2.60 /originally listed at $47.85
Earnings Date           00/00/08 (unconfirmed)
Average Daily Volume =       3.9 million  

FTSE/Xinhau China Index - FXI - close: 27.83 chg: +1.98 stop: 24.95

Friday was a bullish session for FXI. The Chinese ETF spiked higher at the open. When there was profit taking buyers stepped in at $26.00 and shares marched steadily higher for the remainder of the day. The stock closed up 7% and broke through technical resistance at its 50-dma. We would still consider new positions here although you might want to wait for a dip back toward $27.50 or $27.00 to initiate positions. Our target is the $32.50-34.00 zone. More conservative traders may want to inch up their stops toward $26. While I'm on the subject of conservative moves, you might want to start taking profits early in the $29.75-30.00 zone since the $30.00 mark could be round-number resistance.

Suggested Options:
Strikes are available at $1.00 increments. I would use the January calls.

Annotated Chart:

Picked on December 03 at $ 26.27 /gap down entry point
Change since picked:      + 1.56 /originally listed at $27.25
Earnings Date           00/00/00
Average Daily Volume =      51.2 million  

Lockheed Martin - LMT - close: 80.19 change: +3.04 stop: 74.49 *new*

Defense contractor LMT looks pretty strong here. The stock surged past the $80.00 mark on Friday afternoon. I am suggesting that readers start profit taking right here. Aggressive traders could aim for the 50-dma near $84.00. We are sticking with our secondary target to exit at $81.50. LMT has already surpassed our first target at $78.50. Please note that we are raising the stop loss to $74.49, just under Friday's low.

Suggested Options:
We are not suggesting new positions at this time.

Annotated Chart:

Picked on December 01 at $ 73.50 *triggered     
Change since picked:      + 6.69
Earnings Date           01/22/09 (unconfirmed)
Average Daily Volume =       3.6 million  

PUT Play Updates

*Currently we do not have any put play updates*

Strangle & Spread Play Updates

SPDR GOLD Trust - GLD - close: 74.52 change: -0.98 stop: n/a

Gold prices continued to under perform after an early morning rise for the U.S. dollar on Friday. It was a rough week for gold but I suspect the U.S. dollar is poised to move lower. We're not making any directional picks here. We don't care what direction GLD goes but it needs to move quickly. At this point we're going to need a big move toward $85 or $65 in the next two weeks. Is that possible? Yes. Is it probable? Maybe not.

I am repeating my earlier comments that more conservative traders will want to consider an early exit immediately. With only two weeks left before December options expire the time premiums are eroding fast!

We are not suggesting new strangle positions in the GLD.

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.

Suggested Options:
No new positions.

Annotated Chart:

Picked on November 09 at $ 72.50
Change since picked:      + 2.02
Earnings Date           00/00/00
Average Daily Volume =      19.3 million  

Ultra S&P500 ProShares - SSO - close: 25.08 change: +1.66 stop: n/a

Our strangle play with the SSO is not in a very good position. It's been three weeks and we're right back to where we started. We only have two weeks left before December options expire and more conservative traders may want to abandon ship.

We're not suggesting new strangles at this time.

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.

Suggested Options:
No new plays.

Annotated Chart:

Picked on November 12 at $ 24.84
Change since picked:      + 0.24
Earnings Date           00/00/00
Average Daily Volume =       126 million  


Alliant Tech. - ATK - close: 81.33 change: +2.22 stop: 77.99

The Friday morning swoon in the stock market was too much for ATK and the stock declined to $76.94 intraday. That was more than enough to hit our stop loss at $77.99 closing the play. ATK eventually recovered and closed up 2.8% but failed to breakout past its 50-dma. Readers may want to reconsider new bullish positions on a move over $82.50 or $83.00.


Picked on December 03 at $ 79.76 /gap down entry
Change since picked:      + 1.57 /originally listed at $81.05
Earnings Date           01/29/09 (unconfirmed)
Average Daily Volume =       424 thousand 

Axsys Tech. - AXYS - close: 65.70 change: -1.71 stop: 65.95

The relative strength in AXYS evaporated on Thursday and Friday. We warned readers that Thursday's move looked like a bull-trap failed-rally pattern after Wednesday's bullish breakout was reversed. The selling continued into Friday morning and the stock gapped open lower at $66.27 and then plunged to its 40-dma near $61.25. AXYS hit our stop loss at $65.95 closing the play. We would keep an eye on AXYS for another breakout over $70.00 as a bullish entry point. The inverse H&S pattern is forecasting a $90 target.


Picked on December 02 at $ 66.59 /gap down entry 
Change since picked:      - 0.89 /originally listed at $67.43
Earnings Date           02/19/09 (unconfirmed)
Average Daily Volume =       246 thousand 

Costco Wholesale - COST - close: 55.58 change: +2.83 stop: 49.75

Target exceeded! COST showed an impressive amount of relative strength on Friday. There was almost no sell-off on Friday morning and shares soared right past our target at $54.85 and broke through round-number resistance at $55.00 and through technical resistance at its 50-dma. The next level of overhead resistance looks like the $59-60 zone. Watch COST for another entry point after its December 11th earnings report.


Picked on December 02 at $ 48.93 /gap down entry point
Change since picked:      + 6.65 /originally listed at $50.10
Earnings Date           12/11/08 (confirmed)
Average Daily Volume =       7.2 million  

Entergy Corp. - ETR - close: 83.11 change: +1.45 stop: 79.99

Utility stocks were not immune to the market weakness on Friday morning. Shares of ETR gapped open lower at $80.52 and broke down under support at $80.00 and its 40-dma to sink to $77.28 before bouncing back. ETR hit our stop loss at $79.99 closing the play. While the bounce back is encouraging we would wait for a new rally over $84.50 or $85.00 before considering new bullish positions on ETR.


Picked on November 22 at $ 85.76
Change since picked:      - 2.65
Earnings Date           01/29/09 (unconfirmed)
Average Daily Volume =       2.3 million  


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