Option Investor

Daily Newsletter, Monday, 12/08/2008

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Table of Contents

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

Market Wrap

Horse Shoes and Stop Losses

[Image 1] Market Internals

After a strong close on Friday, the markets opened with a bang after news that President Elect Obama plans to launch the largest infrastructure investment program since the 1950s. Other reasons that helped inflate today's stock prices include progress in financial relief plans for the US automakers and an economic stimulus plan that will be large enough to get the economy back on its feet. President Elect Obama also noted that he can’t be concerned with the fiscal/budget deficit in the short term and that he aims to create 2.5 million jobs by 2011. Both Ford (F) and General Motors (GM) advanced on the news that the government was making headway with their bailout package. It was reported that a $15 billion dollar bailout package was being sent to the White House for consideration. F closed up $0.45 or 28% to $3.38 while GM closed up $0.60 to $4.93.

The NYSE (New York Stock Exchange) Euronext Exchange closed up 4.41% or 238.43 points to 5,639.68 today. The exchanges’ stock (NYX) price closed up $4.89 to $26.21. There were 1.75 billion shares traded at the big board, which was slightly less than the 50 day average of 1.78 billion. About 78% or 2,474 of the issues advanced while 710 declined. Only 9 stocks posted new 52 Week highs while 22 hit new 52 Week lows. The longer the market stays down in this range the easier it will be for stocks to post new 52 Week highs. Basically, all any beaten down market needs is time to heal. The NYSE ARMS Index or TRIN closed at 0.60. This shows that a lot of the advancing stocks also had advancing volume. As for the NASDAQ Composite, the technology heavy index soared 4.14% to 1571.74 or up 62.43 points. The volume was slightly lower, at 2.33 billion shares, than the 50 day average of 2.44 billion shares. There were 2,095 advancing issues versus 820 decliners. Only 8 new 52 Week Highs were set on the Comp and 81 new 52 Week Lows.

Other Corporate News

3M (MMM) issued downside earnings guidance for fiscal year 2008 and 2009 and reported that it will cut 1,800 jobs in the fourth quarter. MMM declined 2.47 to $57.38.

McDonalds (MCD) reported that global same-store sales rose 7.7% in November. MCD's U.S. comparable sales increased 4.5% in November due to the strength of McDonald's market-leading breakfast business and the popularity of the chicken line-up. The company also commented that the sales were up because of the everyday value throughout the menu. Breakfast competitor, Starbux (SBUX), has seen slowing growth nationally as a potential result of MCD's burgeoning breakfast menu and as premium coffee alternative. About 4 months ago, I used to wait up to 15 minutes in line to get my order in and coffee delivered through the window. I prefer SBUX coffee, especially with only a couple of cars in the drive through lane. However, the strong dollar concerned investors and caused the stock to decline $2.43 to $60.92. If the dollar weakens in December, the 4th quarter EPS and December sales should help the bottom line. Make a note to watch for that as a indicator for a long or short trade. Coca-Cola could also have the same fate as MCD as both stocks are diversified globally.

Trading Idea: A Pairs trade is a strategy where one establishes a long biased trade on a strong stock in a particular sector or industry while also establishing a short biased trade on a laggard stock in the same sector or industry. One could buy 200 shares of MCD stock at $61 for a total investment of $12,200. Since we want to maintain an equal weighting, we would then sell short 1100 shares of SBUX at a target price of $10.50. If SBUX and MCD both move up an equal percentage, there should be no gain or loss except for slippage. We want SBUX to drop back to its lows near $7.00 and MCD to run back to 67, its all time high. That would be perfect. But if SBUX moves up 5% and MCD moves up 10%, we still profit.

The Indices

Even though I covered a couple of the indices in the internals section, the widely followed Dow Jones Industrial Average (DJIA) advanced nearly 300 points to 8,934.18 which is just short of its 50 day simple moving average (SMA) or 8,941. Referring to the chart below, the next barrier, should the senior index break above the 50 day SMA, is at the November 4th highs at 9600. Then the 89 day SMA comes into play as resistance. The Money Flow Index has been consolidating in the 50s while the DJIA is attempting to find support. The ADX is still declining since the DJIA established a new low at 7,449 on November 20th. This indicated that the downtrend has weakened. A new trend will be indicated, uptrend or downtrend, once the ADX moves higher. I have drawn a Fibonacci retracement from the November low to the high from 11/28/08. The 50% retracement was tested perfectly twice. This is actually a positive sign in that the market was allowed to take profits in an orderly manner and allow investors a chance to re-establish positions not once, but twice.

[Image 2]

The next view is a more microscopic view of the daily chart. A positive indication from the chart below is that the RSI is only at 66 and still has room before becoming overbought. In addition, the Slow Stochastics has re-crossed the moving average and is still out of over bought territory. Today's advance had the DJIA close above the November 28th high of 8831. I realize it may be difficult to make out, but the 8 day exponential moving average (EMA) closed at 8583 while the 21 day EMA closed at 8582. The 8 day EMA is the green line and the 21 day EMA is the magenta line. This is my Blue's Clues chart because the Bollinger Bands are colored in the same color as Blue the puppy while the moving averages are colored the same colors as Blues friends Steve for green and Magenta for Magenta. Anyway, we have a moving average crossover on the DJIA. At 9250, the upper Bollinger band is the near term target. I would like to see the DJIA run up and sell off to test the 21 day EMA before changing the trade bias to uptrend. It is difficult to think that the market could be in an uptrend soon.

[Image 3]

I can't be as positive on the S&P 500 (SPX). The 50 day SMA is 20 points higher at 929. As we found out today, there is heavy resistance from the mid November highs at 918. While the SPX closed above the November 28th high (Black Friday), there is now a gap up that needs to be filled in at Friday's close. If the markets are up tomorrow, one could short at the 50 day SMA and set a target at Friday's high of 879. Don’t get greedy or stuck on exact numbers. Trading is very much like horseshoes and hand grenades; close is good enough.

[Image 4]

The market, however, may try to make an early run to the upper Bollinger band at 955. This level coincides with another resistance point from the 11/10/08 high. Remember, when there are coincidence resistance levels, it just makes them stronger because there are more people finding a reason to sell at that level. Traders, myself included; place target sells at resistance levels. But I usually place the sell order a little lower than the actual resistance price level because the market has a way of coming up just short of a target. As with the DJIA, the SPX's RSI and Slow Stochastics still have room to move up before becoming overbought. However, the 8 day EMA is just shy of crossing above the 21 day EMA. Therefore, we are selling at resistance and covering at support until the SPX makes a good case for being in an uptrend.

[Image 5] Commodities

Crude oil has been on a sharp downtrend. Admittedly, I have been one of those traders that keep thinking it can’t keep going lower because of where it was a few months ago. Crude oil finally bounced today to close at $43.95. The chart above only shows the last month, but it does give us a sense of how volatile the price has been. The price per barrel was at about $65 a month ago and only $40.50 on Friday. Since the commodity closed up and allowed the RSI and Slow Stochastics to re-emerge from oversold territory, one could buy the futures or an ETF that tracks the commodity. I have mentioned USO as an ETF because it offers options as well as a close correlation to the commodity. Proshares has released some new commodity Ultra shares that move 2 times the daily percentage move of the commodity. If I think the market may move up as well as oil, the Proshares Ultra Long DJ Oil and Gas Index (DIG) can provide some good volatility to trade.

[Image 6]

I am going to stop at gold. For a couple of days, gold was trading alike the rest of the markets or more opposite of the US Treasury. Gold is usually a safe haven investment or an inflation hedge. Gold sold off as soon as the Federal Reserve actually confirmed that the US is in a recession and that we may see some continued deflationary pressures. Deflation puts a wrench in my call for inflation in the next couple of years. Gold ran up to the 89 day SMA and quickly turned down. I still think there is value in the hard asset and I am looking at using the SPDR Gold Shares ETF (GLD) and its options to add a little sparkle to the portfolio.

[Image 7]

For some reason, I think that the market will run up into the end of the year and then sell off just prior to the year end. Why do I make this statement? First, it just feels that way. Also, the sell off may be from last minute tax loss harvesting. Tax loss harvesting is a strategy to collect deep losses from the tumultuous conditions seen this year by selling one stock or ETF and placing the loss on the shelf for the potential tax increases coming. The rest of the strategy is to replace the sold stock/ETF with another stock/ETF in the same business or sector. That way, if the sector advances, you collect a loss for later use and maintain the sector weighting. I will send out the Contrarian Newsletter in the next day or so as the indicators actually change. Just to review, the overall signal is Neutral with a slight bias because the Put/Call ratio is Positive, the VIX is Positive but the Investors Intelligence is Negative. In summary, a Neutral signal with slight positive bias suggests that you have a market neutral with some positive bias to capture some limited upside move and a positive theta to profit from time decay. have a great week.

New Option Plays

Tech, Finance, Construction & Gambling

Play Editor's Note: At this point I'm still willing to bet that the oversold bounce has more upside to it but we are due for a correction. The plan here is to buy a dip. Since we remain in a volatile market I'm looking for some significant dips. Don't forget that it is up to the individual trader to decide which month and which strike price best suits your trading style and risk.


Apple Inc - AAPL - close: 99.72 change: +5.72 stop: 88.99

Why We Like It:
We are always looking for an opportunity to play the swings in AAPL. Honestly, traders could probably make a career out of just trading AAPL over the next few years. Today's move saw a nice breakout over resistance near $95.00 and its 50-dma. However, I suspect that the market is due for a mini-correction. The plan is to buy a dip.

The hard part is where to buy the dip. Broken resistance near $95.00 should now be support. That would be the logical place to look for a dip. Yet we know that market volatility is elevated so I'm looking for something a little more severe. More aggressive traders may want to buy calls on AAPL in the $96-95 zone. I am suggesting readers buy calls in the $94.00-92.00 zone. We'll use a stop loss at $88.99, just under Friday's low.

If triggered at $94.00 we have two targets. Our first target is $99.85. Our second target is $107.50.

Suggested Options:
We are suggesting the January calls.

BUY CALL JAN 95.00 QAA-AS open interest= 8182 current ask $11.40
BUY CALL JAN 100.0 QAA-AT open interest=27034 current ask $ 8.65
BUY CALL JAN 105.0 QAA-AA open interest= 8714 current ask $ 6.30

Annotated Chart:

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           01/22/09 (unconfirmed)
Average Daily Volume =      52.8 million  

Goldman Sachs - GS - close: 77.15 change: +6.43 stop: 66.49

Why We Like It:
Goldman Sachs looks like it might be shaping up for a bullish rally into its earnings report next Tuesday, December 16th. We would like to jump on for the ride but first the stock needs to correct a bit. Today's move was bullish with a breakout over recent resistance near $70.00.

We are suggesting readers buy calls on a dip into the $71.00-68.00 zone with a stop loss at $66.49. If triggered we have two targets. Our first target is $79.85. Our second target is $89.00 or the 50-dma, whichever one GS hits first. We do not want to hold over the December earnings report. Thus we have five trading days to enter and exit this play.

Suggested Options:
Aggressive traders can play the December options that expire in less than two weeks since we plan to exit before next Tuesday.

More conservative traders will want to consider the January calls.

BUY CALL DEC 75.00 GS-LO open interest=11423 current ask $7.35
BUY CALL DEC 80.00 GS-LP open interest=14581 current ask $4.55
BUY CALL DEC 85.00 GS-LQ open interest=14069 current ask $2.64

BUY CALL JAN 75.00 GS-AO open interest=13663 current ask $11.05
BUY CALL JAN 80.00 GS-AP open interest= 7523 current ask $ 8.30
BUY CALL JAN 85.00 GS-AQ open interest= 5812 current ask $ 6.00

Annotated Chart:

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           12/16/08 (confirmed)
Average Daily Volume =        29 million  

Jacobs Engineering - JEC - close: 48.87 change: +6.44 stop: 39.80

Why We Like It:
The major construction service stocks soared today on expectations that Obama's infrastructure-heavy stimulus plan will lead to big contracts for the sector leadership. JEC roared 15% higher and broke out from a bull-flag pattern. We want a piece of the action but we don't want to chase it.

Odds are good that JEC will see some profit taking and the likely spot is for JEC to fill the gap. We are suggesting readers buy calls on a dip into the $44.00-42.00 zone with a stop loss at $39.80. This is a volatile stock so expect some big intraday swings! If triggered we have two targets. Our first target is $49.90. Our second target is $54.00.

Suggested Options:
We are suggesting the January calls.

BUY CALL JAN 45.00 JEC-AI open interest= 860 current ask $7.70
BUY CALL JAN 50.00 JEC-AJ open interest= 899 current ask $4.90

Annotated Chart:

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           01/21/09 (unconfirmed)
Average Daily Volume =       3.0 million  

Wynn Resorts - WYNN - close: 44.40 change: +3.79 stop: 37.45

Why We Like It:
The global economy is in recession. The casino companies are going to struggle in this environment. Whether or not you think that has already been priced into the stock price is a discussion for longer-term investors. Short-term WYNN has broken out above various levels of resistance. We don't want to chase it here.

Our plan is to buy a dip in the $40.25-38.00 zone with a stop loss at $37.25. If triggered we have two targets. Our first target is $44.75. Our second target is $49.00. I would expect some resistance at the 50-dma but the P&F chart has turned bullish with a $62 target.

Suggested Options:
We are suggesting the January calls.

BUY CALL JAN 40.00 UWY-AH open interest= 700 current ask $8.20
BUY CALL JAN 45.00 UWY-AI open interest= 692 current ask $5.40
BUY CALL JAN 50.00 UWY-AJ open interest= 727 current ask $3.30

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 =       3.2 million  

In Play Updates and Reviews

Strong day for the bulls, check your stops.

CALL Play Updates

Amazon.com - AMZN - close: 51.41 change: +3.15 stop: 43.25

AMZN continues to rebound sharply higher. The stock dipped to $47.36 before soaring 6.5% and closing above round-number resistance at $50.00 and technical resistance at the 50-dma. We were looking to buy a dip at $46.00 so we're still sitting on the sidelines. As encouraging as today's gain is we would not chase AMZN here. We'll stick to the plan, which is buy calls on a pull back into the $46.00-45.00 zone. 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.

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  

Apollo Group - APOL - close: 75.96 change: +0.09 stop: 72.25 *new*

It was a quiet session for APOL. The stock did hit new nine-month highs at $77.84 but failed to hold them and closed with a fractional gain, under performing the broader market. The overall trend in APOL is still bullish but today's relative weakness is a mystery and a concern. Friday's intraday low was $72.31. We are raising our stop loss to $72.25. We're not suggesting new bullish positions at this time. Our target is $79.75. FYI: The Point & Figure chart is bullish with a $99 target.

Picked on December 01 at $ 73.00 *triggered     
Change since picked:      + 2.96
Earnings Date           01/06/09 (unconfirmed)
Average Daily Volume =       4.0 million  

China Mobile Ltd. - CHL - close: 52.91 change: +3.20 stop: 47.75*new*

Target exceeded! CHL was very strong today. The stock gapped open higher at $52.14, which was above our first target to take profits at $51.75. This happened to be above technical resistance at the simple 100-dma and CHL held there to close up 6.4%. We are raising our stop loss to $47.75. More conservative traders may want to raise their stop toward $50.00 or just exit altogether. We still have a secondary, more-aggressive target at $57.00.

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.


Picked on December 03 at $ 47.11 /gap down entry
Change since picked:      + 5.80 /originally listed at $47.85
Earnings Date           00/00/08 (unconfirmed)
Average Daily Volume =       3.9 million  

Chipotle Mexican Grill - CMG - close: 56.89 chg: +3.79 stop: 48.45*new*

As I suspected over the weekend, CMG continued to rally and charged higher to tag its 100-dma near $58.00. The stock closed the day +7% higher. We did not want to chase the move. Our plan was to buy a dip in the $50.00-48.00 zone. We're going to alter that now so that our entry point to buy calls is the $51.00-49.00 zone. We're raising the stop loss to $48.45. If triggered at $51.00 we have two (new) targets. Our first target is $54.85. Our secondary target is $59.00.

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: 60.46 change: +1.88 stop: 55.95*new*

ESRX, like many stocks today, actually gapped open higher at the open. That makes our official entry point $59.36. On a positive note the stock broke through technical resistance at its 50-dma and managed to close over round-number resistance at $60.00. We are raising our stop loss to $55.95. More conservative traders might want to consider a stop loss closer to $58.00 instead. Our target is $64.00.

Picked on December 06 at $ 59.36 /gap higher entry 
Change since picked:      + 1.10 /originally listed at $58.58
Earnings Date           02/19/09 (unconfirmed)
Average Daily Volume =       3.1 million  

FTSE/Xinhau China Index - FXI - close: 30.30 chg: +2.47 stop: 26.49*new*

Exit alert! We are altering our exit strategy and suggest readers start taking profits in our FXI calls immediately! The stock gapped open higher at $29.72 and rallied to $30.75 intraday to close up 8.8% and close above round-number resistance at $30.00. Instead of waiting for FXI to hit $32.50 we are telling readers to book a profit right now. We're also raising our stop loss to $26.49. We need to expect FXI to fill the gap from this morning, which would mean a dip back toward $28.00. Please note that we're also adjusting our secondary target down from $34.00 to $32.50 and plan to keep the target under the descending 100-dma.


Picked on December 03 at $ 26.27 /gap down entry point
Change since picked:      + 4.03 /originally listed at $27.25
Earnings Date           00/00/00
Average Daily Volume =      51.2 million  

Priceline.com - PCLN - close: 64.45 change: +3.99 stop: 58.49*new*

Target achieved! PCLN displayed some relative strength today. The stock actually gapped open higher at $61.60 so we didn't get the entry point listed over the weekend. Shares went almost straight up and hit $65.50 intraday. Our first target to take profits was $64.90. If you missed your entry point this morning I would wait for a dip back toward the $61-60 zone before initiating new positions. Please note that we're raising our stop loss to $58.49. Our second target is $69.90. FYI: The Point & Figure chart is bullish with a $102 target.


Picked on December 06 at $ 61.60 /gap open higher
Change since picked:      + 0.00 /originally listed at $60.46
Earnings Date           02/12/09 (unconfirmed)
Average Daily Volume =       1.8 million  

PUT Play Updates

*Currently we do not have any put play updates*

Strangle & Spread Play Updates

SPDR GOLD Trust - GLD - close: 76.19 change: +1.68 stop: n/a

A nice drop in the U.S. dollar helped lift the GLD to a 2.2% gain. We're quickly running out of time as December options expire in less than two weeks. I am reiterating previous suggestions that more conservative traders cut their losses and exit early.

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.

Picked on November 09 at $ 72.50
Change since picked:      + 3.70
Earnings Date           00/00/00
Average Daily Volume =      19.3 million  

Ultra S&P500 ProShares - SSO - close: 26.85 change: +1.77 stop: n/a

It was a very bullish day for the markets. The S&P 500 index rallied more than 3.8% and broke through round-number, psychological resistance at the 900 mark. This helped the SSO surged more than 7%. Hopefully this trend will continue. We have less than two weeks left before December options expire.

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.

Picked on November 12 at $ 24.84
Change since picked:      + 2.01
Earnings Date           00/00/00
Average Daily Volume =       126 million  


Fedex - FDX - close: 74.43 change: +0.72 stop: 69.45

FDX under performed the market on Monday after oil finally bounced following several days of declines. The stock gapped open at $75.20 but dipped to $72.52 intraday, providing a better entry point to buy calls. Unfortunately it looks like the bulls are about to get smacked!

After the closing bell FDX offered some unexpected earnings guidance. The company now expects its Q2 results to come in at $1.58 versus analysts' estimates of $1.54. That's not so bad. What is going to kill the bulls tomorrow is FDX's guidance for 2009. The company estimates that earnings will be in the $3.50-4.75 range for the year. Analysts had been expecting full-year earnings of $5.15. After-hours reaction is very negative with the stock trading under $66.00.

We suggest readers abandon ship. Aggressive traders may want to consider holding on in hopes of a midday oversold bounce with the expectation that you might be able to exit in the $69-70 zone. We are hitting the eject button and will exit at the earliest opportunity.


Picked on December 06 at $ 75.20 /gap higher entry
Change since picked:      + 0.00 /originally listed at $73.71
Earnings Date           12/18/08 (confirmed)
Average Daily Volume =       3.9 million  

Lockheed Martin - LMT - close: 81.65 change: +1.46 stop: 74.49

Target exceeded! LMT surged to $83.36 intraday before reversing under its simple 50-dma. Our secondary, more-aggressive target to take profits was at $81.50. Our LMT is closed but we would keep an eye on it for another opportunity if shares bounce from their 10-dma or the $77.00 region.


Picked on December 01 at $ 73.50 *triggered     
Change since picked:      + 8.15
Earnings Date           01/22/09 (unconfirmed)
Average Daily Volume =       3.6 million  


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