Option Investor

Daily Newsletter, Wednesday, 12/10/2008

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Table of Contents

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

Market Wrap

Success or Failure Likely to be "4-Lettered" Word

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After some intra-day gyrations, stocks finished mostly higher by the close, but at tonight's close I'm going to say the current market's rally will be dependent on the four-lettered stocks of the NASDAQ as this market looks like a cat ready to cough up a sizeable fur ball, with buyers looking to have a slight upper-hand.

Earlier today, just before 12:00 PM ET, I recapped some of today's economic releases here in the U.S. in an intraday update, and I'll quickly post portions of today's reports..

Global Economic Calendar -

[Image 2]

At 10:00 AM ET, The Census Bureau said wholesale inventories fell by 1.1% in October to $438.2 billion, which was better than Wall Street's forecast for a 0.2% decline.

The decline in inventories came as a relief as sales remained weak, falling 4.1% to $3.774 billion from a downwardly revised September sales figure.

On the demand side of things, sales of durable goods were down 4.2% (+/-1.1%) from last month and were down 1.6% (+/-1.9%) from a year ago. Sales of metals and minerals, except petroleum were down 5.2% from last month and sales of motor vehicles and motor vehicle parts and supplies were down 4.5%. Sales of nondurable goods were down 4.1% (+/-1.1%) from last month, but were up 6.5% (+/-2.3%) from last year. Sales of petroleum products were down a hefty 11.2% from last month and sales of farm product raw materials were down 6.1%.

October's inventory to sales ratio rose to 1.16 from last year's 1.10%.

Additional "inventory" data came in the form of crude oil and refined products from the Energy Information Agency (EIA).

The EIA said U.S. crude oil inventories rose by 392,00 barrels, which was below analysts estimates for a 1.0 million barrel build.

Total gasoline stockpiles rose by 3.72 million barrels, while total distillates saw a hefty 5.6 million barrel build. Ultra-low sulfur diesel (<0-15 PPM sulfur), a distillate, showed a 2.7 million barrel increase, while heating oil stockpiles (>500 PPM sulfur) were up 1.68 million barrels.

EIA Crude Oil, Total Gasoline, Total Distillates (Table)

[Image 3]

January Crude Oil futures (cl09f) opened higher on the floor at roughly $44.00 and traded a morning high of $45.00 to the penny just ahead of the EIA inventory figures. A knee-jerk, or say a "blown ACL" move lower to $41.89 was found at in just 25-minutes of trade, but by lunch-time, January futures were making an intra-day high to $46.17!

Whew! By today's settlement, January crude finished up $1.45, or 3.45% at $43.52.

January Unleaded (rb09f) settles up $0.0323, or 3.45% at $0.9687, while January Heating Oil (ho09f) slid $0.0342, or -2.38% to settle $1.4027.

On the demand side of things, refiners increased their crude oil inputs by 387,000 barrels/day with the percent utilization of operable capacity also rising to 87.44% from last week's 84.34% of total capacity.

My number of days of crude oil supply edged down to 21.8 days supply from last week's 21.9 days supply.

Closing Internals - 12/10/08

[Image 4]

The 12:00, 02:00 and 04:00 PM price benchmarks of the majors give you some idea of the choppiness, or intra-day volatility, and at time it seemed like buyers were going to run the table, and at times it seemed like sellers would mount to a sharp decline by the close.

Just as I was finishing the 12:00 intraday blog, I was updating the various TRIN, TRINQ and VIX.X ticks at 12:00 and on the 5-minute intervals I thought I was observing some S&P 500 Volatility (VIX.X) action that looked like a BEAR cat was coughing up a fur ball. After returning from a meeting late this afternoon, a suspicious jump in the VIX.X gives the impression another sizeable option trade had a BULL cat coughing something up.

VIX.X and SPX.X - 10-minute intervals

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At this point I'm going to say "false alarm," but something might be up with today's VIX.X observations. The SPX.X itself seemed little moved and without having been able to review some of today's SPX/SPY-related options activity, I might have to assume some pre-option expiration positioning.

If the VIX.X had ended up BELOW the 52.00 measure at today's close, then that initial dart lower could have been the "cat's meow" with SPX likely pressing 950.

Now, see the SPX.X chart above and the DARK GREEN 996.25 near the top? That this QUARTER's Support 2, or Q S2.

Now, keep that in mind as I give you what I think should be considered as this week's "Guinea Pig" and the chart of the week!


[Image 6]

One hundred of the NASDAQ's largest market caps are represented here, but unlike ANY of the other major U.S. averages I follow in the Pivot Matrix, ONLY the NDX/QQQQ are back to challenge the Quarterly S2 (Q S2) at 1,231.

There are SEVERAL excellent tests for further technical strength besides the institutional Q S2.

Near-term downward trend from the 10/14/08 bounce to lower 11/04/08 relative high, where that trend continues to hold.

Having now "drug it down" 0% retracement to the 11/21/08 intra-day low, on Tuesday we would have observed a test of conventional 19.1% retracement at 1,252.

The 50-day SMA at 1,254, where so far, the Dow Industrials (INDU) and S&P 100 (OEX) have been able to trade this week at their respective 8,841 and 446 price levels.

My thinking is this.

If the higher Beta NDX/QQQQ can bust a move higher through these formidable levels of technical resistance, then we're going to see traders get more AGGRESSIVE in the direction of that move.

It seems like a "wide range" from the MONTHLY Pivot (1,195.75) and Q S2 (1,231.04) and even conventional 19.1% of 1,252, but that's the very short-term "range" this market (NDX/QQQQ) is giving.

Conversely, the NDX/QQQQ MONTHLY Pivot also serves the near-term SUPPORT, where if BROKEN to the downside, will also bring more aggressive SELLERS in, or TAKE OUT some long BULLS.

At Tuesday evening's close, Dorsey/Wright's NASDAQ-100 Bullish % (BPNDX) had risen to 62.00%, meaning 62 of the 100 stocks did show a point and figure buy signal on their chart.

This is the HIGHEST level of bullish % for this narrow index since May.

I think BULLS, NDX/QQQQ, or other major average bulls want to see FURTHER STRENGTH come from somewhere, and at tonight's close, the NDX/QQQQ looks to provide the greatest number of technical resistance challenges.

The internals suggest "buy." From here, it will be PRICE action that matters most.

New Option Plays

Wednesday night: No New Plays

Play Editor's Note: No New Plays Tonight.

In Play Updates and Reviews

A Quiet Wednesday

CALL Play Updates

Apple Inc - AAPL - close: 100.06 change: +0.34 stop: 88.99

AAPL spent the day trading sideways and appeared to ignore news that one analyst firm had sliced their price target to $95. Thus far AAPL has been able to hold above its 50-dma and use it as technical support. I don't see any changes from our previous comments. 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.

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  

Amazon.com - AMZN - close: 49.70 change: -1.55 stop: 43.25

AMZN endured some profit taking on Wednesday but the 3% decline was not enough. We are suggesting readers buy calls on a dip into the $46.00-45.00 zone. Although we're thinking about adjusting that entry point a little higher to maybe $46.50, maybe the $47.00 mark. At the moment we'll stick to $46.00. 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  

China Mobile Ltd. - CHL - close: 51.92 change: +1.07 stop: 47.75

It was an interesting day for Chinese stocks. News that China's exports fell in November, the first contraction in seven years, failed to halt the rally in Chinese equities. CHL rallied 2.1% and bounced back above its 100-dma. We're not suggesting new positions at this time. CHL hit our first target at $51.75 yesterday. 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:      + 4.81 /originally listed at $47.85
Earnings Date           00/00/08 (unconfirmed)
Average Daily Volume =       3.9 million  

Chipotle Mexican Grill - CMG - close: 58.91 chg: +5.51 stop: 48.45

I could not find any news to account for the sudden rise in shares of CMG today. Let me say that another way. I know why the stock rose. It looks like a short squeeze and CMG has a very high amount of short interest. Yet I can't find what sparked the short squeeze. On a bullish note CMG managed to breakout over its 100-dma. We do not want to chase this stock. The $60.00 mark should be resistance. The stock is up dramatically in the last three weeks from its lows near $37.00. A 38.2% retracement is going to bring it back down toward the $51-50 zone. We're still waiting for a dip toward support. Our suggested entry point is to buy calls on a pull back into the $51.00-49.00 zone. Our stop loss is at $48.45. If triggered at $51.00 we have two 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: 59.08 change: +1.07 stop: 55.95

We don't see any changes from our previous comments. ESRX bounced from the $57.70 zone and put in a barely discernable higher low. The bounce could be used as a new entry point but more conservative traders may want to wait for another rise over $60.00. Or readers may want to consider a higher stop loss closer to $57.00. Our target is $64.00.

Picked on December 06 at $ 59.36 /gap higher entry 
Change since picked:      - 0.28 /originally listed at $58.58
Earnings Date           02/19/09 (unconfirmed)
Average Daily Volume =       3.1 million  

FTSE/Xinhau China Index - FXI - close: 31.24 chg: +2.16 stop: 27.45*new*

Bad news about falling exports out of China failed to stem the buying interest in Chinese stocks. The FXI Chinese ETF soared 7.4% and closed at new multi-week highs. If you have not taken any profits yet I would do so now. We are raising our stop loss to $27.45. Our secondary target is $34.00.

Picked on December 03 at $ 26.27 /gap down entry point
Change since picked:      + 4.97 /originally listed at $27.25
Earnings Date           00/00/00
Average Daily Volume =      51.2 million  

Goldman Sachs - GS - close: 71.53 change: -1.24 stop: 67.49 *new*

GS continued to dip and fell to an intraday low of $69.35. Our suggested entry point to buy calls was a pull back into the $71.00-68.00 zone. The play is now open. If you did not buy the dip then consider waiting for a bounce. 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 only have a few trading days to enter and exit this play. Please note that we are upping the stop loss to $67.49.


Picked on December 10 at $ 71.00 *triggered
Change since picked:      + 0.53
Earnings Date           12/16/08 (confirmed)
Average Daily Volume =        29 million  

Jacobs Engineering - JEC - close: 53.18 change: +2.13 stop: 42.45

JEC continues to surge on the Obama-infrastructure expectations. The stock rallied 4% but failed to breakout past its 100-dma. We don't want to chase it so we're waiting for an entry point. Please note that we're adjusting our suggested entry point from $44.00 to the $46.00-45.00 zone. We'll use a stop loss at $42.45. Our first target will be $51.00. Our second target will be $54.90.

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  

Priceline.com - PCLN - close: 62.08 change: +0.48 stop: 58.49

PCLN's dip near $60.00 looked like another entry point. You may want to consider new positions on a rally from here. 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:      + 0.48 /originally listed at $60.46
Earnings Date           02/12/09 (unconfirmed)
Average Daily Volume =       1.8 million  

Wynn Resorts - WYNN - close: 44.30 change: +2.60 stop: 38.45

The bounce in WYNN today looked pretty bullish. Shares have been building on a trend of higher lows. We're not going to chase it but we will adjust our entry point. Instead of buying calls at $40.25 we'll use a trigger at $40.75. We'll up the stop loss to $38.45. 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.

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  

PUT Play Updates

*Currently we do not have any put play updates*

Strangle & Spread Play Updates

SPDR GOLD Trust - GLD - close: 79.75 change: +3.42 stop: n/a

Commodities were strong today thanks to another decline in the U.S. dollar. Gold prices surged and the GLD added more than 4.4%. The gold ETF rallied toward resistance at $80.00 and its 100-dma. A continued rally from here would be pretty bullish.

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. FYI: The December $75 call grew to over $5.00 today.

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:      + 7.25
Earnings Date           00/00/00
Average Daily Volume =      19.3 million  

Ultra S&P500 ProShares - SSO - close: 26.36 change: +0.49 stop: n/a

A minor rally in the S&P 500 left the SSO to close with a 1.9% gain. Overall it was a relatively quiet day. We don't see any changes from our previous comments on the SSO strangle. 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:      + 1.52
Earnings Date           00/00/00
Average Daily Volume =       126 million  


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