Option Investor

Daily Newsletter, Saturday, 12/13/2008

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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

Thanks For Nothing

After three weeks and unending hours of airtime the Senate failed to pass a bailout for the big three automakers. Three weeks of posturing in the bright lights of TV cameras provided hours of face time for politicians but not a dollar of relief for automakers.

Market Statistics
[Image 1]

Asian markets plunged on Friday after a procedural vote killed the bailout measure late Thursday night. US markets opened down sharply but rallied back to positive territory after the White House said it would consider using TARP funds for interim relief. On Friday GM hired a bankruptcy firm to advise them on how to proceed if the government does not bail them out. The Bush administration said it would act to prevent the "precipitous collapse" of the U.S. auto industry. Obama sent an urgent request to the White House seeking intervention for the automakers. Republicans don't want to be blamed for giving the automakers a bailout when the business models are clearly flawed. White House press secretary Dana Perino said, "Under normal economic conditions we would prefer the markets determine the ultimate fate of private firms." The eventual format of any long-term bailout proposal will rest on Obama's shoulders once he takes office. The Bush administration will only give them enough to survive until March. GM said it would close all its plants for a month and cut Q1 production by 250,000 vehicles in an effort to save money and reduce inventories.

Competing for headline space on Friday was news that longtime Wall Street figure, Bernard Madoff, had been arrested for running a $50 billion Ponzi Scheme. In A Ponzi scheme initial investors are paid off from new cash generated from new investors. As long as the company continues to generate new cash from signing up new investors the fraud can continue. Once the cash flow stops the house of cards implodes. Madoff started his securities business in 1960 and was a former chairman of the Nasdaq. The fraud was conducted as a quasi hedge fund he ran from a separate floor of the building where his brokerage is based. He supposedly managed pools of money for investors rather than act as an actual hedge fund. Madoff told senior employees and his two sons on Wednesday that the company was insolvent and had been for years and estimated losses are expected to be around $50 billion. Madoff said he planned to turn himself in next week but first wanted to take the remaining $300 million and give it to employees, family and friends. The sons immediately called the FBI. In a form filed with the SEC back in January Madoff said the firm had up to 25 investors with $17 billion under management. Madoff was released on a $10 million bond. The SEC filed separate charges saying it was a stunning fraud and virtually all the assets of the hedge fund business were missing. Madoff's other securities business, Bernard L. Madoff Investment Securities has more than $700 million in capital and is a market maker in 350 Nasdaq stocks. It remains to be seen to what extent the separate hedge fund Ponzi scheme will impact his other business. This was part of the problem. Because he was a market maker he cleared and accounted for his own trades. That removed a level of detection from the process.

Aksia LLC, a New York based adviser to hedge fund investors, urged clients last year not to invest with Madoff's firm. The tip off came when they learned Madoff's accountants were a firm with three employees and a 13-by-18 foot office. There was a secretary, one active accountant and a 70-year old partner who lived in Florida. Obviously there will be a lot of charges filed against numerous people for accounting irregularities, securities fraud, etc, before this is over. Even though SEC documents, obviously in error, only claimed $17 billion under management, Madoff said it was actually over $50 billion and there were no assets. The end came when several hedge fund clients demanded $7 billion of their money back on Dec 1st and Madoff had no money to pay them.

This is a major reason for the sharp market sell off on Thursday afternoon. Madoff's fund had been supplying consistent 8% returns for years but in recent years those returns had risen to the low double digits and nearly every small hedge fund or fund of funds had money invested with Madoff. When the news broke it created a panic on Wall Street that $50 billion in investments had disappeared. Many funds are going to be forced to disclose to investors that their money is gone. This is going to accelerate hedge fund redemption requests as nervous investors seek to regain control of their remaining money. The $50 billion scheme may rank as the biggest fraud case ever and is sure to attract a lot of attention as further details are revealed.

On the economic front there was some good news with Consumer Sentiment for December rising to 59.1 from 55.3 in November. That 55.3 level in November was 28-year low. The present conditions component surged +11.9 points to 69.4 on the strength of lower gasoline prices while the expectations component remained nearly unchanged at 52.4. The 12-month inflation expectations fell to 1.7% from 2.9% in October and readings around 5% back in May through July. Despite sentiment at multiyear lows this was a slightly bullish report indicating consumers are starting to believe that conditions are improving.

Consumer Sentiment Chart
[Image 2]

Producer prices (PPI) fell for the fourth consecutive month with a -2.2% drop due to falling demand. Energy prices continued to decline and that is filtering through the system with an 11.2% drop for the month. Core inflation remained only slightly positive at +0.1%. With producer prices falling rapidly we should see a drop in consumer prices (CPI) when they are released next Tuesday.

Next week has several major economic events. The biggest is FOMC meeting on Tuesday. The Fed is expected to cut rates from 1.0% to 0.5% on its way to a zero rate sometime in Q1 of 2009. This rate cut is widely expected so the absence of a rate cut would be market negative. On Wednesday the Philly Fed will begin the regional manufacturing reports for December. All expectations are for results to be flat to down for December.

OPEC meets on Wednesday and expectations are for another production cut of 1.5 million barrels per day. OPEC is under the gun with many OPEC nations now pumping crude for less than it costs them and less than their budgetary requirements. Russia is not an OPEC member but they budgeted income of $75 per barrel for 2008 and $95 for all of 2009. Their budget is being crushed by oil prices in the mid 40s and this is same problem with Iran and Venezuela. They are drastically underwater and need prices to rise. The hype will be huge as we near the meeting. This will produce some extreme volatility with crude contracts expiring on Friday.

Ecuador said on Friday it was going to default on a $31 million interest payment due on Monday. Ecuador produces 500,000 bpd of oil and the drop in value has killed their ability to make their debt payments. This is a preview of what we will continue seeing by oil producing nations until prices rise.

Economic Calendar
[Image 3]

I also added the Goldman Sachs earnings to the calendar for Tuesday because all eyes are on the firm as an indicator for the sector. Goldman may post the worst quarter in its history with losses nearly every business area. If Goldman reports a smaller loss than expected loss it could be positive for the banking sector. It would be hard for them to surprise on the downside given the negativity so I view the event as a possible market catalyst.

I had surgery on Tuesday and spent the last three days in bed watching stock TV. The negativity was amazing. You would think the normally bullish biased reporters had taken a Jekyll and Hyde pill and changed their stripes. The markets actually did fairly well given the abundance of gloomy outlooks. Every dip was immediately blamed on the news events of the last hour as if investors were just waiting for the next sound bite to bail from their positions.

I was encouraged by the tech stocks and especially chips. Intel closed at the high of the week and the Semiconductor Index (SOX) was very close to its highs. This is even more amazing since the chip sector will see a decline in revenue for 2008 for only the fifth time in the last 25 years. According to Gartner Inc, the chip sector is on track to post revenue of $261.9 billion, down -4.4% from 2007. Also according to Gartner 2009 is going to be considerably worse. They said the recession will cross two calendar years and could be the first back-to-back years of revenue declines. Prior decline years were 1985, 1996, 1998 and 2001. Gartner said it may be too early to buy the group since 2009 estimates are likely to be cut significantly after Q4 earnings results. Evidently investors are willing to take that chance and are buying chips today as the base for a tech portfolio for 2009.

The Nasdaq announced at 8:PM on Friday it was re-ranking the Nasdaq-100 as of the market open on Monday Dec-22nd. Stocks added to the NDX include ADP, FSLR, LIFE, ROST, MXIM, ILMN, PPDI, ORLY, URBN, JBHT and XCRX. The following 11 stocks will be removed from the index. AMLN, CDNS, DISCA, LAMR, LEAP, LVLT, PETM, SIRI, SNDK, VMED, WFMI. Expect increased volatility in all 22 stocks next week. Here is another list of stocks that deserve your attention. RBC Capital put together a list of stocks most likely to benefit from Obama's infrastructure stimulus program. Some of these are not your normal big name stocks and I thought you might benefit from seeing the list. EME, FLR, GWW, FAST, PWR, CAT, JEC, TEX, VMC, ESLR, FCEL and SI. With stocks rebounding on continued horrible news it is tough to form a bearish perspective. When bad news is no longer capable of holding stocks lower it is time to start looking for stocks to buy. We had some horrible news last week but the VIX lost ground all week. Jobless claims hit 573,000 for the week and the highest level since 1982. That is pretty significant news and the markets shook it off. The Senate voted to allow the big three automakers to go bankrupt and the markets rebounded from triple digit losses to close positive. Bank of America said they were cutting 35,000 jobs and the banking sector closes higher. The bad news bulls are back and they are buying the dips. Unfortunately they are not buying in heavy volume and they have not been able to move over strong resistance.

However, there was a really positive move on Friday. The Dow rose +0.25%, Nasdaq +1.4% and the Russell gained a whopping +3.81%. If you read my commentary often you already know I believe the Russell's health is the thermometer for the broader market. Nearly a +4% gain on the Russell on Friday is very bullish for sentiment. I only wish it had been on heavier volume.

I was frustrated the Dow did not manage to break over 9000 on Tuesday but I guess I should be happy that it closed flat for the week given the highly negative news. Support on Friday was 8400 with 8200 as the backup from the prior week. If the lows keep rising eventually we will break over that resistance at 9000.

Dow Chart
[Image 4]

The Nasdaq also failed to break over strong resistance at 1600 but like the Dow it found support at a higher level of 1500 on Friday. I already pointed out that bullish techs in the face of negative chip sales is positive and December is normally a positive for tech stocks. No complaints here.

Nasdaq Chart
[Image 5]

The S&P was a carbon copy of the Dow with support at 860 well over the prior week's support at 820. The S&P spent three days knocking on the door over 900 only to implode on the Madoff news, negative BlackRock comments and the outlook from Jamie Dimon the Chase CEO on Thursday. Those three events occurred almost simultaneously Thursday afternoon and the implosion was instant. The S&P lost over 50 points from the Thursday high to the Friday low but still rebounded to close fractionally higher for the week. This was far from bullish but not bearish either.

S&P Chart
[Image 6]

The Russell closed well off its highs for the week but the +3.81% gain on Friday was critical to sentiment. There was a survey released on Friday on best sectors coming out of a recession and the small cap growth stocks were number one every time. Small cap growth won out over small cap value putting the bullseye on the Russell 2000 for aggressive investors. Initial resistance is 480 with a close at 467 and a definite patter of three higher lows since Nov-21st. The Russell continues to tell me the bottom for 2008 is behind us. However, if the Russell can't move over 480 by Christmas then it suggests an early January market drop.

Russell Chart
[Image 7]

The last couple weeks of the year are normally bullish as year-end retirement money is put to work. That could be what we are seeing today and holiday sentiment could continue to push the indexes higher until Christmas. After Christmas I am worried. I am worried we are going to see some selling once the calendar turns over to 2009. We could see some traders try to front run selling in the first week of January by taking bearish positions after Christmas. I believe any January dip will be bought but it could be a substantial dip. I would urge caution about holding longs over the holidays.

It is that time of year again when we offer our end of year renewal special. This is where existing subscribers can renew their subscriptions for the absolute lowest price of the year plus get a boatload of great gifts as a way of showing our appreciation.

This year we are offering four DVDs worth over $250 plus two special reports and the option expiration mouse pads for 2009.

Click here for the full description of the renewal package

2008 has been a very tough year with record volatility, record market moves and the biggest financial crisis since the great depression. This has been an extremely tough year to make money or just keep what you had when the year started. If you are reading this you are well ahead of most traders. You have waded neck deep through the valley of risk and are now ready for the reward.

We have seen major companies fail or be sold for chump change like Lehman Brothers, Merrill Lynch, Bear Stearns, Wachovia, Washington Mutual, AIG, Fannie, Freddie and Countrywide Financial. If I had listed those firms in January 2008 and told you they would either fail or be nationalized by the end of 2008 you would have thought I was crazy.

Crude prices soared to $147 in July and traded as low as $40.50 in December. This kind of volatility has never been seen before. Commodity funds were wiped out. Over a trillion dollars in commodity value was erased. Dozens if not hundreds of hedge funds will have closed their doors by the end of next quarter.

2008 was a KILLER year but we are still alive and ready to reap the rewards in 2009. Recessions are normally short lived and produce monster rallies as they fade. Given the market levels today we could see 50% gains over the next 24 months. A 50% gain in the indexes would produce monster returns in options on those indexes as well as individual companies. I seriously hope you will be with Option Investor as we reap those gains.

As part of the renewal special I am producing an energy report that will show why $50 oil is only a temporary event. $50 oil will actually accelerate the coming of peak oil and the massive economic collapse that will follow. I really hope that my readers over the last several years have not succumbed to the preaching of the coming oil glut. This will be very detrimental to your wealth if you believe it. You need to read my report this year and understand how reality has not changed.

Renewing through the end of year special is the cheapest way to subscribe to the Option Investor suite of products. Plus you get all the free stuff!

Don't let 2009 arrive without renewing your subscription!

Click here for the complete list of free gifts

Jim Brown

Index Wrap


THE BOTTOM LINE : One of the reasons that I took up technical analysis when I was early to trading on the Street of Dreams, was that it seemed to best deal with what IS, not with what should or ought to be happening according to current supply/demand analysis. With the backdrop of a potential long-term 800 double bottom in SPX albeit in a very disabled economy that continues downhill, the S&P and Nasdaq retraced 62-66% of the last upswing, found price support in the area of their 21-day moving averages (after NDX 'filled in' a prior price gap) and after a second bullish reading in my sentiment indicator the major indexes seem ready to rally again.

I'm not betting the ranch on this one, but based on what the charts are showing there is enough buying coming in to suggest that the first 'leg' up can or will be followed by a second up leg; enough of a second leg for example to propel the S&P 500 (SPX) up to the 1000 area next. If there is a decisive downside penetration of 800 in SPX and especially a weekly close below 800, then our leading index loses its bullish potential technically. But, so far there is this potential for a double bottom and I find it useful to keep the weekly SPX chart formation in mind.

[Image 1]



Key near resistance in the S&P 500 (SPX) remains the low-900 area, at 917-918 specifically. Pivotal or game changing resistance is at the prior highs around 1000-1007. The pullback into Friday found buying interest develop in the area of the 21-day moving average which is a bullish plus.

The watch is at the 900 level on a daily closing basis; this past week saw only one day, Monday, with a close above this level. Two consecutive days above 900 would suggest better upside momentum was developing.

860 is near support, with pivotal technical support at 800. Next support comes in at the prior 741 low.

I've kept the wedge pattern trendlines on my daily SPX chart as they also give reference points on potential support levels, especially the top trendline. Given the bullish 'breakout' move above resistance implied by the upper trendline, this line becomes potential support if stock prices collapse ahead.

[Image 2]


Not a lot that is changed with the S&P 100 (OEX) chart, as it rebounded a bit from the area of its 21-day moving average, like the other major indices. Key support remains 395-400. Next and also a pivotal support is at 350-360.

Overhead resistance is in the 450 area, then at 480, extending to 495-500.

Along with the charts, which are showing some bullish potential, my sentiment ('contrary opinion') indicator got to a bullish reading on Friday. This supports a still-bullish bias I have.

I think that OEX could make it up to the 480-500 price zone. A close below 400, not reversed (back to the upside) the next day, would suggest that bearish momentum had resumed however.

[Image 3]


The Dow 30 Average (INDU) held key nearby chart support in the 8500 area this past week. As long as successive reaction or pullback lows make the 'stairstep' pattern of higher relative lows, I assume that prices can or will continue higher; if this pattern gets broken then it's a different story of course.

The key near resistance in INDU is in the 9000 area; above 9000, next resistance begins substantially higher, around 9500 and extending up to the 9650 area.

Near support is noted on my INDU chart at 8000, which is an area of potential support implied by the previously broken down trendline. Next support and very pivotal support in terms of keeping bullish possibilities alive is in the 7500 area.

I exited most of my Dow Index (DJX) calls bought in the 75 area, on this past Monday's strong move above 88 (Dow 8800). Not because I don't think INDU can't go higher than the 9000 area already seen, but because I usually have 'preset' trade objectives that I adhere to, especially in a counter-trend trade in a skittish market like this one.

[Image 4]


The Nasdaq Composite Index (COMP) rebounded from the exact level of its 21-day moving average; as if it (the average) had 'eyes' so to speak. COMP got more oversold, more 'overdone' on the downside, than the S&P and it's acting like it wants to go higher.

You can see good technical performance in that the pullback after the initial 'false' or premature low-volume upside breakout of COMP above the down trendline, where the subsequent decline started finding support at what had been a resistance trendline.

Key resistance is 1600, then at the prior rally high up near the 1800 area.

The primary support levels are what I discussed last week, at 1400, then down in the 1300 area, which puts prices back at the aforementioned trendline. Major support is at 1200-1160.

[Image 5]


There's not much more to say about the chart/technical action in the Nasdaq 100 (NDX) than already discussed with the Composite. Only the levels are different; the pattern is the same and shows some still-bullish potential. I mentioned in my initial 'bottom line' commentary how the NDX's filling in or finding support at its prior upside price gap area was also a bullish aspect to the chart.

Resistance is in the 1250 area, then isn't seen on the charts before the prior (up) swing high at 1383.

Technical support is in the 1100-1090 area; then at 1000. A close below 1000 in NDX not reversed (back above 1000) the next day would suggest renewed downside momentum.

[Image 6]


The Nasdaq 100 QQQQ tracking stock got up to above 30 on its last rally suggesting the first or near resistance level at 30.5; next resistance is in the 31.8-32.0 area, with fairly major resistance coming in at 34.

Volume levels aren’t showing us much here, although there's a slight tendency for volume expansion on the rallies and contraction on pullbacks, consistent with bullish price action.

Technical support is at 28.5, at 26.8, with the pivotal support at the low for the move to date, at 25.0.

I said last week that "a close above 30 not reversed the next day, is bullish for a move to 32." Well, the Q's did see two consecutive days above 30, so stay tuned (just don't hold your breath) for 32!

[Image 7]


The Russell 2000 (RUT) reversed in the area of resistance implied by its down trendline as can be seen on its daily chart below. However, I've noted first resistance at the recent intraday high in the 490 area, which would start to put RUT above its bearish trendline.

Next resistance is up in the 550 area; if reached, this would put the index finally back above its 55-day moving average and the (average) 'length' I tend to follow for RUT.

Key near support continues to look like the low-400 area, then down at the prior 371 low.

I'll say again that the low and mid-cap stocks are not getting as much play with the 'individual' investor out of the market.

[Image 8]




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

2. Resistance or areas of likely selling interest and notated by the use of 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

Healthcare, Internet, Cement, & Oil


Covance Inc. - CVD - close: 40.58 change: +0.51 stop: 37.97

Why We Like It:
CVD looks like a bullish candidate here. The stock has broken its multi-month trend of lower highs and early December produced a higher low. More recently shares of CVD have built a new trend of higher lows and the P&F chart has reversed into a new buy signal with a $54 target. Meanwhile CVD still has a relatively high amount of short interest at 7% of the 62 million-share float.

More aggressive traders may want to buy calls now. We want to see some confirmation this week so we're suggesting a trigger to buy calls at $41.55. If triggered we're listing two targets. Our first target is $46.00. Our second target is $49.50.

Suggested Options:
Our suggested trigger is $41.55. We would use the January calls.

BUY CALL JAN 40.00 CVD-AH open interest=247 current ask $4.20
BUY CALL JAN 45.00 CVD-AI open interest= 83 current ask $2.00

Annotated Chart:

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           01/29/09 (unconfirmed)
Average Daily Volume =       1.2 million  

Google Inc. - GOOG - close: 315.76 change: +15.54 stop: 293.50

Why We Like It:
I usually avoid playing GOOG on the newsletter because the stock's high-dollar price and volatile swings make the options very expensive to play. That hasn't changed but shares appear to be offering a pretty decent entry point for bullish strategies. Traders bought the dip at $294 on Friday and GOOG rallied to a 5% gain to close at its highs for the day. The move almost looks like a breakout buy signal from a bull flag pattern. The Point & Figure chart has turned bullish with a $424 target.

We're listing two strategies. One strategy is our normal plan, which is to buy a call option and sell it when the stock hits our target. The second strategy is to sell a deep in the money put. See the details below.

Our target on GOOG is $360.00. We're listing a stop at $293.50 but more conservative traders may want to use a stop closer to $300. Speaking of conservative traders you may want to avoid this play altogether or if GOOG fails to see any follow through higher on Monday just exit early.

Strategy #1 - Buying Calls
Suggested Options:

We are suggesting the January calls. We are suggesting positions now but a dip back toward $310 or $305 would also be an attractive entry point.

BUY CALL JAN 330 GGD-AF open interest=1191 current ask $16.20
BUY CALL JAN 340 GGD-AE open interest= 914 current ask $12.30
BUY CALL JAN 350 GGD-AJ open interest=2385 current ask $ 9.10

Strategy #2 - Selling an in-the-money Put
Suggested Options:

This strategy involves selling (short) an in-the-money put to take advantage of the stock's volatility and high option premiums. If the stock goes up the put value will drop drastically and we can buy it back cheaper. You still need to use a stop loss. If GOOG hits our stop this strategy requires that you buy back the put you sold short.

Note: selling a put short does involve risk. If you want to limit your risk consider buying a deep out of the money put as a hedge against disaster.

You can pick any significantly deep in the money put you want to sell. I'm suggesting the January $350. We'll exit when GOOG hits $350.00 or higher.

SELL PUT JAN 350 GGD-MJ open interest=1802 current ask $43.80

Annotated Chart:

Picked on December 13 at $315.76
Change since picked:      + 0.00
Earnings Date           01/29/09 (unconfirmed)
Average Daily Volume =       7.2 million  

NYSE Euronext - NYX - close: 27.53 change: +1.55 stop: 25.45

Why We Like It:
This past week was very bullish for NYX. The stock broke out from its bearish trendline (see chart) and has been consolidating under resistance at $28.00. Furthermore the consolidation has a bullish trend of higher lows so the stock is coiling more tightly for another breakout higher. We are suggesting readers use a trigger to buy calls at $28.10. If triggered our target is the $32.50 mark or the simple 100-dma (currently 33.42), whichever one the stock hits first. FYI: The P&F chart is bullish with a $43 target.

Suggested Options:
We are suggesting the January calls.

BUY CALL JAN 30.00 NYX-AF open interest=7302 current ask $2.10

Annotated Chart:

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           02/05/09 (unconfirmed)
Average Daily Volume =       5.8 million  

Texas Industries - TXI - close: 34.43 change: +1.98 stop: 31.25

Why We Like It:
TXI might be one of the winners from the Obama-infrastructure play. The company provides construction materials like cement. The stock is also a candidate for a short squeeze. The most recent data listed short interest at more than 20% of the very small 21 million-share float.

We are suggesting readers buy calls now with a stop loss under Friday's low. We have two targets. Our first target is $39.50. Our second target is $43.00.

Suggested Options:
We are suggesting the January calls.

BUY CALL JAN 35.00 TXI-AG open interest=189 current ask $4.30
BUY CALL JAN 40.00 TXI-AH open interest=298 current ask $2.40

Annotated Chart:

Picked on December 13 at $ 34.43
Change since picked:      + 0.00
Earnings Date           01/08/09 (unconfirmed)
Average Daily Volume =       745 thousand 

ExxonMobil - XOM - close: 80.45 change: +0.43 stop: 78.45

Why We Like It:
I'm starting to think that crude oil may have found a significant bottom these past two weeks. It may not be the bottom but the commodity is definitely bouncing. OPEC meets later this week and will do whatever they can to cut production and boost prices. At least that is the impression they will try and make on the world. Many believe they won't have much impact on oil at this time.

If oil does continue to rally then XOM should be able to breakout over resistance near $82.00 and its simple 200-dma. I'm suggesting readers use a trigger to buy calls at $82.25. Once triggered our target is $89.50. There is some resistance at $85.00 but I would expect XOM to push through it. FYI: The P&F chart is bullish with a $98 target.

Suggested Options:
Our suggested trigger is $82.25. We would use the January calls.

BUY CALL JAN 80.00 XOM-AP open interest=67371 current ask $5.30
BUY CALL JAN 85.00 XOM-AQ open interest=76528 current ask $2.89
BUY CALL JAN 90.00 XOM-AR open interest=63856 current ask $1.302

Annotated Chart:

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           02/05/09 (unconfirmed)
Average Daily Volume =        56 million  

In Play Updates and Reviews

Friday's Weakness Provided Entry Points

Play Editor's Note: The morning weakness on Friday was perfect. A few of our bullish candidates were triggered and then bounced higher into the afternoon. Our Chinese plays held up in spite of weakness back home. Meanwhile our strangle plays only have five trading days left.

CALL Play Updates

Apple Inc - AAPL - close: 98.27 change: +3.27 stop: 92.40*new*

Our patience with AAPL has paid off. The stock gapped open lower at $92.80 on Friday morning and rebounded sharply from the $92.50 level. Our suggested entry point to buy calls was at $94.00 so we were triggered at the open with a better entry point than expected. AAPL marched higher the rest of the day to close up 3.4% and near its highs. Friday's session has produced a bullish engulfing candlestick pattern. It also looks like AAPL has produced a bull-flag pattern over the last week.

More conservative traders may want to take some money off the table right now given the big bounce from our entry. We are going to stick to our previously listed targets. Please note that we're moving the stop loss up to $92.40. Our first target is $99.85. Our second target is $107.50.

Suggested Options:
If you missed Friday's entry point consider buying calls on a dip near $96 or a breakout over $100. We're suggesting the January calls.

Annotated Chart:

Picked on December 12 at $ 92.80 *gap down entry 
Change since picked:      + 5.47
Earnings Date           01/22/09 (unconfirmed)
Average Daily Volume =      52.8 million  

Amazon.com - AMZN - close: 51.25 change: +3.00 stop: 47.49*new*

AMZN also gapped open lower on Friday morning but investors were very quick to jump on the dip. The stock soared higher and showed impressive relative strength, albeit on below average volume. The move produced a bullish engulfing candlestick and another breakout over its 50-dma and the $50.00 mark.

We had been waiting for a dip to $46.00 or lower. The intraday low on Friday was $47.52. Given AMZN's strength we're going to alter our strategy. I am now suggesting readers buy Friday's bounce with a stop loss under Friday's low. This makes it a much more aggressive play but shares have developed a bullish trend of higher lows and higher highs. If we don't see a new higher high soon we'll consider an early exit.

Our first target is $54.95. Our second target is $59.50. More aggressive traders may want to aim for the 100-dma. FYI: The P&F chart is bullish with a $73 target.

Suggested Options:
We are suggesting the January calls.

BUY CALL JAN 50.00 ZQN-AJ open interest=12127 current ask $6.10
BUY CALL JAN 55.00 ZQN-AK open interest= 6358 current ask $3.70

Annotated Chart:

Picked on December 13 at $ 51.25
Change since picked:      + 0.00
Earnings Date           01/28/09 (unconfirmed)
Average Daily Volume =      12.9 million  

China Mobile Ltd. - CHL - close: 51.65 change: -0.18 stop: 49.75*new*

Both the Chinese Hang Seng index and the Shanghai index plunged sharply lower on Friday. Yet shares of CHL managed to recover from its morning weakness. Traders bought the dip at round-number support near the $50.00 mark. The bounce from its lows is encouraging but we're not suggesting new bullish positions at this time. We are upping the stop loss to $49.75.

CHL has already hit our first target at $51.75. We're currently aiming for the $57.00 level.

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 not suggesting new positions in CHL at this time.

Annotated Chart:

Picked on December 03 at $ 47.11 /gap down entry
Change since picked:      + 4.54 /originally listed at $47.85
Earnings Date           00/00/08 (unconfirmed)
Average Daily Volume =       3.9 million  

Express Scripts - ESRX - close: 57.48 change: -0.24 stop: 55.95

ESRX showed some relative weakness on Friday but the stock failed to break short-term support near $56.00. The last four days look like a consolidation pattern similar to a bull flag. While I am willing to stay bullish on ESRX I'm very cautious here. More conservative traders may want to cut their losses and exit right now. If we don't see a bounce on Monday I will drop ESRX. Wait for a move over $59.00 or $60.00 before considering new bullish positions. Our target is $64.00.

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

Annotated Chart:

Picked on December 06 at $ 59.36 /gap higher entry 
Change since picked:      - 1.88 /originally listed at $58.58
Earnings Date           02/19/09 (unconfirmed)
Average Daily Volume =       3.1 million  

FTSE/Xinhau China Index - FXI - close: 29.99 chg: -0.13 stop: 28.65*new*

The FXI China ETF gapped lower after both the Chinese markets fell sharply on Friday. Yet the FXI managed to bounce from its morning lows and significantly pare its losses. This is a bullish show of strength but we're not suggesting new positions. Instead we're inching up our stop loss to $28.65, about 15 cents under Friday's low.

Early last week we told readers to take profits at $30.00 or higher and adjusted our secondary target to $34.00. Now with the simple 100-dma reaching the $33 level we are adjusting our secondary target to $32.50.

Suggested Options:
We are not suggesting new positions in FXI.

Annotated Chart:

Picked on December 03 at $ 26.27 /gap down entry point
Change since picked:      + 3.72 /originally listed at $27.25
Earnings Date           00/00/00
Average Daily Volume =      51.2 million  

Jacobs Engineering - JEC - close: 46.80 change: -0.92 stop: 42.45

Engineering and construction stocks were hit hard on Friday morning after a Goldman Sachs analyst issued some bearish comments on the sector. Shares of JEC gapped open lower at $44.60, dipped to $42.60 and then rebounded throughout the remainder of the day. Our plan was to buy calls on a dip to $46.00 or lower so the gap down gave us a much better entry point. We're going to leave our stop loss unchanged at $42.45. We have two targets. Our first target will be $51.00. Our second target will be $54.90.

Suggested Options:
Our plan suggested buying January calls. If you missed Friday's entry point consider looking for another bounce from the $45 region.

Annotated Chart:

Picked on December 12 at $ 44.60 *gap down entry
Change since picked:      + 2.20
Earnings Date           01/21/09 (unconfirmed)
Average Daily Volume =       3.0 million  

Priceline.com - PCLN - close: 64.69 change: +3.73 stop: 59.75

Our bullish play on PCLN almost died on Friday morning. Market weakness pushed PCLN toward round-number support at $60.00 but thankfully the level of support held firm. The stock quickly shot higher and eventually closed up 6.1%. If you're willing to play with a wide $5.00 stop loss then this is a new bullish entry point. PCLN does have some resistance near $65.00 but I am expecting a breakout next week and a rise toward our secondary target at $69.90. FYI: The Point & Figure chart is bullish with a $102 target.

Suggested Options:
We remain bullish on PCLN and this bounce looks like another entry. I'm suggesting the January calls.

Annotated Chart:

Picked on December 06 at $ 61.60 /gap open higher
Change since picked:      + 3.09 /originally listed at $60.46
Earnings Date           02/12/09 (unconfirmed)
Average Daily Volume =       1.8 million  

Wynn Resorts - WYNN - close: 42.08 change: +1.38 stop: 39.40*new*

If you missed the entry point on Thursday we got another opportunity on Friday. WYNN slipped to $39.49 and spent a good deal of time bouncing around the $40.00 level before finally rebounding higher. This remains an aggressive play. The economy is sliding deeper into recession and the casino stocks are going to struggle but right now WYNN has developed a bullish pattern of higher highs and higher lows. We're adjusting our stop loss to $39.40. We have two targets. Our first target is $44.75. Our second target is $49.00. I would strongly suggest taking some money off the table at our first target since the 50-dma (currently near $46) could be stiff resistance. FYI: the P&F chart is bullish with a $62 target.

Suggested Options:
We are suggesting the January calls.

Annotated Chart:

Picked on December 11 at $ 40.75
Change since picked:      + 1.33
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: 80.81 change: +0.16 stop: n/a

After Thursday's big fall the U.S. dollar didn't move much on Friday. Gold prices also spent the day trading sideways. The GLD bounced around the 100-dma near $80.00 and the exponential 200-dma near $82.00. If the GLD can breakout over its late November highs near $82.00 it would be a bullish development. As it stands now the GLD might be building a bearish double top.

The December $75 call option closed around $6.00 on Friday. We only have five trading days left before December options expire. More conservative traders will want to seriously consider exiting early right here to protect capital.

For those traders who are willing to speculate that the GLD will continue to rally over the next five days, then I'm adjusting our exit target to $9.90.

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 $9.90.

Suggested Options:
We are not suggesting new option positions.

Annotated Chart:

Picked on November 09 at $ 72.50
Change since picked:      + 8.31
Earnings Date           00/00/00
Average Daily Volume =      19.3 million  

Ultra S&P500 ProShares - SSO - close: 25.26 change: +0.26 stop: n/a

The S&P 500 index bounced from an intraday test of the 850 level. If the index can breakout over its simple 50-dma the market could see a significant rally toward the 1000 region. A bullish breakout would really produce some big moves in the SSO.

We only have five days left before December options expire. More conservative traders need to be looking for an exit either here or anywhere near breakeven.

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:
We are not suggesting new positions.

Annotated Chart:

Picked on November 12 at $ 24.84
Change since picked:      + 0.42
Earnings Date           00/00/00
Average Daily Volume =       126 million  


Chipotle Mexican Grill - CMG - close: 57.47 chg: +2.42 stop: 48.45

CMG continues to show relative strength, which is a great sign for the bulls. However, the rebound is looking pretty extended here after a bounce from $37. We are not going to chase it and we're not willing to short it - at least not here. The plan is to just wait and watch for an entry point. Eventually CMG will correct. Our suggested play was never opened.


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 

Goldman Sachs - GS - close: 67.74 change: -1.97 stop: 67.49

The early morning weakness in the U.S. markets was enough to push GS lower. The stock actually gapped open lower at $65.70 on Friday morning before bouncing up to fail near $70. Our stop loss was at $67.49 so we would have been stopped out at the opening gap. GS reports earnings next week and their results and guidance could have a huge affect on market sentiment and direction, especially for the financials.


Picked on December 10 at $ 71.00 *triggered
Change since picked:      - 3.26
Earnings Date           12/16/08 (confirmed)
Average Daily Volume =        29 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.

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