Option Investor

Daily Newsletter, Wednesday, 12/17/2008

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Table of Contents

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

Market Wrap


[Image 1]

While the major averages don't show it, stocks actually finished mixed to higher as this quarter's triple witch expiration draws ever closer, and when things "don't make sense," or you start seeing/hearing that a once deemed important indicator is "of now use today," its usually a time to start expecting the unexpected.

No, it doesn't make sense that the Market Volatility Index (VIX.X) 49.84 -4.83% opened flat and then trended lower to the close as put sellers/call buyers outnumbered put buyers/call sellers, yet the S&P 500 Index (SPX.X) traded rather "flat" today, only to finish off just less than 1%.

No, it doesn't make sense that TRIN was somewhat bearish above 1.00 for the bulk of the day, yet the NYSE advance decline line turned positive with advancers outnumbering decliners nearly 2:1 by 2:00 PM ET, and still finishing with positive breadth by the close.

And when there's SO MUCH that "doesn't make sense," that usually spells of some type of short-term manipulation (for lack of a better term), before all heck breaks loose, and the cat sitting on the top of the couch, which has been gagging for just about a week, coughs up the fur ball.

Honey! Is Felix acting funny?

U.S. Market Watch -

[Image 2]

Now that's a very mixed picture a red and green today, and we probably get the sense the Felix's stomach is churning in Friday's expiration.

Maybe we could say Felix coughed up a short position in Treasuries since our last visit when the Fed slashed its target for Fed funds to 0%-0.25%.

The reason I think shorts coughed up the fur ball is that I personally don't find a 3.00%, a 2.50%, let alone a 2.19% per year for 10-years overly attractive from the BULL side of things.

Heck, if you shop around a little, you'll find a 1-year Certificate of Deposit (CD) paying more than that right now!

Last Wednesday I noted NDX.X resistance at 1,231 and that was my "chart of the week." We saw that probed to the upside today, but buyers still don't have the conviction to make a bolder move much above that level.

NASDAQ-100 Index (NDX.X) - Daily Intervals

[Image 3]

The "support building" at 1,195.75 has been more of a "pivot" or mid-point since Wednesday's wrap, and since that's this month's pivot, I'll at least say "that makes sense."

As time progresses, about the only "technical" difference at this point is the starting to curl up 21-day SMA.

In the above chart of the NDX.X itself, I highlight some action that ended BEARISH as the NDX fell back BELOW the then FLATTENING out 21-day SMA.

The break above the near-term DOWNWARD trend is encouraging to a bull, now they want to see CONVICTION.

We're seeing NASDAQ new lows somewhat steady and new highs building back up a tad. Over the last 21-days, the broader NASDAQ Composite has been averaging 5 new highs and 286 new lows.

February Crude Oil Futures (cl09g) - Daily Intervals

[Image 4]

Despite a sharp recover in the euro, which I depict with the Euro CurrencyShares (FXE) $144.18 +1.87% since our last visit (+10.62) that hasn't helped the price of oil as we head into Friday's termination for the Jan'09 contract, which settled down $3.54, or -8.12% today at $40.06.

The above chart is the Feb'09 contract, where on Thursday (12/11/08) as the euro broke out of that nice base, it looked like oil prices were going to follow.

Now, this near-term action "doesn't make sense" either as the euro broke down hard on 08/08/08 and oil prices followed, or moved in unison with the euro.

Perhaps things have changed and the once blamed "weak dollar vs. euro" for higher oil prices no longer holds true.

The technicals for crude look bearish below $51 (as depicted by the Feb'09 futures) and today's EIA data didn't do a lot on the fundamental side of things to say different.

Just know that there were more than a few that "ignored" the euro's decline and were still big bulls in oil from August until about a week ago. Some were "big bears" in oil from $100 to $140 as the euro surged from 1.30 to 1.60.

I will also confess I was near-term bullish heading into today's EIA report, LARGELY due to the euro's rise. But I thought I needed a MODESTLY bullish inventory/refinery report to bring in the buyers above last month's termination benchmark ($50.41 above) and that simply didn't happen.

So I'm suggesting flat, to LIGHT short (if at all). If SHORT, be very disciplined should crude oil bid much above $51.00.

Global Economic Calendar -

[Image 5]

I can't say that I see anything in the above global calendar that would have the EURo pushing further higher again today, and the U.S. calendar was light.

No big "surprises" for the current account, or actual crude oil inventory.

Not shown was the EIA reporting the crude oil inputs fell by 415,000 barrels/day in the latest week to 14.55 million barrels/day and they used just 84.12% of refining capacity.

That's NOT a BULLISH near-term demand picture on a U.S.-basis.

The number of days of crude oil supply was flat at 21.8 days.

Well, as I constantly look for something that may be "the chart" or technical that creates "the trigger" for some further sign of strength, or the abatement of the rebound from the November lows, I'm going to turn to the Point and Figure charts, where we'll step out and look things over a bit further.

In my last couple of Wednesday wraps I've noted PRICE levels of support/resistance.

Let's go back to the "Guinea Pig Market" wrap from 12/03/08.

Take a look at that SPX and VIX 30-minute interval montage I put in the wrap, and just go back up to tonight's U.S. Market Watch.

Now this is something that I saw late this afternoon.

VIX.X - 1.00 Point Box

[Image 6]

I've never been much of a VIX.X "trader" but simply view it as a measure that tells me if ... RISING= more put buyers/call seller than FALLING= more put sellers/call buyers.

In September, the VIX.X broke above its BEARISH resistance trend about the time the SEC implemented the "no short" rule some many of the financials. (Rule since removed)

With the VIX.X now at its BULLISH support trend, a BREAK of this trend could shift market participants to a more BULLISH bias. HOLDING of this trend, or BOUNCE higher, BEARISH bias may become renewed.

S&P 500 Index (SPX.X) - 5-point box

[Image 7]

Resistance still showing up below 920, but a trade there a spread triple top buy and short could come in strong with some buying.

First sign of further weakness a break below 850.

If VIX.X were to break below trend, then may be a SIGNAL from that indicator, that "fear" is subsiding.

If you have not taken advantage of our year-end renewal special yet I suggest you do so quickly. We were not able to get as many DVDs as we wanted and will be cutting off the special a lot sooner than in prior years. This is the cheapest rate for the entire year and includes $250 in free gifts.

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New Option Plays

Wednesday Night: No New Plays.

Play Editor's Note: No New Plays.

In Play Updates and Reviews

Two Targets Hit, The Rest Moving Sideways

CALL Play Updates

Amazon.com - AMZN - close: 53.18 change: +0.55 stop: 48.24 *new*

AMZN almost hit our first target today. The stock rallied to $54.77 and we are aiming for $54.95. Shares pared their gains but did out perform the broader market. I would not be surprised to see a dip back toward the $52-51 zone before AMZN continues higher. We are raising the stop loss to $48.24.

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.

Picked on December 13 at $ 51.25
Change since picked:      + 1.93
Earnings Date           01/28/09 (unconfirmed)
Average Daily Volume =      12.9 million  

Caterpillar - CAT - close: 44.65 change: +0.85 stop: 39.95

CAT continued to rally and managed to hit new relative highs over round-number resistance at $45.00 before trimming its gains. Bulls will note that CAT did out perform the S&P 500 today. If CAT does dip look for a pull back near $43.00 or $42.00 as a new entry point to buy calls.

Our target is $49.50. The Point & Figure chart is bullish with a $58 target.

Picked on December 16 at $ 43.80
Change since picked:      + 0.85
Earnings Date           01/29/09 (unconfirmed)
Average Daily Volume =      13.4 million  

China Mobile Ltd. - CHL - close: 53.89 change: -1.33 stop: 51.90

After yesterday's big surge higher CHL hit some profit taking today. Overall we don't see any changes from our previous comments. If you have not taken profits yet I strongly suggest you do so now. Our secondary target is $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:      + 6.78 /originally listed at $47.85
Earnings Date           00/00/08 (unconfirmed)
Average Daily Volume =       3.9 million  

Covance Inc. - CVD - close: 42.78 change: +1.78 stop: 38.75 *new*

CVD showed some relative strength today with a 4.3% gain and a breakout to new relative highs. Volume was strong on the rally, which is bullish. We are raising our stop loss to $38.75. We have two targets. Our first target is $46.00. Our second target is $49.50. Don't forget that CVD has a relatively high amount of short interest at 7% of the 62 million-share float.

Picked on December 15 at $ 41.55 *triggered     
Change since picked:      + 1.23
Earnings Date           01/29/09 (unconfirmed)
Average Daily Volume =       1.2 million  

Express Scripts - ESRX - close: 59.41 change: -1.95 stop: 56.95

ESRX took a step back today following yesterday's breakout from what appears to be a bull-flag pattern. The short-term trend is still bullish but ESRX has resistance near $61.50. Readers may want to wait and watch for a bounce near $58.00 before initiating new bullish positions. Our target is $64.00.

Picked on December 06 at $ 59.36 /gap higher entry 
Change since picked:      + 0.05 /originally listed at $58.58
Earnings Date           02/19/09 (unconfirmed)
Average Daily Volume =       3.1 million  

FTSE/Xinhau China Index - FXI - close: 30.76 chg: -0.41 stop: 28.65

The rally in FXI stalled today. We don't see any changes from our previous comments. Shares might dip back toward the bottom of its trading range of the 10-dma near $29.50. A bounce from its 10-dma could be used as a new entry point to buy calls. FXI has already hit our first target and we are now aiming for $32.50 just under the 100-dma.

Picked on December 03 at $ 26.27 /gap down entry point
Change since picked:      + 4.49 /originally listed at $27.25
Earnings Date           00/00/00
Average Daily Volume =      51.2 million  

Google Inc. - GOOG - close: 315.24 change: -10.04 stop: 299.90

GOOG delivered an impressive rally (or short squeeze) yesterday and gave most of it back today with a 3% drop. The stock is back under its 50-dma again and looks like it could be headed for the simple 10-dma near $305. Wait for a bounce before considering new bullish positions.

We have two strategies listed on GOOG. One is a directional call play with an exit target at $360.00.

Our second strategy is a naked put play where we sell the naked put and then buy it back for less and our target to exit the naked put play is $350. The suggested put to sell was the January $350 put (GGD-MJ).

Picked on December 13 at $315.76
Change since picked:      - 0.52
Earnings Date           01/29/09 (unconfirmed)
Average Daily Volume =       7.2 million  

Jacobs Engineering - JEC - close: 50.10 change: +1.16 stop: 44.95 *new*

Target achieved! JEC rallied to $51.75 and met resistance at its simple 100-dma. Our first target to take profits was the $51.00 mark. I hope readers took some money off the table. JEC could dip back toward $45.00 and still maintain its bullish trend. We're raising our stop loss to $44.95. More conservative traders will want to exit completely right here. Our second target will be $54.90. *Note - I want to reiterate that readers should definitely take some money off the table here. The more I look at JEC's technical indicators and the falling volume numbers the more I think it could see a sharp retracement.


Picked on December 12 at $ 44.60 *gap down entry
Change since picked:      + 5.50
Earnings Date           01/21/09 (unconfirmed)
Average Daily Volume =       3.0 million  

Perini Corp. - PCR - close: 23.21 change: +0.85 stop: 19.95

PCR is another winner. The stock showed relative strength with a 3.8% gain. We don't see any changes from our prior comments on Tuesday night. We have two targets. Our first target is $24.90. Our second target is $27.00. PCR could be a short squeeze candidate. The most recent data listed short interest at more than 11% of the small 27.7 million-share float. The P&F chart is bullish with a $36 target.

Picked on December 16 at $ 22.36
Change since picked:      + 0.00
Earnings Date           02/26/09 (unconfirmed)
Average Daily Volume =       1.0 million  

NYSE Euronext - NYX - close: 29.10 change: -0.84 stop: 27.25

The NYX spent the entire session churning sideways in a narrow range. Odds are decent the stock will retest prior resistance at support near $28.00 so look for a dip there as a new entry point.

Our target is the $32.50 mark or the simple 100-dma (currently 33.04), whichever one the stock hits first. FYI: The P&F chart is bullish with a $43 target.

Picked on December 16 at $ 28.10 *triggered     
Change since picked:      + 1.84
Earnings Date           02/09/09 (unconfirmed)
Average Daily Volume =       5.8 million  

Texas Industries - TXI - close: 36.31 change: +1.06 stop: 31.25

TXI also out performed the S&P 500 today with a 3% gain. Unfortunately the rally stalled near its early December highs. I wouldn't be surprised to see another dip toward the 10-dma again (near $33.50). 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 have two targets. Our first target is $39.50. Our second target is $43.00.

Picked on December 13 at $ 34.43
Change since picked:      + 1.88
Earnings Date           01/08/09 (unconfirmed)
Average Daily Volume =       745 thousand 

ExxonMobil - XOM - close: 81.06 change: -2.08 stop: 78.45

This is an amazing world we live in. OPEC announced it would cut production by 2.2 million barrels a day starting in January and crude oil went down on the news. Shares of XOM followed with a 2.5% decline. At this point I would wait for a bounce near $80.00 or maybe $79.00 before considering new bullish positions in XOM.

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.

Picked on December 16 at $ 82.25 *triggered     
Change since picked:      - 1.19
Earnings Date           02/05/09 (unconfirmed)
Average Daily Volume =        56 million  

PUT Play Updates

*Currently we do not have any put play updates*

Strangle & Spread Play Updates

Ultra S&P500 ProShares - SSO - close: 26.64 change: -0.49 stop: n/a

The market struggled to breakout past its December highs. The S&P 500 traded sideways to down. The SSO failed to breakout past its 50-dma. We only have two days left before our 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:      + 1.80
Earnings Date           00/00/00
Average Daily Volume =       126 million  


Priceline.com - PCLN - close: 70.31 change: +2.91 stop: 59.75

Target achieved! PCLN continues to out perform the market. Shares hit an intraday high of $70.91. Our secondary target to exit was $69.90. Our play is closed but we would keep PCLN on a watch list to see if shares offer another entry down the road.


Picked on December 06 at $ 61.60 /gap open higher
Change since picked:      + 8.71 /originally listed at $60.46
Earnings Date           02/12/09 (unconfirmed)
Average Daily Volume =       1.8 million  


SPDR GOLD Trust - GLD - close: 85.43 change: +0.97 stop: n/a

The U.S. dollar continued to plummet on Wednesday and that lifted gold prices. The GLD gapped open higher at $85.26 and rallied to almost $87 before trimming its gains. As of last night our plan was to exit at 10:30 a.m. if the December $75 call did not hit our target of $9.90. That wasn't a problem. The option (GVD-LW) opened at $10.10 and traded to $11.28 at its highs. -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.


Picked on November 09 at $ 72.50
Change since picked:      +12.93
Earnings Date           00/00/00
Average Daily Volume =      19.3 million  


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