Option Investor
Newsletter

Daily Newsletter, Saturday, 12/20/2008

HAVING TROUBLE PRINTING?
Printer friendly version

Table of Contents

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

Market Wrap

Running Out the Calendar

For three weeks the markets have traded sideways with only a very small upward bias. Traders have either already quit for the year or are simply hoping to run out the year-end clock and escape with their meager rebound gains.

Market Statistics
[Image 1]

I wish I had a lot to write about this weekend but unless you want 1000 words on the auto bailout plan there really is a lack of newsworthy events. Traders are still in shock from the events of the last three months and those still in the markets are simply trying to get to year-end without any further declines. Rallies are weak, sell offs are weak and volume is already drying up as many traders move to the sidelines for the holidays. The market could have closed on Friday and remained closed until Jan 5th and very few traders would have cared. After a huge bear market drop, the worst financial crisis since the depression and the largest stimulus/bailout program in history, traders are still in shock and emotionally spent. Until the economic news calms and we start seeing some results of the bailout moves the markets are not likely to post major gains.

There was only one economic report on Friday and that was Mass Layoffs for November. We already know unemployment is rising so the news mass layoffs rose to 2,328 events for November should be no surprise. The layoffs involved 224,079 workers compared to 232,468 in October. Manufacturing layoffs accounted for 39% of all events and 45% of initial claims. Transportation equipment (primarily automakers) cut 25,042 workers. Overall layoffs have doubled over the last year. Mining operations are experiencing huge layoffs now that commodity demand and prices have fallen significantly.

The biggest commodity drop has been oil. OPEC met on Wednesday and agreed to cut another 2.2 mbpd of production. January crude prices fell from $44.31 to $32.40 at Friday's lows. January crude prices fell -27% for the week or -$12.71. This entire drop is unprecedented in terms of dollars and percentages since the July high. Actually the problem with the current price is not as bad as it seems on the surface. Friday was the expiration for the current January futures contract. Everybody who was long those contracts in hopes of a major move higher after an OPEC announcement was forced to rush to the exits when that bounce did not occur.

Another reason for the decline was the excess crude currently in storage. Crude inventories have been piling up in record amounts for weeks as refiners, processors, manufacturers, etc, stocked up on cheap oil. Now there is nowhere left to put it. Cushing Oklahoma is the delivery point for the U.S. crude futures contract. The tank farms at Cushing are full and there are few remaining options for delivery other than pay expensive storage while they wait. This means companies long the contract are in panic sell mode instead of being forced to pay for expensive storage. Prices for future months are nowhere near the price on the expiring January contract. The futures are telling us that prices are expected to move sharply higher over the next 12 months. The December 2009 contract at $55.20 is currently trading for more than $20 over the expiring January contract. This is a major premium suggesting investors expect the OPEC cuts and a rebound out of the recession will push prices much higher.

Crude Contract Spreads
[Image 2]

Another problem is the unwinding of hedges by companies like airlines and truckers. When faced with constantly rising oil prices in the first six months of 2008 all of these people put on huge amounts of complicated hedges in order to protect themselves from higher prices. The only way to hedge is to be long the futures and options in some form. Because of the expense of creating longs representing the billion barrels of crude they burn each year they are forced to do this with leverage instead of straight crude futures. We all know how leverage works. It is great if the position is going in your favor but horrible when it turns against you. The losses pile up even faster than the gains. Companies hedging against $100 oil were jumping for joy as prices fell back to $60 and then $50. Thinking they were seeing prices dip back to realistic levels many actually increased their hedges while celebrating their good fortune. As prices fell under $50 and then $45 those long hedges began costing them hundreds of millions in losses. As the losses mount they are forced to liquidate and that means selling their longs with increasing panic as their own selling pushed prices even lower. We saw airlines reporting billions in losses when crude went over $75 and I suspect we are going to see them report monster losses from hedging exposure for the current quarter. Crude prices for the February contract are likely to come under some serious pressure next week as the market begins to factor in the same supply glut for February.

January Crude Contract Chart
[Image 3]

The automakers got their holiday gift from the government but it came with strings. GM will get a loan of $9.4 billion and Chrysler $4 billion. GM could get another $4 billion next year. Ford said it did not need any money now but would be badly damaged if either of the other two makers sought bankruptcy. The government has the option of becoming a stockholder like it did with the banks. Another provision called for wages to be lowered to parity with foreign automakers. That brought a scream of unfair from the UAW and they pledged to have Obama remove that stipulation from the deal in January. The unions were strong supporters of Obama and his share the wealth message. Obama was quick to mention in a press conference on Friday that the bailout would not come on the backs of the working class, meaning he was going to take care of the union workers. The deal also called for the elimination of the "jobs bank" program where laid off workers can receive up to 95% of their pay for years. This was a UAW engineered program with the cost borne by the automakers. Earlier this month the UAW agreed to suspend it after Congress complained so loudly. 95% pay for years to come? No wonder the automakers are in such bad shape. Another point in the deal called for two-thirds of the automakers debt to be exchanged for stock thereby freeing up debt payments to be used for operations. This provision and the addition of new stock for the government will dilute shareholders many times over by quadrupling the shares outstanding.

If carmakers cannot prove viability by March 31st they will be required to immediately repay the loans. Think about that for a minute. They are on the edge of bankruptcy today and this cash is supposed to be a bridge loan to cover operations for the next 90 days. They have no money and they are going to spend the government's money to stay alive. If they can't prove viability are they suddenly going to give the money back? This is insane. That is like giving a poor family a turkey for Thanksgiving and coming back a week after Thanksgiving and demanding the same turkey back. It is not going to happen and the automakers are not going to have the money to repay the loan in 90 days. Viability according to the deal is positive cash flow and the ability to repay the loan. Whoever wrote this provision was dreaming and any automaker that agrees to it is on drugs. This is setting the stage for nationalizing the automakers in March. One analyst said just the unemployment claims from a GM bankruptcy would be more than the $13 billion they will receive under the loan. This is a pay now or pay later deal for the Treasury and there was no alternative. Bush had to swallow another crisis that he did not create in order to avoid future claims that "Bush allowed the automakers to fail." You can bet he is not only counting the days until the inauguration but the hours and minutes as well. Obama's new stimulus plan is moving past $775 billion in the press and before lawmakers get done adding their pork to it the price should be over $1 trillion and has already earned Obama the title of the Trillion Dollar Man.

The Madoff scandal continues to grow and there are rumors circulating it could be a lot more than $50 billion. Major investors are coming out of the closet and admitting billions upon billions in losses. It could be months before the final total is known. Imagine you had invested $10 million with Madoff ten years ago. His average annual return was about 10%. For ten years you got a statement showing you earned $1 million and you had to pay taxes on that amount. By now with compounding your $10 million is supposedly worth about $25 million and your "returns" and taxes have been growing for years. Today you found out that not only have you paid taxes on $15 million in earnings you didn't actually earn but your original $10 million has disappeared. The tax nightmare is going to be horrendous. Apparently there are different qualifications on how the loss can be deducted. If you actually earned money for say 5 years and your balance grew to $15 million and then the theft began then there is a way to deduct that $15 million as a theft loss. The flip side assumes you never actually made any money and only your initial $10 million was stolen and that is all you can claim as a loss. Your taxes on the $15 million in phantom earnings are not recoverable unless you file amended returns with a three-year look back limit on that option. This is crazy. I am sure I butchered the actual remedies and tax law in that brief explanation but you get the picture. I am not a tax accountant and a couple of those I have heard could not even agree on how it would work. I am sure you have heard the new punch line making the rounds but I will repeat it here. It was not the Bernie Madoff fund but Bernie Made Up the Fund.

On the stock front it was a boring day with little of interest. S&P cut its long-term ratings on American Express (AXP) to A from A+ and affirmed the A-1 short-term rating. They cited the deterioration in the credit card portfolio and consumer credit. S&P also lowered its credit rating on 12 major U.S. and European banks citing increasing industry risk and the deepening economic slowdown. They singled out GS for additional criticism saying their core investment banking, trading and asset management business could be significantly weaker than previously assumed. The other banks were BAC, Barclays, C, CS, DB, HBC, JPM, MS, RBS, UBS and WFC. Are you asleep yet? I told you it was boring.

Potash cut its profit estimate for 2008 by -10% citing a sudden sharp drop in demand. They expect 2009 volume levels to be higher than 2008 with a sharp increase in the last three quarters. Their 2008 profits will be more than triple 2007 and 2009 should be higher than that. People still need to eat but there is a big problem in financing fertilizer purchases. Growers can't get letters of credit or loans because of the credit crunch. It is even worse when you are trying to buy a shipload to deliver overseas. The credit markets across countries are even worse than the credit problems inside the US. Potash is still producing a product in high demand but they can't ship the product until somebody can raise cash to pay for it.

Research in Motion (RIMM) had the last word on critics after they reported better than expected earnings and a rosy outlook for the current quarter. Revenues and estimates were surprisingly robust and they even hinted they were "layering in some conservatism" in the forecast. Everyone talking down their products were wrong and RIMM added 2.6 million new customers for the quarter. This was a very strong quarter in a period where everyone else is in a dive. RIMM gained +4.39 on the news.

Credit Suisse gets a gold star for creativity in dealing with its two biggest problems. First they have billions in "illiquid assets." That is Wall Street speak for things you can't sell and are cluttering up your balance sheet with losses. Second they owe a fortune in bonuses to employees that are not going to be fired in the recently announced 5,300 job cuts. They came up with a plan to put the troubled assets into an employee "Partner Asset Facility" and will give employees shares in the fund as a bonus. They get rid of their worthless assets and their cash drain liability for year-end bonuses. Now the employees will take the hit on any further losses. Since they helped put those assets on the balance sheet to begin with this is the perfect solution.

Next week is going to be a sleeper. There are no material economic reports and of course Christmas is Thursday. If there were any material reports there would not be anybody around to see them. The Q3 GDP on Tuesday is not expected to change from the prior reading and it would be no real shock if it did drop. The Q4 GDP is going to be a market mover when it is announced on January 30th. The official estimate is for something in the -5% range but there are highly visible whisper numbers as high as -8%. I actually view that release as a potential surprise if the number comes in less than expected. I think the market would explode. That is still a month away. The only vaguely interesting reports next week are the Richmond Fed Survey and Durable Goods, but again, nobody will be around to listen.

Economic Calendar
[Image 4]

The VIX declined to 41 intraday and a three-month low. This is not the result of the bulls coming back to the market. It is a result of the lower volume and smaller swings in the market. All the bad news is priced in and we have not had a major market sell off in three weeks. The anxiety is slowly bleeding out of the market but it has yet to be replaced by bullishness.

What we are seeing is the process of normalizing from the record volatility resulting from the financial crash. Investors have pulled back from the fear of the last couple months but they are not yet coming back to the market. Most market analysts are expecting a rally to appear by the end of January but most are avoiding discussing the first week of January. I am also afraid of that week.

The markets wandered on Friday as December options expired with barely a whimper. The Dow and NYSE closed down while the Nasdaq, S&P and Russell closed slightly higher. The cheers for the auto bailout plan died before the news alert rolled off the TV screen. It was already baked into the cake and no surprise Bush would get something done. The northeast was being hit by a major snowstorm with 4-5 hour delays at the major airports. Traders were only thinking about closing up shop for a weeklong holiday. Next week will be a ghost town on the market floor and in trading rooms across the country. Money managers will be contemplating a new profession as they review their bonus checks for the year. Most funds have shutdown for the year except for skeleton crews and they are only there in case disaster strikes.

The Dow still has a minor uptrend intact but it appears to be running out of steam. Resistance is rock solid at 9000 and every decent uptick is followed by a couple days of decline. This is not a bullish market despite the lack of losses. Support at 8400 could be deceptive and I could easily see a retest of 8000 around the first of the year.

Dow Chart
[Image 5]

The S&P chart is a clone of the Dow as it has been for weeks. Strong resistance at 920 and rising support at 860. The S&P looks only slightly stronger than the Dow with the trading range shrinking each week. We are definitely setting up for a major move when this range breaks.

S&P-500 Chart
[Image 6]

The Nasdaq is slightly more bullish than the Dow and S&P with the resistance at 1600 being tested more often and the minor dips being quickly bought but on low volume. Tech stocks are shaking off daily earnings warnings with the chip sector seeing 1-2 warnings a day. This is increasingly bullish but until we move over 1600 there is still a lot of behind the scenes worry that the gains are just window dressing. Funds have to be invested in something at year-end and techs are always a crowd pleaser. Support at 1500 was tested hard last week and held. I view that as a positive compared to the brief support tests on the Dow.

Nasdaq Chart
[Image 7]

The most bullish chart remains the Russell with a new 6-week intraday high on Friday. The bulls are chipping away at resistance just under 500 a little more every day. The dips are becoming shallower and there is less hindrance by the actions of the blue chips. The Dow was off -.6% for the week but the Russell was up nearly +4% with a minor new intraday high each of the last three days. It appears fund managers are nibbling at the small caps to keep them moving higher until year-end.

Russell Chart
[Image 8]

I believe conditions are forming where a low volume buy program could appear out of nowhere next week and produce a short covering rally that punches through resistance. I think a buy program in a low volume market could be a major surprise to people like me who think we could see a serious dip the first week in January. I have read/listened to a dozen analysts who claim there are sellers waiting for an end of year rally and that does not surprise me. It would be the perfect time to sell to raise cash for hedge fund withdrawals on Jan-1st. Bottom line, I think we could see a surprise break higher but I would be skeptical of its strength. Secondly I believe the closer we get to year-end the more dangerous it will be for the bulls.

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.

You get not ONE but FOUR DVDs worth over $200!

[Image 9]

Everybody gets TWO mouse pad calendars. These are very worthwhile even if you don't trade options. For an entire year you never have to look for a calendar because it is always under your mouse. Market holidays, FOMC meetings, Crude expirations and of course option expiration dates.

[Image 10]

Everyone gets this entire package with their subscription!

  • Option Investor Newsletter
  • Premier Investor Newsletter
  • LEAPS Trader
  • Couch Potato Trader
  • Option Writer
  • Option Investor Expiration Calendar Mouse pad
  • Jim Brown's Special 2009 Energy Report
  • The 91-page Hirsch Report on Peak Oil
  • A Crude Awakening, 85-Min DVD
  • Complete Course in Option Trading, 87-min DVD
  • Bull and Bear Spreads, 73-min DVD
  • Exploiting Volatility, 108-min DVD

Thank you in advance for your continued support of Option Investor.

Jim Brown


Index Wrap

RUN ALMOST DONE?

THE BOTTOM LINE :

Unlike the more 'fixed' outlook that investors can be prone to on a fundamental basis, trader types need to be flexible and continually evaluate the outlook for the market; this is especially true of technical analysis. I've gone back to the drawing board so to speak and now see that this recent run, the rebound seen from the late-November (11/21 low), may be about over as the major indexes approach tough resistances.

I have been most focused on the bullish implications of upside momentum implied by prices piercing the steep September early-December down trendline; which I was seeing as the upper line of a bullish falling 'wedge' pattern. However, in my ongoing evaluation of my charts and indicators, there are some other, bearish, aspects that have come to the forefront. Key resistances are implied by the following:

Prior (up) swing highs; e.g., at 918-919 in SPX, the 1600 area in COMP

1. The upper end of the downtrend channels especially apparent in the S&P and Dow.

2. The 55-day moving averages. There is a significant amount of focus, even among fundamentally oriented fund managers in the 50 and 200-day moving averages and (upside or downside) crossovers of these two. I look at the 55-day, a fibonacci number, but the 5 day difference is relatively minor.

3. 13-day RSI levels that are nearing levels that have 'signaled' tops in the last few months. There tend to be degrees of overbought (and oversold); e.g., in a bear market, the major indexes tend to top out at lower RSI levels than is typical in bull markets.

4. Bullish sentiment has declined recently, but it has been relatively high for a bear market prone to reversals after minor rebounds of 25 to 38% of the prior downswing.

5. Non-confirmation, of volume. Its been declining on balance during the recent rally; in the indexes, this is apparent on the QQQQ stock chart.

The foregoing analysis doesn't mean of course that there can't be a bullish surprise by a decisive upside penetration of the key resistances not far above this past week's closes. The market can be full of surprises.

As a trader I continually focus on probabilities; e.g., what is the probability or likelihood that the S&P 500 (SPX) advances another 100 points versus a decline of similar magnitude? With my most recent assessment of this, there appears to me to be more than a 50/50 chance of a decline. I'd rank it more like 40/60 or 30/70; e.g., a 40% chance of another leg up versus a 60% chance of another decline.

I took profits this past week on index calls bought at the late-Nov. turnaround, but still hold some QQQQ stock as my remaining 'proxy' long stake where I don't have time erosion in premiums if the market trends sideways in the slow holiday period ahead. Puts (ATM) taken out on the close approach to 9000 in the Dow, the several intraday rallies to above 900 in SPX and to OEX 440, look to have a favorable risk to reward.

Since SPX, OEX and INDU have gotten to or just below the down trendlines seen on the individual index charts, the appropriate exit points for puts are on any decisive upside penetration of those trendlines, especially on a close above the trendlines and even more so if there's a similar second consecutive close. With the Nasdaq 100 index (NDX), the resistance trendline is a bit further above recent highs, although not substantially, at around 1257.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES S&P 500 (SPX); DAILY CHART:

Key near resistance at prior recent highs in the S&P 500 (SPX) in the 918-919 area still hasn't been overcome and if we look at resistance that's also suggested by the top end of the downtrend channel, as well as the 55-day moving average, SPX may have gone as far in this rally as it's going to.

If there is a decisive upside penetration of resistance, a move up to the 1000 area is a possibility. If SPX was going to be have such a breakout and additional up leg, I'd expect support on pullbacks to the 900 area; resistance and resistance trendlines, once broken, tend to become support on subsequent pullbacks.

Near technical support is anticipated in the area of the 21-day average, currently at 867, with even more pivotal support in the 800 area. A close under 800, not reversed (back to the upside) the next day would suggest that SPX could again be headed back toward the low end of its downtrend channel.

I've taken the wedge formation off my daily charts as this pattern isn't as useful as highlighting the downtrend channel and key resistance implied by the upper trendline of the downtrend channel. If resistance here is overcome, then the bullish potential implied by the aforementioned falling wedge channel continues to be operative.

[Image 1]

Another aspect to the current technical picture is that the 13-day RSI seen above has reached an area where prior rallies in recent months have faltered or reversed.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) is up against resistance implied by its prior recent highs, the upper end of its downtrend channel and its 55-day moving average. OEX would need to clear 450 to suggest a decisive upside breakout and then the index would need to stay above 445 on a closing basis to suggest that it was regaining upside momentum; OEX is currently 'stalled'. Next upside resistance is suggested by its prior intraday highs at 483 and 495. 500 is a likely to be a key psychological resistance.

Support implied by the 21-day average is at 436 currently, with pivotal technical support in the 400 area. A close below 400, especially if there were two such days running, would confirm that OEX will likely stay within its downtrend channel. Major support begins in the 360-350 area.

[Image 2]

MARKET SENTIMENT:

As displayed above, below the OEX price chart, there was a Friday retreat in bullish sentiment. Before this, a mildly bullish outlook has been suggested by the CBOE equities call to put ratio (CPRATIO). This indicator has been showing perhaps too much optimism considering that the indexes were approaching prior highs and a possible 'stopper' to the rally.

My 'sentiment' indicator tends to reach lower extremes before substantial rallies set up (the 11/21 'oversold' low) and higher extremes also 1-5 trading days before downside reversals. There was a 12/12 low that has only preceded a minor rally after it, so far at least. There's been no recent high ('overbought') extreme, so that's a minor plus for the bulls.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The chart pattern for the Dow 30 Average (INDU) is remarkably consistent and similar to the S&P charts; i.e., in terms of an inability to exceed its prior recent high, a dominant down trendline and the key 55-day average. A decisive upside penetration of 9000 would be bullish for another up leg, especially if this same (9000) area found buying interest coming in on subsequent INDU pullbacks to the same area.

Key INDU near resistance remains the 9000 area; above 9000, next resistance is well above, around 9500, then comes in at the prior pivotal high at 9653.

Near support, in the area of the 21-day average is at 8539 currently; I could as well say that support is in a zone from 8540 down to 8500. Next support is at 8125 and fairly major technical support should be found around 8000.

I'm not missing holding the Dow Index (DJX) calls I owned from the 75 area, having exited on the Dow rally above 8800. What's the old saying: "you can never go broke taking a profit". Depending on how you trader, this is not to say that you want to take a bunch of small profits since one medium to big-sized loss wipes out a lot of those!

[Image 3]

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

Key near resistance in the Nasdaq Composite Index (COMP) remains at 1600, then at 1650 at the down trendline and next up in the 1780-1800 area. The very short-term trend is now more or less sideways. COMP looks to me to be quite vulnerable to another sell off ahead. However, a close above 1650 would suggest a bullish breakout and potential up to the 1800 area.

Near support is in the 1500 area, then around 1400; a close below 1400 would suggest definite and renewed downside momentum.

[Image 4]

NASDAQ 100 (NDX) DAILY CHART:

With the Nasdaq 100 (NDX), recent tendency to rally looks to be in jeopardy with this confluence of several ways of seeing resistance. Especially important is the ability to pierce prior highs around 1250 or not; in the very near-term the bearish down trendline intersects in the 1260 area. 1250-1260: the key resistance area.

A close above NDX's down trendline that was more than a 1-day affair would suggest renewed upside momentum and the potential to challenge prior highs; first, in the 1380 area, then at 1470.

Initial support begins around 1193 and extends to the 21-day average, currently at 1172. New support and a pivotal one, is at the line of prior lows at 1091. A close below 1090 would suggest renewed downside momentum.

[Image 5]

As discussed with the S&P previously, the 13-day Relative Strength Index or "RSI" seen above is approaching the area where prior rallies tended to falter, although this indicator is not at the extreme seen for the period shown in the chart. A key point here is that bear market rallies, if that's what this is, don't typically get to overbought 'extremes'; e.g., reaching 65-70.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

A key added trade data provided by the Nasdaq 100 tracking stock (QQQQ) is what any stock provides: VOLUME information. While price patterns are the primary point of analysis, volume trends are a good secondary or confirming type indicator.

When prices are trending higher but with a declining volume trend (as highlighted with the declining line above the volume bars) as we have with QQQQ, it tends to 'reinforce' what we see with the other suggestions of resistance on the price chart.

The 30 to 30.5 area remains a key near resistance. Above 30.5 there's no apparent chart resistance before the prior high at 34.

Near support is at 28.7, then at 26.8, with critical for the bulls support at 25. I'm holding some of the stock as a 'proxy' long if a rally breaks out above the key down trendlines seen on the major market index charts. My current sell stop is at 28.5.

[Image 6]

RUSSELL 2000 (RUT) DAILY CHART:

I'd note the initial bullish breakout in the Russell 2000 (RUT) above its 55-day average, although this hasn't been maintained. The downtrend channel, as is often the case with chart patterns in general is different in RUT than in the S&P and Nasdaq.

RUT has more to go on the upside, to around 570 currently, before it would challenge resistance implied by the upper boundary of its downtrend channel. But before 570, there is the prior 551 high as a 'benchmark' resistance.

Since I also measure overbought/oversold levels differently with RUT versus the other indexes, by using a 21-day RSI, the Russell 2000 could have more 'room' on the upside so to speak. Will it buck the trend, if the S&P and Nasdaq start selling down again? Not very likely.

Key near support is at 440, then 416 and lastly at the prior low for the Sept-Nov decline, at 371.

[Image 7]



GOOD TRADING SUCCESS!



NOTES ON MY TRADING GUIDELINES AND SUGGESTIONS

CHART MARKINGS:

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.

I WRITE ABOUT:

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

REITs, Mobile Devices, Refiners and more


NEW DIRECTIONAL CALL PLAYS

Alcon Inc - ACL - close: 88.07 change: +1.37 stop: varies

Why We Like It:
The trend in ACL is growing a lot more bullish. The stock has built an inverse head-and-shoulders pattern so a breakout would be bullish not bearish. The neckline happens to be near round-number resistance at $90.00. More aggressive traders may want to consider positions now. We are suggesting two different entry points. One entry point is a breakout over resistance at $90.00 with a trigger to buy calls at $90.25. A second entry point would be another dip back toward $85.00 with a trigger to buy calls at $85.25. If triggered at $90.25 we'll use a stop loss at $85.75. If triggered at $85.25 we'll use a stop loss at $83.45.

There is potential resistance at the 50-dma and at the $100.00 level. The Point & Figure chart is bullish with a $110 target. If we are triggered our target is $99.00.

Suggested Options:
We are suggesting the January calls.

BUY CALL JAN 90.00 NOZ-AR open interest= 967 current ask $4.10
BUY CALL JAN 95.00 NOZ-AS open interest= 116 current ask $2.15
BUY CALL JAN 100.0 NOZ-AT open interest= 496 current ask $1.00

Annotated Chart:
ACL

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           02/04/09 (unconfirmed)
Average Daily Volume =       840 thousand 


Goldman Sachs - GS - close: 80.73 change: +0.68 stop: 77.95

Why We Like It:
The market is not going to get very far unless the financial sector participates. Fortunately many of the financials have developed a bullish trend of higher lows. GS has a bull triangle pattern with resistance near $80-81. I am suggesting that readers buy calls on a breakout over the simple 50-dma. More aggressive traders may want to jump in now or on a move to a new relative high over $81.25. Our trigger to buy calls will be $$83.00. If triggered we will have two targets. Our first target is 89.85. Our second target will be $97.50. FYI: The P&F chart is bullish with a $112 target.

Suggested Options:
Our suggested trigger is $83.00. We would use the January calls although more conservative traders may want more time and use February calls.

BUY CALL JAN 80.00 GS-AP open interest=10846 current ask $6.45
BUY CALL JAN 85.00 GS-AQ open interest=10249 current ask $4.05
BUY CALL JAN 90.00 GS-AR open interest=12695 current ask $2.37
BUY CALL JAN 95.00 GS-AS open interest=15388 current ask $1.23

Annotated Chart:
GS

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           03/18/09 (unconfirmed)
Average Daily Volume =      25.7 million  


iShares Dow Jones US Real Estate - IYR - cls: 37.25 chg: +1.76 stop: 34.95

Why We Like It:
The IYR is the iShares exchange traded fund (ETF) that mimics the Dow Jones U.S. real estate index, which reflects the performance of a large number of REITs. This sector of the market has rebounded sharply and the IYR looks poised to move higher as investors hope the worst is behind it.

We are suggesting readers buy calls right here following the IYR's bounce from the $35.00 level on Thursday-Friday. We'll use a short-term target to take some money off the table at $39.95. Our secondary target is the $42.50 mark. More aggressive traders may want to aim higher. The Point & Figure chart is bullish with a $58 target.

Suggested Options:
We are suggesting the January calls. Strikes are available at $1.00 increments.

BUY CALL JAN 39.00 BJN-AM open interest=2680 current ask $2.80
BUY CALL JAN 40.00 BJN-AN open interest=7712 current ask $2.40
BUY CALL JAN 42.00 BJN-AP open interest=2676 current ask $1.70

Annotated Chart:
IYR

Picked on December 20 at $ 37.25
Change since picked:      + 0.00
Earnings Date           00/00/00
Average Daily Volume =        49 million  


Research In Motion - RIMM - close: 42.83 change: +4.39 stop: 37.99

Why We Like It:
RIMM surprised a lot of people with their positive fourth quarter guidance. The stock exploded higher on Friday with an 11.4% gain. This broke the bearish trend of lower highs. It's very possible that last week's earnings report may have been the spark that ignites a new trend higher for RIMM. We don't want to chase the rally on Friday. We're suggesting readers wait for a dip with a trigger to buy calls at $41.50. More conservative traders may want to use a trigger closer to $40.00.

If triggered at $41.50 our first target is $44.95. Our second target is $48.00. FYI: The P&F chart is bullish with a $56 target.

Suggested Options:
We are suggesting the January calls. Our trigger is $41.50.

BUY CALL JAN 40.00 RUP-AH open interest=11043 current ask $4.85
BUY CALL JAN 45.00 RFY-AI open interest= 8847 current ask $2.26

Annotated Chart:
RIMM

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           12/18/08 (confirmed)
Average Daily Volume =        25 million  


Sunoco Inc - SUN - close: 42.30 change: +2.46 stop: 39.45

Why We Like It:
The refining industry has seen its stocks come alive again and we're starting to see some bullish breakouts. SUN looked like the most attractive stock to play with relative strength and a bullish breakout over resistance at $40.00 and its simple and exponential 200-dma. The P&F chart is very bullish with a $54 target. We are suggesting call positions now or on a dip back toward $40.00. Our target is $47.00.

Suggested Options:
We are suggesting the January calls although more conservative traders may want to use February calls.

BUY CALL JAN 40.00 SUN-AH open interest=3077 current ask $4.90
BUY CALL JAN 45.00 SUN-AI open interest=3627 current ask $2.45

Annotated Chart:
SUN

Picked on December 20 at $ 42.30
Change since picked:      + 0.00
Earnings Date           02/04/09 (unconfirmed)
Average Daily Volume =       4.2 million  



In Play Updates and Reviews

Stocks Pull Back to Short-term Support


CALL Play Updates

Amazon.com - AMZN - close: 51.56 change: -0.52 stop: 49.45 *new*

Shares of AMZN were downgraded to a "market perform" on Friday but it failed to have much of an affect on the stock. AMZN drifted lower but held on to short-term, rising support at its 10-dma. I see this dip as another entry point to buy calls however, more patient traders may want to wait and see if AMZN dips closer to the $50.00 region. The $50.00 level should be round-number, psychological support so we're raising our stop loss to $49.45.

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. Given a choice I'd use the $50 or $55 strikes.

Annotated Chart:
AMZN

Picked on December 13 at $ 51.25
Change since picked:      + 0.31
Earnings Date           01/28/09 (unconfirmed)
Average Daily Volume =      12.9 million  


Caterpillar - CAT - close: 42.69 change: +0.53 stop: 39.95

Friday's session provided yet another bullish entry point to buy calls on CAT as shares bounced from the $42.00 level. The stock out performed the broad market indices with a 1.2% gain. More importantly there was no follow through on Thursday's bearish engulfing candlestick pattern. We're not necessarily "out of the woods" yet but CAT is maintaining the bullish pattern of higher lows. More conservative traders may want to raise their stops. I am going to keep our stop loss under the $40.00 mark, which should be another level of support. If the market sees any weakness this week expect CAT to retest the $40 level.

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

Suggested Options:
I would use the January $40 or $45 calls.

Annotated Chart:
CAT

Picked on December 16 at $ 43.80
Change since picked:      - 1.11
Earnings Date           01/29/09 (unconfirmed)
Average Daily Volume =      13.4 million  


Express Scripts - ESRX - close: 61.35 change: +2.00 stop: 57.95 *new*

ESRX showed some holiday cheer with a nice 3.3% bounce from rising support at its 10-dma. Friday's move definitely relieves some of our concern that the rally was stalling. The stock is still struggling with resistance near $62.00 but the bullish pattern of higher lows would suggest the next real move is higher. We are raising our stop loss to $57.95. Our target is $64.00.

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

Annotated Chart:
ESRX

Picked on December 06 at $ 59.36 /gap higher entry 
Change since picked:      + 1.99 /originally listed at $58.58
Earnings Date           02/19/09 (unconfirmed)
Average Daily Volume =       3.1 million  


FTSE/Xinhau China Index - FXI - close: 30.55 chg: +0.07 stop: 29.45 *new*

Chinese stocks were a mixed bag on Friday. The Shanghai index traded quietly higher but the Hang Seng index plunged 2.4%. The FXI managed another bounce from the $30.00 level and closed in positive territory, barely. The trend is still higher but momentum is waning. We are raising our stop loss to $29.45. Almost any downturn this week will stop us out. Only nimble traders should consider opening new bullish positions now. FXI has already hit our first target and we are now aiming for $32.50 just under the 100-dma.

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

Annotated Chart:
FXI

Picked on December 03 at $ 26.27 /gap down entry point
Change since picked:      + 4.28 /originally listed at $27.25
Earnings Date           00/00/00
Average Daily Volume =      51.2 million  


Google Inc. - GOOG - close: 310.17 change: - 0.11 stop: 299.90

Bulls need to turn defensive on GOOG. This past week was a struggle for the stock, which was unable breakout past its descending 50-dma. On a very short-term basis GOOG has developed a trend of lower highs that will very quickly come into conflict with the three-week trend of higher lows. My comments last week suggested that any weakness would likely push GOOG toward round-number support at $300. That hasn't happened yet but the stock looks poised to test that level soon.

Currently, my expectations are for the market to drift higher over the next five to seven trading days. If I did not have this slightly bullish bias I would exit GOOG right here and cut losses early. Right now I would wait for a bounce from the $300 level or wait for a breakout above the 50-dma near $320.

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).

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

Annotated Chart:
GOOG

Picked on December 13 at $315.76
Change since picked:      - 5.59
Earnings Date           01/29/09 (unconfirmed)
Average Daily Volume =       7.2 million  


Perini Corp. - PCR - close: 21.94 change: +0.04 stop: 19.95

PCR is a bet on the Obama-infrastructure build out. The stock has been stair-stepping higher inside a narrow bullish channel. The stock just spent the last couple of days digesting some gains and pulling back to short-term support at the 10-dma. This should be a new bullish entry point to buy calls. More conservative traders may want to raise their stop loss toward the $21.00 level.

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. We have two targets. Our first target is $24.90. Our second target is $27.00.

Suggested Options:
We are suggesting the January calls.

Annotated Chart:
PCR

Picked on December 16 at $ 22.36
Change since picked:      - 0.42
Earnings Date           02/26/09 (unconfirmed)
Average Daily Volume =       1.0 million  


Texas Industries - TXI - close: 34.87 change: +0.04 stop: 32.45 *new*

Cement maker TXI is another infrastructure play. The stock's rally seemed to stall this past week but shares have maintained a bullish trend of higher lows. We are going to try and reduce our risk by raising the stop loss to $32.45. If we do get stopped out keep TXI on your watch list. The $30.00 level should be support and the TXI might also find support at the 38.2% Fibonacci retracement of its November-December bounce near $30. A bounce from $30 would look like a new bullish entry point. Currently we have two targets. Our first target is $39.50. Our second target is $43.00. The stock is 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.

Suggested Options:
We are suggesting the January calls but plan to exit ahead of the early January earnings report!

Annotated Chart:
TXI

Picked on December 13 at $ 34.43
Change since picked:      + 0.44
Earnings Date           01/08/09 (unconfirmed)
Average Daily Volume =       745 thousand 


PUT Play Updates

*Currently we do not have any put play updates*


Strangle & Spread Play Updates

*Currently we do not have any Strangle or Spread play updates*


CLOSED BULLISH PLAYS

China Mobile Ltd. - CHL - close: 52.51 change: -0.15 stop: 51.90

Some of the technical indicators in CHL are suggesting that the rally is running out of steam. On a positive note volume has been light for the dip last week and CHL still has a bullish pattern of higher lows. Unfortunately, the intraday low on Friday just happened to be $51.90, our recently adjusted stop loss. I would keep an eye on CHL for a dip and a bounce from the $50.00 level as a possible entry point for new positions. CHL had hit our first target at $51.75 days ago. We were aiming for a second target at $57.00.

Chart:
CHL

Picked on December 03 at $ 47.11 /gap down entry
Change since picked:      + 5.40 /originally listed at $47.85
Earnings Date           00/00/08 (unconfirmed)
Average Daily Volume =       3.9 million  


CLOSED STRANGLE & SPREAD PLAYS

Ultra S&P500 ProShares - SSO - close: 25.47 change: -0.18 stop: n/a

November 12th the S&P 500 has broken down under the 900 level again and fallen straight toward what was support near 850. The index was setting up for a big move either direction. We launched our strangle but instead of using the S&P 500 we played the 2x double-long SSO ETF. The next several days after launching our play the market plunged to new lows but the rebound was equally sharp. Then volatility began to fade away as stocks churned in a tighter and tighter range. This left our strangle position to evaporate and eventually expire.

The narrowing wedge or triangle pattern on the S&P and SSO is actually another set up for a straddle or strangle play. We might reconsider another position after Christmas.

Chart:
SSO

Picked on November 12 at $ 24.84
Change since picked:      + 0.63
Earnings Date           00/00/00
Average Daily Volume =       126 million  


DISCLAIMER

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.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163

E-Mail Format Newsletter Archives