Option Investor

Daily Newsletter, Wednesday, 12/24/2008

Printer friendly version

Table of Contents

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

Market Wrap

Market Sentiment Indicators

I want to take this opportunity to clarify that the bias suggested in the newsletter refers to the broader markets and not the indicators. Each indicator is independent and helps to provide some insight into investor’s psychology.

The Put/Call Indicator

We look at the CBOE Equity Option Volume Put/Call Ratio to determine the level of put volume being traded versus the level of call volume. Generally higher put volume suggests bearishness in the market as investors begin to hedge long positions and speculate on further declines. There is usually a point of inflection that determines that mostly everyone that was going to hedge has done so and the Put volume retracts to indicate that the market has possibly reached a bottom. We look for the masses to throw in the towel before buying and throw everything, including the kitchen sink into buying the market before selling. We look to trade the opposite of the herd mentality. But we have to be patient and wait for a confirmation from a reversal of some sort. For the Put/Call Indicator, we use the 10 and 20 day moving average to help provide some clarity to the choppiness of the indicator. While the Put/Call ratio generally cycles between 0.50 and 1.00, the 10 day moving average signals bearish from ticks below 0.65 and bullish from ticks above 0.85. From time to time, the range is readjusted to reflect the short term skew of option investor’s trading tendencies. For instance, the Put/Call ratio is skewed upward to reflect more option traders hedging their portfolios. In fact, this bearish skew is contrarian in that it indicates more people buy portfolio protection near the bottom. The overly cautious investor is hedging a portfolio that has already declined 40 - 50%. Therefore, my interpretation of the Put/Call Skew is to be Positively biased on the market.

[Image 1]

Earlier in the week I sent out an alert to point out that the Signal had been changed to a Negative bias. This was because the 10 day moving average crossed above the 20 day moving average. The lower volume trading is possibly throwing off the indicator because the 10 day has curled downward to almost cross below the 20 day moving average while the S&P has declined five straight days. I am going to a Nuetral Bias until the 10 day moving average retests 0.70 or curls upward. As of last night, the 10 day moving average closed at 0.737 while the 20 day moving average closed at 0.735. SIGNAL: NEUTRAL BIAS

Volatility Index Indicator [Image 2]

The CBOE Volatility Index has come down 50% off its high of 96.40. It should be noted that there hasn’t been any new regulations to provide order to the market. I would like to see the SEC put the uptick rule back. Without that, 96.40 doesn’t have to be the high. But for now, the range of the $VIX is bound by the 200 day SMA at 34.16 and the upper Bollinger band at 69.93. Even though the VIX moved higher yesterday, the $VIX 10 day SMA (blue line) continues to decline. A downtrending moving average is a bullish indicator for the $SPX. It is the reversal that determines either a Neutral or Negative bias. If the $VIX advances up to the 10 day SMA while the indicator is still Positively biased, you may want to add Positive deltas with new money. It should be noted that contrary to its historical inverse tendencies, volatility has been dissipating while the $SPX has declined.

Investors Intelligence

The Investors Intelligence polls that are released each week represent a sampling of newsletter writers’ market bias. The polls show the percentage of investment newsletter writers that are bullish, bearish and calling for a correction. We try to determine the crowd’s psychology by looking for signs whether the masses are extremely bearish or bullish. When signs of either of these occur they help define a buying or selling opportunity.

[Image 3]

Finally, the Bullish percentage of advisors decreased below 40% to 38.3%. The Percentage of Bullish advisors decreased to 35.1% from 26.9%. As the chart shows, the spread between the Bulls and Bears increased substantially. It moved up 17.2% higher to 3.2%. However, the spread is still below 0 and remained so since August. The signal remains on a Positive bias. SIGNAL: POSITIVE BIAS

SUMMARY: The $VIX indicator continues to maintain its consistent signals and is still Positive while the Put/Call Indicator is Neutral. The overall signal is a Positive bias (+ + -) for the $SPX and Dow Jones, but you may choose to wait until the $VIX spikes to the 10 day moving average before entering any positive Delta trades.

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.

  • 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.

New Option Plays

Christmas Eve: No New Plays

Play Editor's Note: No New Plays Tonight. From everyone at OptionInvestor.com, we wish you a Merry Christmas!

In Play Updates and Reviews

Quiet Day on Wall Street

CALL Play Updates

Alcon Inc - ACL - close: 85.37 change: -0.45 stop: 83.75

ACL spent the session consolidating sideways and bouncing from the $85.00 level. Overall I don't see any changes from our previous comments. Wait for a breakout over the very short-term trend of lower highs as the next entry point.

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

Picked on December 22 at $ 85.25 *triggered     
Change since picked:      + 0.12
Earnings Date           02/04/09 (unconfirmed)
Average Daily Volume =       840 thousand 

Caterpillar - CAT - close: 41.91 change: +0.78 stop: 39.95

CAT delivered a decent bounce today with a 1.9% gain but I remain wary of the price action. We're still not suggesting new bullish positions at this time. I want to see a lot more relative strength or a clean bounce from the $40.00 level. 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:      - 1.89
Earnings Date           01/29/09 (unconfirmed)
Average Daily Volume =      13.4 million  

Research In Motion - RIMM - close: 41.02 change: -0.79 stop: 37.99

The bounce in RIMM continues to fade, which is short-term bearish. Odds are good that we'll get a chance to buy a dip near $40.00. Wait for the pull back. It looks like we were too early buying calls at $41.50. More conservative traders may want to tighten their stop loss.

We have two targets. Our first target is $44.95. Our second target is $48.00. FYI: The P&F chart is bullish with a $56 target.

Picked on December 22 at $ 41.50
Change since picked:      - 0.48
Earnings Date           12/18/08 (confirmed)
Average Daily Volume =        25 million  

Sunoco Inc - SUN - close: 42.11 change: +0.95 stop: 39.45

The refining stocks managed some decent gains in spite of another drop in crude oil. Tesoro (TSO) added more than 6% today. Shares of SUN out performed the market with a 2.3% gain. SUN is still holding above what should be support at broken resistance near $40.00 and its 200-dma. My short-term market bias is down so I suspect that SUN will test the $40 level yet again.

The P&F chart is very bullish with a $54 target. Our target is $47.00.

Picked on December 20 at $ 42.30
Change since picked:      - 0.19
Earnings Date           02/04/09 (unconfirmed)
Average Daily Volume =       4.2 million  

PUT Play Updates

AvalonBay - AVB - close: 57.60 change: -0.23 stop: 64.05

I know the closing numbers on AVB looks off. Your quote service says AVB lost 23 cent when it actually dropped $2.93 from yesterday's close of $60.53. This is because the stock actually declined 23 cents and began trading "ex-dividend". The company will pay a $2.70 cash dividend on January 29th to shareholders on record as of December 29th. So it looks like AVB decided that shares would reflect the dividend early.

That's okay with us. The trend is still the same. Shares are breaking down. The opening trade at $57.98 is our new entry point. We would still consider new put positions here. We have two targets. Our first target is $55.10. Our second target is $50.55. FYI: The Point & Figure chart currently points to $50.00.

Picked on December 24 at $ 57.98 *gap down entry
Change since picked:      - 0.38
Earnings Date           02/04/09 (unconfirmed)
Average Daily Volume =       3.5 million  

Avon Products - AVP - close: 22.63 change: +0.17 stop: 24.05

AVP painted a minor bounce today but the move actually provides a more attractive entry point for us to open put positions. 00.

We have two targets. Our first target is $20.25. Our second target is $18.60. FYI: The Point & Figure chart is bearish with an $11 target.

Picked on December 23 at $ 22.46
Change since picked:      + 0.17
Earnings Date           02/05/09 (unconfirmed)
Average Daily Volume =       4.6 million  

Capital One Financial - COF - close: 29.40 chg: +0.40 stop: 31.51

COF gapped open higher at $29.38 (our new entry price) and spent the day trading sideways. A bounce or failed rally anywhere under $31.00 would look like a new entry point to buy puts. I don't see any changes from our previous comments.

Our first target is $25.50. Our second target will be a new relative low at $21.00. FYI: The P&F chart is bearish with a $17 target.

Picked on December 23 at $ 29.38 /gap higher entry
Change since picked:      + 0.02
Earnings Date           01/22/09 (unconfirmed)
Average Daily Volume =       8.5 million  

Strangle & Spread Play Updates

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


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