Option Investor

Daily Newsletter, Wednesday, 10/22/2008

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Table of Contents

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

Market Wrap

Phillies Vs. Rays At 8:00 PM Eastern!

Stocks around the globe retreated on Wednesday, where from the opening bell it appeared buyers were more interested in handicapping this year's World Series than buying stocks.

While baseball is thought to be "America's favorite pastime," selling stocks and commodities for a couple of days after a Monday gain has also become the "world's favorite pastime."

Any baseball aficionado knows that in Japan, baseball ranks high among viewer interest, and Wednesday's 631-point decline for the Nikkei-225 ($NIKK) 8,675 -6.79% was equivalent to being down 6 runs in the top of the first inning when other Asian markets were yet to open.

Hong Kong's Hang Seng ($HSI) faired only slightly better with a 775-point, or 5.15% decline to finish at 14,267. Buyers had one more pitch to hit, but after a few foul balls, struck out with the Shanghai Composite ($SSEC) falling 62 points, or -3.20% to 1,896.

In Europe, where sports fans would rather kick a ball than swing at it, London's FTSE-100 ($FTSE), Germany's DAX ($DAX) and France's CAC-40 ($CAC) fell roughly 5% as worries about the global economy persisted.

Wednesday's Global Economic Calendar

While Italy's -0.5% decline in August retail sales isn't what many would consider to be a key economic report from the Euro block, a 0.3% month-to-month decline in food sales and a 0.7% decline in non-food sales offered little reason for optimism.

MPC minutes looked like a box score with all members voting unanimously for the 50 basis point cut earlier this month to 4.5%. The Bank of England's Mervyn King said he thought that the British economy was probably entering a recession.

James Knightley of ING said he thought the base case for further cuts would be to cut rates further, to as low as 2.75% in the first half of 2009.

The British Pound was hammered further lower as depicted by the British Pound CurrencyShaes (FXB) $162.69 -2.68% plunging further since our visit on Wednesday.

The only economic report here in the US was the weekly EIA inventory and refinery utilization figures, and while oil was weak ahead of the data, "peak oil" continue to try and find its trough.

EIA Weekly Inventory and Refinery Data

If there was ONE surprise in today's figures, it was the DECLINE in the # Days Supply of Crude oil, which actually FELL to 22.6 days supply from last week's 23.7 days.

While this 1.1-days supply decline comes from a lofty level of 23.7 days supply, refiners continue to come back online with utilization (up to 84.75%) after Hurricane Ike (66.71%).

December Crude (cl08z) - Daily Intervals

In early September, as the above contract broke lower from $117.48 to $108.47, that decline and subsequent selling had the December contract's Point and Figure chart building a BEARISH vertical count to $63.00. While BEARISH and BULLISH vertical counts may be traded, sometimes exceeded, and sometimes NEVER met, the December futures contract gets my "chart of the week" status as the bearish vertical count nears.

In today's Market Monitor at OptionInvestor.com, I also reviewed some recent history in late 2006 where the euro, which has been a key driver for oil's weakness, the # Days Supply of Crude Oil, and the PRICE of the US Oil Fund (USO) $54.93 -6.53% are starting to line up in equilibrium.

Bears can stay short, but a move above the $76.24 level from a benchmark prior month's termination benchmark (November Crude Oil terminated yesterday, Tuesday), could bring in some powerful short covering.

One of the PRIMARY reasons traders want to note VERTICAL COUNTS is to assess RISK/REWARD to the count.


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At today's settlement of $66.75, REWARD for a BEAR to the VERTICAL COUNT is $3.75.

In the above chart, I did add a "-11.8 fib," which is nothing more than the technique I've taught traders over the years. It is the SAME type of fibonacci range as 50% to 38.2% if taken from the recent pre-termination low settlement of the November contract. The "-19.1% fib," is nothing more than the same fibonacci range from 38.2% to 19.1%, again taken from the pre-termination low settlement of $70.26.

Now, let's take a look at our Global Equity benchmarks, but let's also focus in on some of our "oil equity/oil commodity" and our "gold equity/gold commodity" benchmarks.

There could be a couple of "arbitrage-like" trades here as the discrepancies continue to play out.

Major Global Indexes, Currencies, Oil, Gold, HUI, OIX, XLF

First things first, and I started noticing this several days ago, is that the Russell 2000 (RUT.X) and the Select Financial SPDRs (XLF) 14.64 -6.27% are really moving in unison in Q3 and so far Q4. Now, the XLF doesn't have a "small cap" in the bunch, but the RUT.X's most heavily weighted sector is financials themselves.

Point here is that an ASSET ALLOCATION doesn't need both at this point in the game.

Now check out the USO and a "like" equity index in the CBOE Oil Index (OIX.X) 507.13 -10.8%. Not that much different Q3 and so far Q4, but on a 2008 YTD, USO the commodity -27.13% yet OIX.X -43.13%. A trader here may be to be LONG an oil STOCK and short the commodity (see above for a stop on the commodity), but the difference on a 2008 YTD suggests something has to give. AGAIN ... CALL/PUT OPTIONS a great way to MINIMIZE capital exposure, but when the PRICE MOVE comes, it can come QUICKLY and SIGNIFICANTLY.

Now, even MORE notable is the StreetTracks Gold (GLD) $72.01 -5.28% today (~$720.10 spot) and the Amex Gold Bugs Index ($HUI.X) 168.36 -16.32% today, but LOOK at the 2008-YTD discrepancy GROWING and the Q3 and Q4 to date. Here the trade is to pick a "gold" equity on the call side, and PUT the commodity still.

One blurb I caught on the news wire today was Russia's central bank saying it expects its GOLD and foreign exchange reserves to grow at a slower pace than originally planned this year and next, amid a plunge in oil prices and outflow of capital from the country.

I (Jeff Bailey) mentioned that I was "surprised" Russia's central bank used the word "grow" as it relates to any GOLD buying, as their currency has been PLUNGING, there equity markets have seen SEVERAL halts due to mass liquidation. It is usually this that has the country's central bank DUMPING gold on the market in order to raise cash it so desperately needs.

Isn't that why some stuff their mattress with gold?

Here, let's take a quick look at the U.S. Market Watch, and while we still can with QCharts' 5.01 version, take a look at the 20DyNet% as well as some of today's "sea of red."

I can tie USO with OIX.X, UNG with XNG.X, and SLV/GLD with HUI.X.

U.S. Market Watch - 10/22/08 Close

On certain days we'll see some INCREDIBLE percentage moves from the equity-side of things, ESPECIALLY the sectors that are "tied" with a commodity.

See the GOLD/SILVER disparity with the HUI.X? MUCH greater than the OIL/OIX.X and Nat.Gas/XNG.X.

It has been my observation and teachings over the YEARS that the COMMODITY tends to FOLLOW the equity trade.

Remember the Market Wrap from Wednesday 10/08/08. Due to some type of glitch, it didn't get posted until Friday, so view that day's "archive" 10/10/2008.

But here's what happened since. Let's keep the same "0%" fibonacci anchor point, and like I showed above in the cl08z, let's add some -11.8%, -19.1% and even a -38.2%.

AMEX Gold Bugs ($HUI.X) - Daily Interval

Here we are two (2) weeks later, and the HUI.X after popping 18.7% reversed course. The COMMODITY SHOULD FOLLOW the stocks.

A "gold stock" that tends to trade UP in BIG moves and shows is GoldCorp (NYSE:GG) $16.75 -15.91%. On 10/08/08 it closed $31.02.

I'm not kidding! Slam dunked -50% without the benefit of a 2:1 stock split.

PUT the GLD, and CALL shares of GG. Something has "gott'a give!"

There were a lot of earnings reported today. Some of the more notables were ...

Dow component and drug giant Merck (NYSE:MRK) $28.01 -6.53% saying Q3 earnings fell to $1.09 billion, or $0.51/share, on weakness in its cholesterol-drug joint venture. The company did lower the long-term forecast that it withdrew in July and says it will cut 7,200 jobs by 2011.

Telecom giant AT&T (NYSE:T) $23.78 -7.57% said its Q3 net rose to $3.23 billion, or $0.55/share, with revenue rising 4% to $31.34 billion as launch of Apple's iPhone 3G helped boost its wireless business, but subsidies paid to Apple weighed on results.

Boeing (NYSE:BA) $42.91 -7.52% said its Q3 net fell to $0.96/share, with results hurt by the ongoing machinists strike. Revenue fell 7%.

Fast-food giant McDonald's (NYSE:MCD) $54.18 -1.72% said quarterly profits rose to $1.19 billion, or $1.05 a share, besting analysts' expectations of $0.98/share. Comparable-store sales rose 7.1% globally, but only 4.7% in the U.S.

Energy producer and refiner ConocoPhillips (NYSE:COP) $49.06 -9.08% Q3 net rose to $5.19 billion, or $3.39/share, which was above analysts' expectations of $3.06 a share, with revenue climbing 52% to $70 billion amid higher energy prices.


Tobacco giant Philip Morris (NYSE:PM) $40.83 -3.15% said Q3 net rose to $2.08 billion, or $1.01/share. Analysts' were looking for $0.90/share. Company execs said revenue jumped 22% across its markets despite a global economic crisis.

Northwest Air (NYSE:NWA) $11.87 -1.33% said it posted a Q3 loss of $317 million, or $1.20/share, but excluding fuel hedging losses, it would have earned $0.35/share, topping estimates of $0.25/share. Revenue rose 12% to $3.8 billion, above its September projection of 10% growth, helped by fees for checked bags.

One question I keep seeing asked is "capitulation" signs. Another is ... "how does an index trader trade this mess of price volatility?";

Here's what we can do with a Point and Figure chart of the S&P Depository Receipts (SPY) $90.64 -5.44%, which would have fallen 5-boxes today.

With StockCharts.com's PnF charts, we can turn on VOLUME of each column, we can also look at how MARKET participants may be trading.

SS&P Depository Receipts (SPY) - $2 and $1 box

Volume observations don't suggest a "capitulation" low at this point. See the 5th's column from the right? Even that ooong column of O (supply/selling) didn't generate as much as the "little" column of O nine (9) columns from the right, from $140 to $120.

See the "triangle" starting to form? Lower highs and higher lows??

One pattern that might be worth trading near-term is to simply look for a 3-box reversal.

Example of what MARKET participants might be doing is "everybody in" at $87. Then "everybody out" at $99. Then "everybody in" at $90. Then everybody out yesterday at $96.

With SPY having traded $88 today, a 3-box reversal would be $91.

Feel the "compression" as you say "everybody in," and "everybody out?"

That's the triangle.

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
NUE None

New Long Plays

Nucor - NUE - close: 34.36 change: -1.70 stop: 24.90

Why We Like It:
A lot of the basic material stocks have been crushed as investors worry over the global slowdown. If we continue to see panic selling then NUE might retest its October lows. Nimble traders could try and short NUE and exit near 28-27. We're going to suggest readers wait for the dip and then buy the stock. Right now our suggested entry point to buy NUE is in the $27.50-26.00 zone. If triggered we have two targets. Our first target is $34.50. Our second target is $39.50.

Picked on October xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/22/09 (unconfirmed)
Average Daily Volume: 9.7 million

New Short Plays

None today.

Play Updates

Updates On Latest Picks

Long Play Updates

Intel Corp. - INTC - close: 14.58 change: -0.67 stop: 12.45*new*

Our bullish play on INTC has been triggered. The intraday low this afternoon was $14.25. We were suggesting readers buy the dip in the $14.30-14.00 zone. Now that the play is open our target is $16.75, although after some further study we are adjusting that to $16.25 and adjusting our stop loss to $12.45. The October 9th, 2002 low was $12.95. FYI: More conservative traders might want to use a very tight stop close to $14.00 just in case the sector continues to crash.

Picked on October 22 at $14.30 *triggered 10/22/08
Change since picked: + 0.28
Earnings Date 10/14/08 (confirmed)
Average Daily Volume: 74 million


U.S. Nat.Gas - UNG - close: 29.68 chg: -0.74 stop: 28.89

A huge sell-off in oil and energy stocks is starting to weigh on natural gas, which has been out performing its brethren. At the moment we would consider buying a dip or better yet buying a bounce near the $29.00 level. If UNG breaks under $28.75 it might be a good idea to switch to bearish strategies and aiming for the 26.00-25.00 zone. Currently our upside target is $34.00-34.50.

Picked on October 19 at $30.68
Change since picked: - 1.00
Earnings Date 00/00/00
Average Daily Volume: 8.5 million


Ultra(long)Russ.2000 - UWM - cls: 23.20 chg: -2.52 stop: 19.45

The small cap sector continues to sink and the UWM lost 9.8% today. This is the double long of the Russell 2000 so when the RUT finally decides to bounce the UWM should scream higher. Right now the plan is to buy a dip into the $20.65-20.00 zone. If triggered we're setting two targets. Our first target is $26.00. Our second target is $33.00. The first target could be hit in a few days. The second target might take a few weeks.

Picked on October xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume: 3.3 million


Wal-Mart - WMT - close: 52.27 change: -1.40 stop: 41.95

WMT is slowly sinking after its recent failed rally under resistance. It's possible that investors could see WMT as some sort of safe haven but shares were not immune to the panic selling we saw earlier in October. We are sticking to our two different entry points.

Entry point #1 is to buy a dip in the $44.50-44.00 zone. If triggered at $44.50 we will have two targets. Our first target is $49.50. Our second target is $54.00.

Entry points #2 is to buy a breakout at $56.25. If triggered at $56.25 our stop will be $52.35. Our first target will be $59.95. Our second target will be $63.00.

Picked on October xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/13/08 (unconfirmed)
Average Daily Volume: 25 million

Short Play Updates

Citigroup - C - close: 13.32 change: -0.86 stop: 15.55*new*

Citigroup continues to sink and lost another 6% on Wednesday. More conservative traders may want to take some money off the table with shares down more than 10% from our picked price. We are adjusting the stop loss to $15.55. Right now our target is $12.15. More aggressive traders could try to squeeze a little more out and aim for $11.50-11.00. FYI: The most recent data listed short interest at 2.4% of the float.

Picked on October 19 at $14.88
Change since picked: - 1.56
Earnings Date 10/16/08 (unconfirmed)
Average Daily Volume: 137 million


Intrepid Potash - IPI - close: 16.77 change: -2.34 stop: 20.15*new*

Target exceeded. Our first target on IPI was $16.65. The stock plunged to new lows of $14.00 this afternoon. Unfortunately, our entry point wasn't as good as it could have been when IPI gapped open lower at $18.12. We're adjusting our stop loss to $20.15. Our secondary target is unchanged at $13.00. We're not suggesting new positions at this time. Readers need to be aware that some of IPI's rivals report earnings this week, like POT on Thursday, and the news could move shares of IPI.

Picked on October 21 at $18.12 /gap down entry
Change since picked: + 0.00 /originally listed at 19.11
Earnings Date 11/11/08 (confirmed)
Average Daily Volume: 2.3 million


Ultra Russell2000 ProShares - UWM - cls: 23.20 chg: -2.53 stop: 26.51

The UWM gave up almost 10% today. Sadly we didn't get the best entry point when shares gapped open lower at $24.33. We remain bearish but we're adjusting the stop loss to $26.51. Our target to exit is $20.75. This is also our target to switch directions and buy the UWM is the $20.65-20.00 zone.

Picked on October 21 at $24.33 /gap down entry
Change since picked: - 2.53 /originally listed at 25.73
Earnings Date 00/00/00
Average Daily Volume: 3.7 million


Wal-Mart - WMT - close: 52.27 change: -1.40 stop: 55.55

WMT out performed the broader market on Wednesday. The S&P 500 gave up 6% while WMT only lost 2.6%. The trend is still bearish. We don't see any changes from our previous comments. Our target is $48.00.

Picked on October 19 at $53.77
Change since picked: - 1.50
Earnings Date 11/13/08 (confirmed)
Average Daily Volume: 25.5 million

Closed Long Plays


Closed Short Plays


Today's Newsletter Notes: Market Wrap by Jeff Bailey and all other plays and content by the Option Investor staff.


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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