Option Investor

Daily Newsletter, Monday, 11/17/2008

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Table of Contents

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

Market Wrap

Japan In Recession

[Image 1]

Economic data released Sunday evening confirmed Japan was the latest major economy to fall into recession after the country's Cabinet Office said gross domestic product (GDP) contracted for a second-straight quarter, falling 0.1% (July-September) in the third quarter after a -0.9% decline in Q2 (April-June).

With the world's second-largest economy contracting for a second-straight quarter and the euro zone already in a formal recession, many traders and investors continued to trade cautiously with the United States and Britain on the brink of a recession and China's economy slowing sharply.

Nymex crude oil continued to ease into Thursday's December contract termination. December Crude (cl08z) settled down $2.09, or -3.66% at $54.95, with the U.S. Oil Fund (USO) finishing lower by just more than a bone ($1.00), or -2.21% at $45.16.

Reports of Somali pirates having hijacked a Saudi-owned supertanker off the Horn of Africa had oil prices modestly higher in the early part of this morning's trade, but the roll into Thursday's termination and easing global demand kept things in check.

After today's close, the EIA said the national average retail gasoline price plunged an additional 0.152/gallon, to $2.072/gallon for the week ended Monday.

The average price/gallon is the lowest since March 14, 2005!

Prices are now $1.027, or 33.1%, below a year earlier.

Nymex December Unleaded (rb08z) settled down $0.0645, or -5.21% at $1.1746. That's off $0.1933, or -14.13% from last Monday's settlement.

Global Economic Calendar-

[Image 2]

Old new travels fast; and with the Nikkei-225 having fallen 16.5% in Q3, Japan's benchmark Nikkei-225 ($NIKK) edged higher by 60-points, or +0.71% to finish Monday's trade at 8,522.58.

The yen was strong versus the greenback with the Yen CurrencyShares (FXY) $103.47 +0.83%.

Hong Kong's Hang Seng ($HSI) shed 13 points, or -0.10%, while mainland China's Shanghai Composite ($SSEC) gained 44 points, or 2.22% to reclaim the 2,000 level.

European bourses were weak with bankers and miners pacing the declines.

Housing data (Rightmove House Price Index) out of the UK helped set a negative tone for the FTSE-100 ($FTSE), which fell 100-points, or 2.38% to 4,132.16 on Monday.

Sellers in England and Wales lowered their asking prices by 2.9% on average in November, pushing prices lower by 7.1% versus a year ago.

The property Web site showed the number of new sellers dwindling to just 20,000 a week, almost half the number this time last year.

Economists noted that the bulk of the Rightmove survey was conducted before the Bank of England's (BOE) 1.5 percentage point interest rate cut on 11/06/08, which took the official rate down to 3.0%.

The Pound CurrencyShares (FXB) $150.54 +1.64% got a bounce, but the Euro CurrencyShares (FXE) $126.63 -0.33% remained bound between the $125-$130 (1.25-1.30 eur/$) going on 4-weeks.

US Intra-day Internals -

[Image 3]

Economic data as well as news of further job cuts at Citigroup (NYSE:C) $8.89 -6.61% found the major averages opening mixed-to-lower as the opening bell rang.

The nation's number 2 bank said it would cut 52,000 jobs by early next year in a move to offset mounting debt losses and sagging economies worldwide.

U.S. industrial output rebounded in October after hurricane disruptions (Gustav and Ike) aided a sharp decline in September.

Industrial production rose 1.3% in October after a downwardly revised 3.7% decline in September.

Just as I've noted the rise in U.S. refinery capacity utilization in recent weeks after hurricane disruptions in September, here too we see some manufacturing capacity showing a slight rebound with 76.4% of the nation's manufacturing capacity being utilized in October.

Still, the Federal Reserve noted that while the hurricane disruptions and a strike in the commercial aircraft industry impacted production negatively in September and October, excluding these two items, total production is estimated to have fallen around 0.66% in both September and October.

One note I'd have traders and investors make is a survey from the Philadelphia Fed regarding some fourth quarter figures which estimates the U.S. Q4 GDP falling by 2.4%, with a further decline of 1.1% in Q1 of 2009. The survey suggested the U.S. unemployment rate could rise 7.6% by Q3 2009.

Volumes at both exchanges were what I would consider to be anemic with the big board turning just 4.93 billion compared to its 21-day average volume of 5.85 billion.

NASDAQ volume also below its 21-day average volume of 2.33 billion shares.

I'd expect volume to pick up into this week's option expiration.

Here are some of this month's November option "Max Pain" theory tabulations. These are simply the averages of all call/put option open interest among the various strikes for November expiration at Friday's close.

"Max Pain" Theory (DIA, SPY, QQQQ, IWM, SMH, XLF, USO, GLD)

[Image 4]

At Friday's close, and today's, all those securities listed in the above table would currently be residing below their respective November option "Max Pain" theory tabulations.

The StreetTracks Gold (GLD) $72.65 -0.88% (~726.60 spot) today, is nearest its 11/14/08 tabulation (these can/will change daily), -4.41% below its current $76.00 tabulation and may at least be a security to monitor for any signal to where some "pain" might be delivered.

The idea behind "Max Pain" is that a short-term gravitation, or elevation of a security's PRICE in order to deliver as much "pain" to the option holder.

An OPTION trader currently holding PUT options that are PROFITABLE would be on the alert here, as an "unexplained" jump in PRICES (that's what an option expiration can deliver... unexplained price action) could be painful.

My basic thought process for TRADERS and investors is to be aware of the upcoming option expiration. Should the GLD reclaim the $76.00 level and begin moving notable higher, start assessing UPSIDE risk in other securities.

At tonight's close, the Dow Diamonds (DIA) $82.95 -1.50% would be -7.94% from its $90.00 "Max Pain" theory tabulation.

I would note here that based on last week's high/low/close for the DIA, this week's WEEKLY R1 (resistance 1) is $90.70. This week's Pivot of $85.27 (mathematical midpoint of last week's h/l/c) kept things in check, "give-or-take" $0.71 with the DIA trading a session best $85.98.

Many are under the impression that volatility measures have risen significantly since last expiration. That isn't necessarily the case, or at least my observation.

Here's a chart of the CBOE Market Volatility Index (VIX.X), which would more fully encompass the S&P 500 (SPX.X).

CBOE Market Volatility Index (VIX.X) - Daily Intervals

[Image 5]

Since last expiration Friday (10/17/08), the VIX.X is relatively unchanged. Actually a bit below the 70.33 level found at the 10/17/08 close.

On Thursday of last week, the VIX.X fell to 58.66, just above this month's MONTHLY Pivot of 58.20. That's a MEASURE to monitor, or assess some volatility to if we're to see a jump in SPX-SPY related PRICE action.

Today's broader market "light volumes" has me on my toes and a bit jittery. ALL INDICATORS are very BEARISH and VERY OVERSOLD.

It is like the "quiet before the storm."

S&P Depository Receipts (SPY) - Daily Intervals

[Image 6]

Trying to call a market into an expiration is always tough. I've noted this $97.00 "Max Pain" theory level on the SPY, and really narrowed down a "range" from the 10/10/08 intra-day low to the 10/14/08 intra-day high.

As I look at it, the SPY can't get to $97.00 without first getting above $87.77, then $91.96 and $94.55.

New Plays

Healthcare Moving Lower


UnitedHealth Group - UNH - close: 18.89 change: -1.13 stop: 21.05

Why We Like It:
Many of the managed care and healthcare stocks are picking up speed as they reverse lower following last week's bounce. Shares of UNH broke round-number support at $20.00 this morning. Then when UNH bounced midday it failed at the $20.00 level, which is common as broken support becomes resistance.

We are suggesting readers short UNH here with a stop loss at $21.05. Our target is the $15.15 mark. The October low was $14.51 and the $15.00 level might offer some support.

Annotated chart:

Picked on November 17 at $18.89 
Change since picked:     + 0.00   			
Earnings Date          01/22/09 (unconfirmed)    
Average Daily Volume:      11.4 million     

In Play Updates and Reviews

The midday bounce has failed.

BULLISH Play Updates


BEARISH Play Updates

Chemed Corp. - CHE - close: 40.29 change: +0.36 stop: 42.55

CHE bucked the trend in the markets on Monday but the trading was still bearish. Shares rallied to $41.27, just above its 200-dma, before rolling over again. Even though CHE closed up 0.9% we would still consider new shorts here. We don't see any changes from our weekend comments.

We are suggesting a stop loss at $42.55, just above Friday's high. We have two targets. Our first target is $35.25. Our second target is $31.50.

FYI: It is important for traders to note that CHE's short interest is about 9.5% of the 21.4 million-share float. That is a relatively high amount of interest and a very small float. Together they raise the risk of a short squeeze. Consider this a higher-risk play.

Picked on November 15 at $39.93 
Change since picked:     + 0.36   			
Earnings Date          02/19/09 (unconfirmed)    
Average Daily Volume:       357 thousand    

iShares Germany - EWG - close: 16.35 change: -0.36 stop: 18.01

Hmmmm.... maybe we should add a short on Japan. Last week it was announced that Europe had officially slid into recession. Today Japan had officially moved into a recession. The EWG Germany ETF continued lower. The midday rally failed under support/resistance at $17.00. We don't see any changes from our weekend comments.

More conservative traders may want to use a tighter stop. The October low was $14.75. We're aiming for $15.05. More aggressive traders may want to aim lower.

Picked on November 15 at $16.71 
Change since picked:     - 0.36   			
Earnings Date          00/00/00 
Average Daily Volume:       1.0 million     

iShares S&P SmallCap 600 - IJR - close: 40.00 chg: -0.35 stop: 43.55

Bears do not want to see relative strength in the small caps. If mutual funds start to turn bullish then we'll see buying pick up in the small cap names. The Russell 2000 and its associated ETFs all out performed the S&P 500 index. The IJR only lost 0.8%. This sort of "strength" might encourage more conservative traders to inch down their stop loss. Overall the trading action was still bearish and until the trend changes we're going to stay with it.

Our target is $35.50. The Point & Figure chart is bearish with a $17.00 target.

Picked on November 15 at $40.35 
Change since picked:     - 0.35   			
Earnings Date          00/00/00 
Average Daily Volume:       2.9 million     

J.C.Penney - JCP - close: 16.72 change: -0.55 stop: 20.01

Surprise, surprise... the outlook for JCP, a retailer, is negative. What world are the ratings agencies living in? Fitch just announced today that they lowered their outlook on JCP to negative thanks to weaker sales. In the last ten weeks the stock has been crushed from $43 to $17 and the stock was trading around $85 less than two years ago.

We do not see any changes from our weekend comments. We have two targets. Our first target is $15.05 since the $15.00 mark might offer some psychological support. Our second, much more aggressive target is $11.00. Again, the $10.00 level could offer round-number support. The weekly chart suggests some support near $14.00-14.50. The Point & Figure chart is bearish and forecasting an $8.00 target.

Picked on November 15 at $17.27 
Change since picked:     - 0.55   			
Earnings Date          02/13/09 (unconfirmed)    
Average Daily Volume:       7.4 million     

Juniper Networks - JNPR - close: 14.72 change: -0.31 stop: 16.15

The sell-off in JNPR continues. The intraday rally attempt failed and JNPR is building on its trend of lower highs. We don't see any changes from our weekend comments. Technicals are bearish and the P&F chart is forecasting a drop toward $10.00.

Given the stock's recent action this does look like an entry point for shorts. We're suggesting a stop loss at $16.15, just above Thursday's high. Our target is only $11.00.

Picked on November 15 at $15.03 
Change since picked:     - 0.31   			
Earnings Date          01/22/09 (unconfirmed)    
Average Daily Volume:      12.9 million     

Northrop Grumman - NOC - close: 39.68 change: -0.66 stop: 43.01

Defense stocks performed better than the broader market and NOC only lost 1.6% versus the S&P 500's 2.5% drop. Yet the action in NOC remains very bearish and today marked its first close under the $40.00 level in years. The Point & Figure chart is forecasting a drop toward $29.00.

We're suggesting a stop loss at $43.01. Our target is $35.50. More aggressive traders may want to aim lower.

Picked on November 15 at $40.34 
Change since picked:     - 0.66   			
Earnings Date          01/22/09 (unconfirmed)    
Average Daily Volume:       3.6 million     

Pitney Bowes Inc. - PBI - close: 23.26 change: -0.11 stop: 24.75

PBI did not see a lot of follow through lower today but the trading action was still negative. The early morning rally failed at its trend of lower highs. The stock closed near its lows for the session and its MACD is nearing a new sell signal. We don't see any changes from our weekend comments. The Point & Figure chart is extremely bearish with a $6.00 target.

We're suggesting bearish positions now with a stop loss at $24.75. Our first target is $21.00 and we suggest that readers exit the majority of their position here. We are setting an aggressive, secondary target at $18.00.

Picked on November 15 at $23.37 
Change since picked:     - 0.11   			
Earnings Date          02/05/09 (unconfirmed)    
Average Daily Volume:       2.1 million     

Market Vectors Steel ETF- SLX - cls: 26.67 change: -0.72 stop: 30.05

The SLX steel industry ETF continues to drift lower. Shares closed down 2.6% after bouncing back above the $28.00 level early on. We don't see any changes from our weekend comments and would continue to short the SLX here. More conservative traders may want to wait for the SLX to trade under $25.00 before initiating positions.

We're suggesting a stop loss at $30.05. Our target is $21.00. The P&F chart is bearish with an $18.00 target.

Picked on November 15 at $27.39 
Change since picked:     - 0.72   			
Earnings Date          00/00/00 
Average Daily Volume:       459 thousand    

Staples Inc. - SPLS - close: 16.48 change: -0.61 stop: 18.51

SPLS gave up another 3.5% as traders continue to sell into any strength. There was a midday spike over $17.00 but it didn't last long. We would still consider new bearish positions here.

We're suggesting a stop loss at $18.51, just above Friday's high. More conservative trades may want to try a slightly tighter stop loss. Our target is $14.00. The October lows were near $13.60.

Picked on November 15 at $17.09 
Change since picked:     - 0.61   			
Earnings Date          12/02/08 (unconfirmed)    
Average Daily Volume:      13.4 million     


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