Option Investor

Daily Newsletter, Wednesday, 12/24/2008

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Table of Contents

  1. Market Wrap
  2. New 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.

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New Plays

Christmas Eve: No New Plays

Play Editor's Note: No New Plays Tonight. From everyone on the PremierInvestor team, we wish you a Merry Christmas.

In Play Updates and Reviews

Wandering Aimlessly on Light Volume

Play Editor's Note: Action in stocks was muted on Wednesday as investors were focused on their coming Christmas holiday than trading. Volume was incredibly light and will remain light throughout the rest of 2008.

BULLISH Play Updates

Hansen Natural - HANS - close: 33.68 change: +0.67 stop: 29.95

HANS posted another strong gain and set a new six-month closing high. I continue to suggest that readers do some profit taking here with HANS up more than 11% from our entry price. I am adjusting our official target from $34.90 to $33.90. We'll adjust our more aggressive, secondary target to $36.00.

Picked on December 16 at $30.25 *triggered       
Change since picked:     + 3.43   			
Earnings Date          02/26/09 (unconfirmed)    
Average Daily Volume:       1.8 million     

Hasbro Inc. - HAS - close: 29.13 change: +0.14 stop: 27.90

Shares of HAS have developed a pattern of strength in the morning that fades throughout the day. While the stock continues to slowly build on the bullish trend of higher lows we are not suggesting new positions at this time. We have two targets. Our short-term target is $29.90. Our secondary target is $32.25. FYI: A move over $30.00 would produce a brand new P&F chart buy signal.

Picked on December 06 at $28.31 /gap higher entry
Change since picked:     + 0.82 /originally listed at $27.84
Earnings Date          02/09/09 (unconfirmed)    
Average Daily Volume:       2.6 million     

Henry Schein - HSIC - close: 35.53 change: +0.02 stop: 33.95

HSIC retested its short-term trendline of higher lows, which means it should be ready for another bounce to another new relative high in the $36.50-37.00 zone. More cautious traders might want to consider a tighter stop loss near the $35.00 level. Our target is $39.00.

Picked on December 18 at $35.21 
Change since picked:     + 0.32   			
Earnings Date          02/25/09 (unconfirmed)    
Average Daily Volume:       1.2 million     

RadioShack - RSH - close: 11.95 change: -0.16 stop: 11.15 *new*

RSH tuned out on Wednesday and meandered sideways. The stock happened to glance off its simple 10-dma intraday. The short-term trend is still up but we're not suggesting new bullish positions at this time. We will adjust the stop loss to $11.15 (breakeven). RSH has already hit our first target. Our second target is $13.75.

Picked on December 13 at $11.15 
Change since picked:     + 0.80   			
Earnings Date          02/12/09 (unconfirmed)    
Average Daily Volume:       4.3 million     

Shaw Group Inc. - SGR - close: 19.40 change: +0.02 stop: 17.95

Unfortunately, I don't see any changes from our previous comments on SGR. The stock continues to drift sideways with a one-week trend of lower highs. Momentum indicators are waning. Wait for a new move over $20.00 before considering bullish positions again. More conservative traders may want to raise their stops toward $18.50ish.

We have two targets. Our first target is $24.00. Our secondary target is $27.00 but we suggest readers take off most of their positions at $24.00.

Picked on December 16 at $19.54 /gap down entry
Change since picked:     - 0.14 /originally listed at $19.74
Earnings Date          01/07/09 (unconfirmed)    
Average Daily Volume:       3.6 million     

Total System Services - TSS - close: 14.00 change: +0.17 stop: 13.49

We are still waiting on a bullish breakout for TSS. We're suggesting a trigger to buy the stock at $14.40. More conservative traders may want to use a trigger above $14.50 instead.

We're listing two targets. Our first target is $15.95. Our second target is $17.45.

Picked on December xx at $xx.xx <-- see TRIGGER  
Change since picked:     + 0.00   			
Earnings Date          01/22/09 (unconfirmed)    
Average Daily Volume:       1.1 million   

BEARISH Play Updates

Applied Materials - AMAT - close: 9.83 change: +0.11 stop: 10.51

AMAT scored a minor bounce on Wednesday but we don't see any changes from our previous comments. We would still open short positions here or on a bounce closer to the $10 level. AMAT has already broken the bullish trend of higher lows and the MACD is nearing a new sell signal.

More conservative traders may want to try and play with a stop near $10.25 instead. Our first target is $9.05. Our second target is $8.25.

Picked on December 23 at $ 9.72 
Change since picked:     + 0.11   			
Earnings Date          02/10/09 (unconfirmed)    
Average Daily Volume:      19.8 million     

Walt Disney Co. - DIS - close: 21.99 change: +0.14 stop: 23.05

The action in DIS today looks like another lower high. We don't see any changes from our previous comments and would open new shorts here. Our first target is $20.10. Our secondary target is $19.05.

Picked on December 23 at $21.85 
Change since picked:     + 0.14   			
Earnings Date          02/03/09 (unconfirmed)    
Average Daily Volume:      17.9 million     

DreamWorks Animation - DWA - close: 23.15 change: -0.03 stop: 24.35

DWA spiked toward $22.65 this morning before recovering. I suspect that DWA could rebound toward the $23.75-24.00 zone before moving lower. Use any such bounce as a new entry point for bearish positions. We have two targets. Our first target is $21.00. Our second target is $19.25.

Picked on December 23 at $23.18 
Change since picked:     + 0.03   			
Earnings Date          02/26/09 (unconfirmed)    
Average Daily Volume:       902 thousand    


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