Option Investor
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Grabbing for the Knife

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Play Editor's Note:

Friday is a big unknown for the markets. Everyone will be waiting on the 8:30 a.m. jobs report. Expectations are for job losses of 700,000 to one million. I suspect that anything over 800,000 will be seen as exceptionally poor and stocks sell off. Anything better than -700K might just see an oversold, relief rally. There's no guarantee on what the herd is going to do tomorrow. Personally I expect another downdraft in the morning and then an oversold bounce in the afternoon but it could be just the opposite. One thing is for sure. The U.S. markets are very oversold and due for a multi-day retracement but we can always get more oversold first.

I would have added more plays tonight but the jobs report is too big of a wildcard. Here are a few stocks to watch:

VFC $48.07 -1.28, The failed rally at $50.00 this week is bearish. It looks like VFC wants to go lower.

OXY $50.04 -2.78, The two-week pattern is a neutral, pennant formation but the larger pattern is bearish and I'm expecting a breakdown under $48.00 soon. Traders could target 41-40 on a new relative low.

FLS $44.91 -3.30, I think this stock look vulnerable and could be testing its lows near $40-38 within the next couple of weeks.

ZMH $33.05 -2.08, I was tempted to open bearish positions with the oversold bounce failing so quickly. Unfortunately, the stock is so oversold that shorts seem like a higher-risk strategy. On the other hand it doesn't look like any sort of bullish candidate.

RIG $51.89 -4.55, This is another big-name oil service stock and today's breakdown under its 50-dma is definitely bearish.


DIAMONDS - DIA - close: 66.07 change: -2.70 stop: 63.45

Why We Like It:
This is a very aggressive, trying to catch "the falling knife" type of play. The markets are extremely oversold and I think we're way overdue for a hefty bounce. The wildcard here is the jobs report tomorrow. Everyone expects it to be terrible. That presents the opportunity for an upside surprise. Whatever the case turns out to be I still expect a dip in the DJIA and a great way to play the Industrials is through the DIAMONDS (DIA).

I'm suggesting readers buy a dip in the DIA in the $64.50-63.50 zone with a stop loss at $63.45. If triggered our first target is $69.50. I'll consider a secondary target based on the strength of the bounce. Right now I'm thinking a secondary target at $72.50. My time frame is less than two weeks.

Suggested Options:
I am suggesting the March or April calls. March options expire in about two weeks so more conservative traders should consider the Aprils. Keep in mind that strikes are available at $1.00 increments. It is up to the individual trader to decide which month and which strike price best suits your trading style and risk profile.

BUY CALL MAR 65.00 DIJ-CM open interest= 980 current ask $3.40
BUY CALL MAR 67.00 DIJ-CO open interest=1563 current ask $2.22
BUY CALL MAR 69.00 DIJ-CQ open interest=2094 current ask $1.36

BUY CALL APR 65.00 DIJ-DM open interest= 441 current ask $4.60
BUY CALL APR 67.00 DIJ-DO open interest= 561 current ask $3.50
BUY CALL APR 69.00 DIJ-DQ open interest=1698 current ask $2.50

Annotated Chart:

Picked on    March xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           00/00/00
Average Daily Volume =        35 million  

Diamond Offshore - DO - close: 55.27 change: -2.81 stop: 54.15

Why We Like It:
DO is part of the oil service sector. The oil service stocks tend to be more volatile than the oil production stocks. Shares of DO have certainly displayed some volatility. Right now the stock is showing a variety of mixed signals. Bearish traders could point to the trend of lower highs, failed rallies and even a bearish head-and-shoulders pattern if you look hard enough. Bulls will point out that DO is very oversold and managed to hold on to support near $55-54 today.

At this sort of crossroads you have to look at DO and think, "Is the stock going to bounce from support like it did in December and January? Or is the stock going to breakdown under support and begin an entirely new leg lower?" Bigger picture it seems like DO is headed lower but short-term I suspect that the stock will bounce from here. I could be completely wrong but we can use a pretty tight stop loss just in case. I would buy calls now with a stop at $54.15. Our first target to exit is $59.75. (As an alternative, if you're nimble enough, consider buying puts if DO breaks down under $54.00). My timeframe for this play is less than two weeks. If DO gaps open below our stop loss at $54.15 do not open bullish positions.

Suggested Options:
I am suggesting readers buy calls with a tight stop loss. I'm suggesting the March or April calls. Be aware that March options expire in about two weeks.

BUY CALL MAR 55.00 DO-CK open interest= 181 current ask $3.40
BUY CALL MAR 60.00 DO-CL open interest= 738 current ask $1.35

BUY CALL APR 55.00 DO-DK open interest=  18 current ask $5.30
BUY CALL APR 60.00 DO-DL open interest=1048 current ask $3.00

Annotated Chart:

Picked on    March xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           04/23/09 (unconfirmed)
Average Daily Volume =         5 million  

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