Options Trader: Wednesday Morning Ideas

by: Philip Davis

We have a busy day today! Alcoa Inc. (NYSE:AA), a company that never gives guidance, missed by a lot as aluminum prices were down but costs were up, and that's making a lot of people nervous about the economy in general. The key factor was energy costs did not come down fast enough to save Q3 -- if that happened to Alcoa, then it may have hit many companies as well.

We will get refinancing numbers early this morning, which may disappoint, but the big Kahuna are the FOMC minutes at 2 pm. The oil and gas inventory reports will be pushed off until tomorrow due to Columbus day, so more choppy action in store for us there.

It will be interesting to see if this matters enough to give us a downside test, although it does turn out that North Korea has only, maybe, detonated one nuke so far. As John Stewart said, "Good, News -- North Korea Has One Less Nuclear Bomb!"

Asian shares were down this morning, and Europe is trying to overcome a bad open. We need to keep a close eye on foreign markets as the S&P has pulled ahead of the Nikkei while the FTSE is facing a critical test as it approaches the April high of 6,137.

Back home, we need to keep our eye on the following danger zones:

  • Dow: 11,700 needs to hold.
  • S&P: 1,340 is an early warning, but 1,320 is the line in the sand
  • NYSE has no real support until 8,400 where it faces a critical test of a rising 50 DMA. Nasdaq: 2,275 is the magic number but 2,225 is the very flat 200 DMA.
  • SOX need to hold 450, also running into a rising 50 DMA at 445
  • Transports need to show us something at 2,550, probably the single most critical index this week.

Cramer issued a 'mon back on financials, cyclicals and technology last night, urging us to buy on the dips. Maybe if we hold our levels but otherwise, I'll just let it dip a bit...

Oil will test $59 today, as it touched the $58 line in overnight trading but was pumped up at exactly noon in Europe! T Boone is on CNBC saying "What's the rush to get Purdoe Bay back on-line? Everybody's happy with where oil is now, there no need for more production." Sounds like a bit of a senior moment for T Boone, letting his true stripes show!

Joe Kernin just asked Pickens if he's just pumping his portfolio! Pickens' answer: "Wherever I am in the market, that's where I want it to go of course..." Wow! Actual reporting on CNBC!

Pickens new prediction is, "$70 before $50," a far cry from the $100 he was touting this summer!

Wall Street may be souring on crude (get it -- souring!), but it's kind of like trying to empty out a stadium after a packed concert -- there just aren't enough exits to get everybody out quickly and safely in an emergency!

Amaranth already got trampled by the gas crowd and OPEC; Pickens and other pumpers are urging everyone to remain calm.

Connecticut's Attorney General has set up an oversight unit to rein in the hedge funds.

There's no shortage of gold either, and we'll see if the $560 line holds this week. The ECB indicated it may raise rates again, putting a little pressure on the dollar which could hold gold up, at least until 2pm when we see what our own Fed has to say.

Yet another problem for the Republicans, as a British study has found that 600,000 Iraqis have been killed in the war (2.5%) -- four times the U.S. army's estimate. Think about how your life would be affected if one out of 40 people you knew were dead. Now multiply that by 3 as the number of people you see every day with scars, missing limbs, etc...

Bush will make a "Major Announcement" today, likely to claim he has cut the deficit in half ahead of schedule. Yes, it is half of his projected deficit, not half the actual one, and, with the national debt up $3T since he took office, one can only hope Americans aren't as stupid as he obviously thinks they are.

The true purpose of the announcement is to tell you how the Democrats are trying to steal your money by raising taxes with Bush's closing remarks, as he did yesterday at a reception:

"Next month, our nation has to make a choice: Do we keep taxes low so you can keep our economy growing? Or do we let the Democrats in Washington raise taxes and hurt the growth of the economy? The decision you make in the voting booth will have a direct impact on your bottom line"

I'm sorry, I keep trying not to make political statements but come on! This is just insulting...

There's no reason to make new oil plays today, at this point they either work or they don't, but let's get ready to lighten up on our calls if we start breaking below our targets. I'd rather go to all cash now and pick my spots for leg 2 of the super rally than let my plays get wiped out hoping for a bounce.

As I said at the close of the month, the remaining positions represented just 15% of cash and we are now weighted 31 puts to 20 calls. If anything I will be adding to some put positions, but I'm certainly going to wait to see what the Fed minutes reveal!

All October calls have very tight 10%-of-the-profit stops, or 10% loss stops at this point. If we break our technicals, I will feel the same way about Novembers...

On a possible market turn like this, my attitude is the same as it is early in a rally: If it's a real crash, we have all the time in the world to take short positions.

Today will be a good test of Bed Bath & Beyond Inc.'s (NASDAQ:BBBY) strength as they admit to $66M in options backdating, and will take a charge of $8M (1.3%) to the third quarter.

Now MySpace is kissing Google's ring. The two already have a deal, and MySpace was an early bidder for YouTube, so they see the value of the model and want to make sure they don't miss out. Google, meanwhile, is stepping up the pressure on Microsoft with a suite of office-type apps. If they can get them working as web apps, it will be a real threat!

Infosys Technologies Ltd. (NASDAQ:INFY) had good numbers, which is good for them, but how good is that for the U.S. jobs that got outsourced? I am a great fan of outsourcing in general, but I just worry that excellent growth in India indicates money is very tight on this side.

Dow component Monsanto Co. (NYSE:MON) had a huge miss on lower sales, and we discussed AA last night...

Host Hotels & Resorts Inc (NYSE:HST) came in in-line with so-so guidance, and will not be rewarded even though growth is good.

Uh-oh, good news does not seem to matter!

Be very careful out there today, it's going to be rough for everyone before it's over!

Read all of Phil Davis's articles on Seeking Alpha.