Options Trader: Thursday Morning Ideas

by: Philip Davis

Phil Davis submits: Yesterday was very impressive! We may be moving out of the Meatball rally and into the Energizer rally phase, but let's see how the week shakes out before we take another shot of Kool Aid and go all in (I'm still 65% cash).

Asia was mixed, with India being a major exception as INFY's numbers ignited the whole market for a 1.4% gain. Japan's banks led small slide in the Nikkei. A very interesting development is a sharp decline in the Chinese defense industry; perhaps they feel the N. Korea issues will be resolved peacefully.

Europe is moving up along with the U.S. futures, so we have mixed signals from the FTSE and Nikkei, but the FTSE and S&P are behind so a little catching up is good.

We'll see if yesterday's little incident in New York re-ignites terror concerns. What struck me yesterday was the way the market shrugged off the news, we are now so jaded about tragedies that a tragic accident can take place and people say, "It wasn't terrorists -- Great!" I don't know if that's progress...

As we seem to be consolidating this week we will continue to watch our lower resistance levels (discussed yesterday) but if we are going to transition into a more positive (yes it can get more positive) rally phase we will need to set greedier targets:

The Dow may be forming a nice flag above 11,800 but holding this mark is all the difference in the world as to near-term direction.

The S&P is our leading indicator again as it refused to lose at 1,350 -- you cannot take down the markets without taking down the S&P!

The NYSE remains the more volatile directional indicator and it would be so nice if they hold 8,500 as we could set up for a real bull run!

Nasdaq was yesterday's disappointment with a 7-point drop, and holding 2,300 will be key, so let's watch that one closely.

What are the SOX doing? They are channeled between 450 and 460 since 9/18 so let's watch those earnings closely as I think this little index may lead the whole market.

Transports have firmed up above 2,550 and I remain concerned that they were considerably higher in June, so let's hope we see something here soon.

Oil -- ROFL -- Oil (sorry, I have to take a break to laugh)... Oil looks like it will open at a 52 week low, just 100% over November '03s level when the winter was cold, the inventories were 500M barrels lower and everyone was buying a Hummer.

I'm hoping for a run-up ahead of or just after inventories so we can get back in on the Valero Energy Corp. (NYSE:VLO) $50 puts or the ExxonMobil Corp. (NYSE:XOM) $67.50 puts, but I don't know if there are enough buyers left at this point. Let's keep an eye on that $57.14 level as a bounce point on the 5% rule, but below that is a straight shot to $55 -- a level we were shocked to be at last July.

Today they are looking for a big 1.8Mb build in crude, but a small 63Bcf build in natural gas, so it will be interesting to see how the inventories play out.

Cambridge energy says there are 360 new energy projects in motion that will supply millions of additional barrels of oil, further reducing OPEC's percentage of global supply. This is the biggest problem for OPEC -- high oil prices spur competition and damage the economy, leading to a crushing oversupply should we enter a slowdown.

Here comes the Camry hybrid! If anything should scare the oil bulls, this should. One of the world's most popular cars with 30% better gas mileage in an affordable package... No wonder Toyota Motor Corp. (NYSE:TM) says they expect sales to double!

Gold is in sad shape and will get much sadder quickly if the dollar breaks its 200 DMA; at this point I am wondering if they will hold $500 by Jan 1 as winter jewelry demand tapers off.


Yet another day for watching from the sidelines... We will, of course be watching the oil inventories with great interest and will be looking for opportunities on our favorite plays if the pumpers are foolish enough to give us good targets.

I did not like the trade deficit numbers at all as $69.9B on declining oil prices means we are buying way too many imports! This will put pressure on rates (we need more money) and lower U.S. domestic forecasts -- how can that not matter? These are August numbers though (avg $74/barrel), so we can look forward to much better numbers for September (avg. $64/barrel). $10 a barrel times 13M barrels a day is a $4B reduction ahead.

It's try to take down Google Inc. (NASDAQ:GOOG) day on CNBC as they are wheeling out a ton of negative stories around the YouTube deal. There is the poor company Utube.com -- their web site has been decimated by 67M misdirected hits. There is a string of copyright lawyers trying to show how smart they are by trying a supreme court worthy case in 2 minute segments on every news channel, and now there is every person who has ever wanted a video removed being given their 15 minutes of fame.

Last month's pick McDonald's Corp. (NYSE:MCD) raised guidance by 7%, that is beyond huge! We took our Oct $40s off the table at .90 on the 28th as we thought that was enough of a rally...

Pepsico Inc. (NYSE:PEP) beat by 2 cents with slightly raised guidance.

Sony Corp. (NYSE:SNE) came out with their line of "IPod killers" for the holidays -- expect a relief rally from Apple Computer Inc. (NASDAQ:AAPL) as it looks like they have nothing to worry about.

Last month's winner, CKE Restaurants Inc. (CKR), is still going strong and they are buying back another $50M worth of stock at this all-time high. I guess the Russian expansion is going well...

Yum! Brands Inc. (NYSE:YUM) had nice numbers so we need to check out Darden Restaurants Inc. (NYSE:DRI) and Cheesecake Factory Inc. (NASDAQ:CAKE) to see if consumers are trading down or just going out more.

Gannett Co. Inc. (NYSE:GCI) had disappointing sales but that's why we rolled the Jan $60s last week as we became concerned. It's not looking good for our Jan $65s and my bad for not taking .80 off the table on Tuesday! As it's a roll we could take our double and go home but I'm going to let it ride as well as our Jan '08 $55s. We need to watch the 200 dam at $57 closely.

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