Options Trader: Thursday Morning Ideas

by: Philip Davis

Wow, Thursday already, this week is flying!

Looks like the Dems won the Senate too and I think the markets are going to like it!

The Hang Seng liked it with a 141 point gain but the Nikkei can't get it back in gear as rising oil ground Japan's industrials to a halt.

Europe is flat ahead of our open but are holding their own record highs.

Will we get serious breakouts on our own indices this morning? If oil stays below $60 (but not so low as to crash the energy sector) I think we have a shot at 12,200!

Mr. Jones looks ready to party and, with 70% of the companies reporting so far giving us a beat, why not? This week may be a little early for a breakout, but if we make it through the weekend without anything blowing up, we could be in very good shape.

Let's keep an eye on some good and bad levels:

  • Dow 12,200 very good, 12,100 not so much.
  • S&P 1,390 record high, 1,380+ still very strong
  • NYSE 8,900 record high, 8,800 holding record highs
  • Nasdaq 2,400 = lift off, 2,350 needs to hold
  • Russell 770 is breakout, 760 weakness

The SOX give us the greatest concern, they are likely to have trouble at the 200 DMA at 470, but anything above there will lift the Nasdaq over 2,400 -- hopefully Microsoft's confirmation of Vista release will help today.

The Yuan is on the move -- now at it's year high as China tries to deflect criticism of this month's record-breaking trade surplus. The Bank of England adds pressure to the dollar with another rate hike, bringing them to 5%.

That is bad for oil prices but not bad for U.S. equity prices as they look cheap to foreign investors. The dollar is down 3% since the 16th which adds $1.80 to the price of oil and $18 to the price of gold.

Gold is, not too coincidentally, up $18 since that date while oil has remained flat at $58.95. Subtract that $1.80 dollar boost and we have oil at $57.15 -- my 9/25 bottom target. This is my bad for not keeping on top of this, as any bounce around here -- even back to the topline resistance of $61.69 (now $59.89) -- is to be expected.

Very unfortunately, since we have to live with the dollar at this level, we are now looking at $59.89 as firming up as a floor for oil ,and we can expect a move to $62.88 (up 5%) without violating the general downtrend (but completely violating our puts!), and I would say a break over 2.5% ($61.38) will be very unpleasant for us oil bears!

It will also be unpleasant for the people of California who, as Cramer pointed out, let themselves be bought and are already facing 20 cent increases at the pump just 2 days after they voted against reform. Hopefully they will remember that extra $4 (or more if this keeps going) every time they fill up for the next 12 months enough to reconsider next time the oil companies tell you how why they should be allowed to keep all of your money.

The facts haven't changed: OPEC is telling us we cannot possibly consume the amount of crude they are capable of producing, even at $60 a barrel, and the IEA says it will take 30 years for consumption to go up 50% (if it were a stock, would you buy it?) -- but so what? Fundamentals haven't mattered in this market since September...

What has changed is the fact that it seems to be politics as usual and so what if the oil industry has to toss around a billion of the $400B in profits they made this year to buy a few votes -- it's money well spent!

Still I hang on to the hope that some trillionaire investing group will step in on our side and take control of this market (it certainly is ripe for the picking), but you've got to be in for a good fight. Our downside resistance starts at the 2.5% mark of $58.39 and a real downside will be confirmed below the next 5% stop at $56.89.

Senate committees will be the topic of discussion today as Pat Leahy looks to take over Judiciary, Dan Inouye will take Commerce, Ted Kennedy will run Health, Education, Labor and Pensions (uh-oh GM!), Chris Dodd takes Banking and Jeff Bingaman will take over Energy and Natural Resources.

Leahy is looking to remove the antitrust exemptions enjoyed by insurance companies and Kennedy will make it his mission to raise the minimum wage and do something about health care.

Bingaman is a big alternative energy guy. Dodd is no fan of "excessive interest being charged by credit companies" as evidenced by Mastercard Inc.'s (NYSE:MA) 8% drop in the past 2 days:

Mastercard Chart 9 11 06


So times they are a changin' and we'd better be ready to change our investment strategies with it!

As I said yesterday, the Nasdaq loves the Dems and, traditionally, big oil doesn't, but they will hold their cards until they are forced to fold, so we may be waiting until spring for real change.

How can the Nasdaq not love Cisco Systems Inc.'s (NASDAQ:CSCO) Q1 report? Let's look for some really good movement in the equipment sector (because they've got to be hooking those things to something!).

Texas Instruments Inc. (NYSE:TXN) benefits from any good tech run and has been lagging lately, but enough is enough at $29.50 so I'll take some Dec $30s for .75 but certainly out if it hits .50.

I'm watching Dell Inc. (NASDAQ:DELL) but not ready to jump back in until it proves something at the $25 resistance. Lenovo's margins are under pressure so I don't think there will be a price war this winter.

One tech company I won't be buying is Hitachi Ltd. (HIT)! Not only are sales off from 2005 but they only made $300M on $80B in sales, that's a sales-to-income ratio of 270!

How many times can UnitedHealth Group Inc. (NYSE:UNH) go down on the same options story? Once a week or so seems to be the answer... This time I'm looking for an entry point as this nonsense has nothing to do with the company's forward prospects.

BT Group plc (NYSE:BT) had great earnings so I like AT&T Inc. (NYSE:T) again with the Jan $35s at .90. Let's keep an eye on Nippon Telegraph & Telephone Corp. (NYSE:NTT) for signs of cost problems when they report tomorrow.

My buddies at Cambridge Display Technology Inc. (NASDAQ:OLED) report tomorrow, but I find myself without any as we took our 40% profits off the table at $6.89 at the end of September and they bounced back so fast we missed it! Hopefully tomorrow will give us a new entry as it is doubtful they made money and traders are very impatient.

Petroleo Brasileiro S.A. (NYSE:PBR) shoots for an all-time high tomorrow but didn't we hear something about Venezuela not pumping as much oil? It will be interesting to watch...

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