Options Trader: Monday Morning Ideas

by: Philip Davis

Leave it to Barron's to splash water on our rocket party!

They pointed out this weekend that bullish sentiment is at a dangerously high 56.4% vs. 22.3% bearish.

Bearish sentiment is one of the main thrusters on our stock rocket and it is running dangerously low on fuel as we near critical velocity. Now a perfect launch gives us just enough fuel to escape the gravity well without filling up with too much, which might weigh us down.

If you are in a space shuttle and your thrusters are just about expended and you are about to break orbit -- it is not OK if you suddenly hear a big thump and you drop back into the atmosphere! Think of where we are in the market that way -- we MUST break orbit as we have little fuel left to overcome a problem at this altitude.

If we break free (Dow 12,500, Microsoft Corp. (NASDAQ:MSFT) $30s, Apple Computer Inc. (NASDAQ:AAPL) $100, oil under $60) we can drift up here forever, giving us a chance to refuel, but if we get caught in a gravity well -- then Houston, we have a problem!

Barron's also points out that there has been a lot of inside selling in the financial sector. How much is a lot? In mid-October there were 24 shares sold by insiders for each share bought, again -- maybe we are running out of fuel here...

But we are being given mixed signals as some people seem to think the markets are still very undervalued:

That's a lot of faith in something! It's a funny day for it with the Nikkei falling 365 points, specifically on a sell-off of financial and commodity stocks (which I've been waiting for since Amaranth collapsed back in September). A lot of this is possibly more due to a change in the tax rules than a real change in sentiment, but this is how sell-offs start so let's be careful!

Rereading that article I see that at the time I felt a commodity collapse would impact IntercontinentalExchange Inc. (NYSE:ICE) and Chicago Mercantile Exchange Holdings (NASDAQ:CME) so let's watch them and the newly inflated Nymex Holdings Inc. (NMX) for serious signs of trouble, which hasn't come so far...

In addition to the drop in Japan, the Hang Seng fell 228 points in a general sell-off that even drove down China Mobile Limited (NYSE:CHL), who added 4.6M subscribers in October. No, that's not a mistake, this $23B cap corp. added 4.6M subscribers in a month vs. $105B capped Verizon Communications Inc. (NYSE:VZ), who added 3.6M for the quarter!

Europe is taking the Asian sell-off surprisingly well ahead of the U.S. open so let's not get all panicky until it's really time to panic. As we discussed in comments over the weekend, I do have one finger on the sell button at all times and will be very happy to cash out after the performance so far this month, this year for that matter!

It's vacation time for me anyway and I will be gone from Wednesday through Monday so I may be personally going very light into the weekend unless we see a lot of new highs.

Sticking to our escape velocity analogy let's look for a tight band to form as we skim the upper atmospheric trading range, looking for that little extra push that will send us orbital and away from all that nasty bearish gravity!

The Dow needs to hold 12,300 and get over 12,400 if we are to achieve weightlessness in December. It's a greedy target but there will be no points awarded for a good try on this one. I would seriously love to say I'm not worried if it tests 12,200, but I will be seriously lightening up if we hit 12,249!

Dow Chart 21 11 06

I would much rather be embarrassed that I got out too early than face the alternative! We can always reinvest cash...

The S&P is already facing strong resistance at 1,400 and needs to prove it can hold that level or we will be looking at 1,390 again very soon. Failure there is a very clear sign to pack up our calls.

S&P Chart 21 11 06

Google Inc. (NASDAQ:GOOG) must break $500. MUST -- to give investors enough faith to keep putting money into this market. Apple Computer Inc. (AAPL) must hold $85 but I really need to see $90 there too. This is not greed, investors paid to go to the moon, and will leave this ship quick if we don't get out of the atmosphere soon.

Google Chart 21 11 06

The NYSE will be our earliest indicator if it can't take out 8,900 this week and we really want to see 9,000 if we want to get more money off the sidelines.

NYSE Chart 21 11 06

The Nasdaq already took a hit at the 2,450 mark and cannot afford to fall below 2,425, just 20 points away! The Russell also flashed danger signs last week and needs to sustain itself over 790 or it will begin to form a nasty looking double top on the weekly charts.

Nasdaq Chart 20 11 06 Russel 2000 Chart 20 11 06

We must have our SOX, also weakening above 480, still miles below January highs of 559 so there is NO excuse for hanging out down here -- we've been there, we've done that with a 120 point rally that began last October. MSFT must set us free and give us the green light to love tech again!

The transports are in a similar situation but only 150 points off their May high of 2,852. Still, there is no excuse for not breaking 2,700 with oil continuing down.

SOX Chart 20 11 06 TRANQ Chart 20 11 06

Oil is very annoying with the contract rollover but let's keep an eye on the February contract spread, currently just $1.57 at $60.64, vs. the almost $3 spread we got going from December to January.

The December contract price closed Friday at $58.97 and $59 forms only limited resistance and $60.69 is the real inflection point to watch. Above that will be a real problem and that number will go down every day we are below it as the 50 DMA is still crashing down to the $60 level.

Oil Chart 20 11 06

Our first danger zone is at $59.17, which should give us a little upside resistance, but we need a solid break below $57.65 to confirm the next leg down. It would be a huge sign of weakness if we head into the weekend below $59.17 with Iran issues and an OPEC conference looming, in addition to the inevitable Nigerian rebel attack and some nonsense from BP PLC (NYSE:BP).

Gold firmed up last week and the dollar failed to break 85.50, which it MUST do before it collapses its own 50 DMA. Gold needs to break $630 and must hold $625 to be taken seriously but Northern Dynasty Minerals Ltd. (NYSEMKT:NAK) ">stopped us out last week and I keep a nervous watch on Metallica Resources Inc. (MRB), although I would think the PD merger should boost both plays.

That yield curve is still inverted, now by .17 -- a pretty steep number so let's keep an eye on that spread!

Inverted Yield Curve 20 11 06

I'm still very optimistic that we can make our new highs but that's not going to stop me from going all cash and waiting for the retail sales results which will send the market one way or another after this weekend!

If I cash everything out and rebuy next week, what do I miss? A few more points of movement and some commissions? Look at it as in insurance cost for a very happy Thanksgiving -- so be very careful out there!


I'm not going to make a lot of picks as I will be watching over existing positions closely. We need oil to stay down and the dollar to stay up and we need MSFT and GOOG to give the Nasdaq and the S&P the boost they need to offset a pullback in commodities.

Freeport-McMoRan Copper & Gold Inc.(FCX) is an $11B company buying a $19B company for $26B and if they don't go down I will eat a penny! This is the same behavior we saw in the gold sector as gold turned down and various producers sought to constrain supplies (*cough* cartel *cough*) by buying out the competition. Unless copper really picks back up I like the Jan $50 puts for $1.45, but I'm sure it will open higher than that, hopefully not more than $2.50.

Medtronic Inc. (NYSE:MDT) reports today and if they take off we need to get right on the Boston Scientific Corp. (NYSE:BSX) bandwagon! As it looks more like an abandoned wagon right now, I think I want to go long with the Jan '08 $17.50s for $2.50 but only if MDT breaks $49.50.

Boston Scientific Chart 20 11 06 Medtronic Chart 20 11 06

I will post some more in comments as the day progresses but I want to get this post up asap!

Have a great day,

- Phil

Read all of Phil Davis's articles on Seeking Alpha