Options Trader: Tuesday Morning Ideas

by: Philip Davis

Did I miss anything? I tried to put a good spin on the charts but it looks like day one of a correction to me. We have the UBS sales report, Durable Goods and Red Book ahead of the bell, followed by Consumer Confidence and Existing Home Sales at 10am plus Bernanke speaks in NY this afternoon!

To say I have no idea what will happen today is a massive understatement!

At times like this I have to look at the charts and the charts look very ugly indeed. Not as ugly as the Hang Seng, which dropped 564 points (3%) this morning as exporters took a power dive on fears of a U.S. slowdown along with the obvious problem of collecting worthless dollars from U.S. consumers.

We sell $20b worth of Treasury Notes this afternoon (this is a nice way of saying we will borrow another $20b to fund our debt addiction) and we can expect Asia to step in and bail us out with "strong demand." This is a short-term fix for the dollar but should help a little.

The Yen is also pulling back and the currency trade of the moment is probably to short the Euro around 134 so the rebound in the dollar this week (assuming there is one) will be more related to profit-taking there than real strength here.

Yen Chart 28 11 06 Euro Chart 28 11 06 US Dollar Chart 28 11 06

I'm still fairly hopeful but I can afford to be since I cashed out last week!

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

On Tuesday I said: "So we will watch the transports and pray they hold 2,650, otherwise it is really time to lighten up ahead of the holidays -- despite my generally bullish disposition. If it's a real rally, I can certainly afford to miss one month out of 120!"

The transports did hold but, on Wednesday I said: "I will be cashing out ahead of the weekend on any weakness as I will just sleep better with more off the table."

By Friday I was officially shorting Diamonds Trust Series 1 ETF (NYSEARCA:DIA) with the Jan $121 puts for $1.10 (now $1.80), so let's not say I didn't tell you so!

That being said, I don't put too much stock in a market sell-off when they're selling off Apple Computer Inc. (NASDAQ:AAPL) at the same rate as IntercontinentalExchange Inc. (NYSE:ICE), International Paper Co. (NYSE:IP), Dow Chemical Company (NYSE:DOW), Toyota Motor Corp. (NYSE:TM) (a gift by the way), Nokia Corp. (NYSE:NOK), Sirius Satellite Radio Inc. (NASDAQ:SIRI)...

Some of these companies must be good -- mustn't they?

As I said in yesterday's comments, it looks a lot more like programmed profit taking than a genuine top, but who's to say when the programs stop taking those profits?

The Dow may test the rising 50 DMA at roughly 12,025 and I will be bullish if we can hold that for the week but it will take a close over 12,300 for me to get interested in putting money back in otherwise.

The S&P broke my heart yesterday but showed some signs of life at 1,380 and meets its rising 50 DMA at 1,365 but let's hope we don't see that as the S&P is not as bouncy as the Dow!

The NYSE held 8,800 only because they rang the bell and a breakdown there could give us serious momentum issues to the downside so let's keep a close eye on this one.

After working so hard to break 2,450 the Nasdaq gave it up like it was a bad joke. If we see the underside of the 2,400 mark, we will very likely be testing the 50 DMA at 2,350 and I don't want to be near a long position if that happens!

Let's watch those transports closely as they have held up very well in the face of rising oil but I think another day above $60 will put them over the edge and a drop below 2,650 could turn ugly fast!

I'm excited about the SOX testing 470 -- it will give us lots of buying opportunities (Texas Instruments Inc. (NYSE:TXN), Corning Inc. (NYSE:GLW), Motorola Inc. (MOT), Intel Corp. (NASDAQ:INTC)) on stocks that had gotten away from us but let's remember our summer mantra:

Markets 28 11 06

It is not my job to save the markets... I am not the guy who calls the bottom!

Think of the markets as a $22T train that you desire to ride in a certain direction:

  • You can get to the station and the train may be there or it may not be there -- if you haven't checked the schedule (done research) you may consider this to be a random event.
  • If the train is there, congratulations -- you are in the right place! Now, is it the right time?
  • Again, you should be checking your schedule, but I know some of you insist on boarding and will sit there for hours waiting for it to get going.
  • Others will push which, not surprisingly, doesn't work well...
  • The ones I am really, really worried about though, are those of you who get to the station, see the train isn't there (at a bounce point), yet insist on jumping on the tracks with all your money and predicting "it's going to stop right here!"

Squish is an understatement for most of those people! Please don't try to be a market hero, there will be plenty of chances to board the train once the whistle blows and it gets moving again. It remains to be seen whether this week's action is just a sharp curve on the way up or a real long-term change in direction.

I write all this just a half hour ahead of the durable goods report which may answer that question for us but I'm not taking any chances until we retake our levels, one way or the other.

Oil seems determined to ruin the party and will test both the 50 DMA and our patience at $60.32 in U.S. non-dollar-adjusted trading.

Demand for crude in Europe is strong as oil is trading at an 18-month low in Euros and is being snapped up by speculators at this level.

On a dollar-adjusted basis oil is at $58.82 to foreign investors, but I know that makes everyone's head spin so I'll keep things in the current dollar perspective.

$61.76 should be a major resistance point to the upside, 5% up from the October trading band and very close to our reliable $61.69 barrier that held at the end of October. A failure to break over this level spells trouble for oil.

Of course we have inventory tomorrow and a build of even a barrel will be bad news for traders there, and a rebound of the dollar off today's Treasury auction can really throw things off.

Downside resistance comes at $60.32 and then back at $58.82. A failure there will take us quickly to $57.34, on the way to $55.88, which is where we should be given the current supply picture.

That would bring the OPEC basket price dangerously close to a dollar adjusted $50 though, and that's a level they will defend vigorously. In any case, expect Nigerian rebels and additional BP PLC (NYSE:BP) shenanigans to occur at each of our downside levels.

All these figures are subject to change with the buck, and I'll do my best to keep up, but I expect that $60.32 to be a very powerful line as it has significance on all four continents.

Zman cracked me up with this comment: "From the "you've got to be kidding me" files, India's Finance Minister Accuses OPEC of Rigging Oil Prices. What about the word cartel does this guy not understand?"

Gold has no strength of its own, it is just moving counter to the dollar, but this train is gathering momentum of it's own and a move above $650 can take us back over $700 in the spring.

On the whole, it's a sidelines day and we'll see how the markets take their news before we check our schedules and decide which train will take us where we want to go.


8:30 Durable goods are a disaster! Down 8.3% and, even without transportation, down 1.7%. There's no good way to spin this, major purchases are simply off the table for consumers and our DIA puts should continue to do very well.

Boeing Co. (NYSE:BA) orders are off 44% due to monthly fluctuations (they were up 200% last month) and computers were of 25.6%, probably ahead of the Vista roll-out, so I don't think it's as bad as it sounds, and now we have to see if consumers are shifting spending or not spending at all.

Speaking of Boeing, they just pulled another massive order of 60 737s ($5.7B) from Air Berlin so if you blinked you may have missed that pullback.

I'd be playing for a drop in oil and gold ahead of the Bernanke speech, just for a day-trade, but I won't be here this afternoon and I wouldn't risk it if I can't watch it.

Motorola Inc. (MOT) got a mistrial on their patent dispute with SPS but that good news will be washed out by Nokia Corp. (NOK), who just lowered guidance as their radical discounting program is running out of gas (as I predicted). This is good for MOT and I will be buying more if the market stabilizes.

Tesoro Corp. (NYSE:TSO) broke above 200 day resistance at $66, let's keep a good eye on them as an early indicator of a refiner correction with Valero Energy Corp. (NYSE:VLO) and Holly Corp. (HOC) (Z's picks) trading in tandem. TSO is no leader but it just happens to be in a better testing spot.

Will Sirius Satellite Radio Inc. (SIRI) and XM Satellite Radio Holdings Inc. (XMSR) get together? I doubt it, this is no reason to buy either stock. Will one or the other get bought by a major broadcaster? Yep.

ExxonMobil Corp. (NYSE:XOM) got some bad news today as Alaska finally got fed up with them sitting on major land leases while making no production plans. They've been in default on the development since 2005 -- "Over the last three decades, Exxon Mobil has filed 22 development plans for the 106,200 acres unit. No commercial oil or gas operations have begun in that time."

Once again it bears repeating -- What about the word cartel does this guy not understand?

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