Options Trader: Tuesday Morning Ideas

by: Philip Davis

Can we do it again?

It would be great if we could tag on another 100 points and blow through all the recent highs, break out of orbit and leave all the cares of the world behind us:

No more declining dollar. No more ballooning deficit. No more rising commodities. No more declining housing market. No option scandals...

Earth 4 12 06Up here in Spaceship Market we don't concern ourselves with such mundane, earthly matters. Dow 15,000 is so close up here we can almost reach out and touch it -- we just need a little more fuel!

Chinese demand doesn't seem like such a big deal from 220 miles up and we can hardly even see Iraq, North Korea, Nigeria, Chad, Fiji (coup today) and who can even tell where Iran is pointing their missiles at or where Kim Jong Il is testing his.

Perspective is a wonderful thing for those of us who can afford to have it!

Earth Glance 4 12 06Let's just remember where we all fit in the GRAND scheme of things as we all click on our mice and move our little virtual piles of virtual money about while we avoid contemplating that this is just one of 125 billion galaxies in the known universe and there are 100 billion stars in just the Milky Way yet we are very likely the only species on any of the possibly 1 trillion local planets that goes around thinking that the whole thing belongs to us.

Just something to think about for those of you who complain that your purchase of an option caused the stock to dip!

Back here on Earth I'm getting some annoying warnings from my own navigational computers that are saying something about not having enough fuel to break orbit as we've taken on an additional $2.4 trillion in extra weight since the summer but we're going to ignore that flashing red light until it starts beeping... What? Oh it's beeping... Well just turn up CNBC really loud so we can ignore that too!

Perspective (or lack of it) will be very important this week as we try to make the same levels we didn't quite make yesterday.

The Hang Seng is back on a tear with a 241 point gain, taking them close to 19,000 again, a party caused by Hong Kong dropping plans for a "goods and services tax." Oil stocks dragged down the Nikkei, despite a rebound in oil prices in overseas trading.

China Telecom Corp. Ltd. (NYSE:CHA) rose 15.6% and China Netcom Group Corp. (NYSEARCA:CN) gained 8.5% on expectations they will win licenses for 3G Networks. This will be a negative for China Mobile Limited (NYSE:CHL) but not too bad and a big plus for all the phone suppliers who have 1.2B people awaiting next generation phones. Those Motorola Inc. (MOT) Jan '08 $22.50s of ours have so many ways to pay off!

Europe is up a bit this morning and I think they finally get it and are willing to move on without us. A lot of European traders they interview are looking East a lot more often than they are looking West when discussing business prospects.

Remember when you look at that globe, Russia is part of Europe now! When we talk about the Western Power block, it's just U.S., Canada and Mexico (because Central and South America certainly want little to do with us) over on our side of the planet...

We'll see today how our policy of de-facto isolationism is paying off for us as the markets take a major test of our comfort levels:

  • Dow 12,300 is a must! Failure at 12,299 or less.
  • It's not going to happen without Transports at 2,650
  • S&P made a new high yesterday and needs to lead us to 1,420 but let's be happy with 1,410
  • NYSE also breaks new ground and 9,050 would be great
  • Nasdaq breaks out at 2,469 -- fails under 2,450
  • SOX need to show us the money over 490
  • RUT will test 800 and must hold 790

US Markets 5 12 06

If we can break these levels, not even $65 oil can weigh us down! Productivity numbers are OK and costs are under control, housing looks like the worst may actually be over and a weak dollar may force some sector rotation we haven't been getting before.

So we can be optimistic but very cautiously so. As I said yesterday, the pattern forming is very similar to the one we had just before Thanksgiving, so now we'll get to see what kind of follow-through we get in a non-holiday week.

Oil is getting a mega pump in European trading this morning and will retest my $63.09 target from below. If we can form a ceiling here, we may finally be ready for the next leg down in prices.

It's still all about the dollar and gold will tell the tale (as it's hard to track to buck intraday). We REALLY need to bounce the dollar off the 82.50 level otherwise the next stop is 2.5% further down the road, just above 80 (a tragic 2 year low).

A bounce in the dollar will send gold down fast so keep an eye on the $650 line to see if we hold it. Absolutely out of the Barrick Gold Corp. (NYSE:ABX) calls if gold fails to hold it!


sanofi-aventis (NYSE:SNY) is the anti-Pfizer today with a very good result from Acomplia in Phase-2 studies. They face heavy problems from generics on their main lines but the Mar $45s were $1.80 last night and I'll want to look at them if they are not too crazy at the open.

U.S. Mortgage delinquencies have doubled in '06 causing a ripple effect in the $10T mortgage market. 4% over 60 days may not seem like much but that's $400B missing from some banker's ledger at the end of each month. That's a lot of money -- just ask Uncle Billy!

Who are the bankers who get hurt the most? Usually it's sub-prime lenders, but most of them have been bought up the past few years by Investment Banks like Morgan Stanley (NYSE:MS), Merrill Lynch & Co. Inc. (MER) and Bear Stearns Companies Inc. (NYSE:BSC). They are scary to short, but see my comments yesterday about what happens when you have too few people with too much money!

Retailers are cutting back on free shipping. If I had to have something confirm that it's a great on-line shopping season that would be it! They are doing so well they don' need no stinkin' perks...

No free shipping means Amazon.com Inc. (NASDAQ:AMZN) users have all the more reason to be loyal as they have a club plan that's been very popular (and initially painful for Amazon) so let's keep an eye on them but, as I said earlier, the best play there is to short them on Christmas Eve.

eBay Inc. (NASDAQ:EBAY) held the 200 DMA and is being met by the rising 50 DMA by the week's end so we may get a pop there with the $32.50s at just .60 but there are so many people on that side of the trade it worries me. I'd rather play the Jan $32.50s on a drop to around yesterday's low of $1.25 if we get so lucky.

Balmer finally made an attempt to talk up Microsoft Corp. (NASDAQ:MSFT) stock and they really need something to break $30, but I don't think 13% growth is what people were looking for. I don't get it myself unless they just don't think Vista will win a lot of converts.

If we don't hold my admittedly greedy levels, let's take the "rally" with a grain of salt, the air is pretty thin up here and we might just be getting a little giddy.

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