Options Trader: Thursday Morning Ideas

by: Philip Davis

Last Thursday was a disaster!

Keep that in mind today, as last week was a canary catastrophe when Berkshire Hathaway Inc. (NYSE:BRK.A) dropped below $110K, down 5% for that week, and we lost levels on the Nasdaq, S&P, SOX and transports.

In the wrap-up that day I said I wasn't worried, and that has worked out nicely for us as we played this rebound correctly. But I'm now concerned we are going to ping-pong off these highs and fall into a toppy looking range. It's very difficult as the markets just don't want to consolidate any more, it's either up or down with no rest in between.

wile_gravity 28 12 06With almost 200 Dow points added on in 2 days -- we can only conclude that the traders who left (volume is down 40%) felt confident enough not to place a lot of sell orders. Just holding half of yesterday's gains would be great today, and any positive move would be spectacular:

  • Dow 12,480 would be nice to hold, it was the resistance we fell off last Thursday.
  • Transports are much improved but MUST break over the 50 DMA at 2,617.
  • S&P 1,424 for the same reason.
  • NYSE 9,140 is our soft spot, but I think falling below 9,150 is an early warning.
  • Nasdaq MUST firm up over 2,425, and that is no big deal at all.
  • SOX are a big deal if they don't turn up! They were at 475 last week -- this is pathetic!
  • Russell is well above last week's levels and needs to pass 800 to lead us into a real rally.

US Markets 28 12 2006 Chart

As I said on Tuesday: "The "January effect" when it happens, is a small-cap mover so the NYSE and the Russell should lead the way."

bush-oil-crisis 28 12 06Last Thursday I also said that $60.80 was my downside oil target -- and here we are -- so let's not get our hopes too high ahead of inventories today. As usual, we will keep right on top of the action in comments but we are already being set up for failure by "analysts" who predict:

  • A 1.2Mb draw in crude (despite the ship channel closure)
  • A 220Kb BUIILD in gasoline!
  • A 590Kb BUILD in distillates!
  • A 60Bcf draw in natural gas (about half of normal for this time of year).

Keeping expectations ridiculously bearish allows them to make hay out of the actually bearish facts. Not only that but wait until we get a quarterly adjustment to inventories which is almost certain to show an additional build as oil is just proving to be far more abundant than Mr. Pickens would have you believe.

We won't know the story on the dollar until we get the existing home sales report at 10 but, as I said last week, the dollar is a report card on our economy, which seems pretty weak compared to Asia and Europe.

Gold still has to wrestle with that $630 mark so good luck to the gold bugs, one would think a booming Asian economy would create some sort of demand for their favorite metal -- one would think...

Oil Dollar Gold 28 12 2006 Chart

Speaking of Asia, the Hang Seng added another 276 points today and finished at 20,001 -- the Dow must look awfully small from way up there! All of Asia continued up with huge gains in steel stocks that should bode well for our United States Steel Corp. (NYSE:X) Feb $75s.

Despite large gains in the financial sector in general, ICBC fell 1.2% as someone besides me finally thinks they may be a bit overvalued for a bank.

Europe is taking a pause today and is likely to coast into the holiday around here, just under record highs, so we should be in for another interesting day in U.S. trading.


This is old news now but this video on the "Kramer Incident" is hysterical if you're a Seinfeld fan.


Just like a good football game, this market is best watched from the sidelines.

I've got a busy weekend ahead of me lining up some long-term picks for next year, but I'm not likely to get suckered into making new year's predictions -- I make predictions all the time, but only when I have enough facts to make good ones.

This silly game of getting otherwise reasonable analysts to make half-baked predictons based on whatever facts happen to be available on December 31st is one of the most damaging indicators that are followed by individual investors! It is perhaps even worse than "lists" of future picks, also hastily assembled to make arbitrary deadlines that have nothing to do with market conditions and everything to do with getting people's names in the paper.

Reviews are another story, I think reviewing what worked and what didn't work throughout the year is a vital tool in laying the groundwork for future success. "Those who forget the past are doomed to sit through reruns of American Idol" or something bad like that...

Read all of Phil Davis's articles on Seeking Alpha