Options Trader: Wednesday Morning Ideas

by: Philip Davis

I don't even know what to say at the moment!

I have a lot of picks lined up but this is not the time to hit them, there are far too many unknowns jumping into an unusually short week like this and playing catch-up with the global markets.

Over in Asia, the Hang Seng has moved another 400 points ahead of us since Friday, ending this morning's session at a whopping 20,413. The Nikkei is reserved by comparison, perhaps a little toppy at 17,225 or perhaps consolidating for a power move! Thailand took a 3% hit today, this time over a string of bombings in Bangkok.

Hong Kong November retail sales rose 7% over last year but Indonesian consumer prices rose 6.6% and concern about inflation is spreading throughout Asia. If Asian CBs tighten to fight inflation -- how low can the dollar go?

Europe is taking a break from a huge 1.5% gain yesterday and are flat into our open, waiting to see if U.S. investors are willing to run with this up market thing.

Breaking Orbit 3 1 07

Before we get too excited about breaking orbit today, let's make sure are fully out of our bearish gravitation signals before we unbuckle our belts and attempt to float about the cabin.

Our markets will open higher! That is a fact, there are millions of unfilled foreign orders from 2 days of trading that we missed so we can set our expectations fairly high.

When you are slipping away from stock market gravity you should feel an acceleration, not a pullback at this point. What happens is new money (thrust) is poured into the markets while the passengers (shareholders) sit tight, confident that they are safe and secure on the way to higher orbits (a higher trading channel).

While there will always be some worry-warts who get space sickness and throw up (take profits), a real breakout should give us both an increase in volume (money flow) and a nice, healthy move up with little pullback if we are truly in the early stage of a major move.

US Markets 1-3-07 Chart

Sorry, I detest the role of chicken little on a day we should be all excited, but my annual review put me in a cautious frame as we were very excited for the first week of January last year only to end the month with a very pathetic whimper.

The Nasdaq shot up from 2,220 to 2,330 between Jan 3rd and Jan 11th but was back at 2,240 on the 20th and was range bound until it fell off a cliff in May, back to 2,050. 2,400 is the 100% rule from way back in October of 2002 which was the tail end of the drop from 5,000 in March of 2000.

So, if it's a real rally, we have a looooooong way to go, both to catch up to our old highs in tech and to catch up to the foreign markets, who left us in the dust long ago.

Oil will, as usual, set the table for our market mood and will continue to test my break point at $60.40 but the 1% drop in the dollar yesterday means they've already lost if they can't open a good .60 higher.

Oil Dollar Gold 1-3-07 Chart

Bear Market Dollar

Since the dollar is loaded with bearish sentiment and oil traders are well aware of this, they must be exceedingly bearish on crude at the moment. There are still 300M barrels heading to Cushing, OK if they can't get rid of those contracts in the next 12 trading sessions and taking 8M barrels out of inventory last week just isn't quite going to make enough room to store the other 292M!

Forget oil though, it's 50 degrees in New York again this week and we may be halfway through January before we get some freezing weather! There is 3.2Tcf of natural gas in storage and even if we draw down 100 Billion cubic feet per week for 6 weeks, we will still have more gas in storage than we did last January!

Natural Gas Storage

Now, here's the problem: We really can't store more than 3.4Tcf in this country. Between March and October '06 we added 1.6Tcf into storage so we need to clear out another 1.4Tcf in the next 90 days or Chesapeake Energy Corp. (NYSE:CHK) will have to shut down even more production than they already have. They should have sold it while you could... suckers!

So put another shrimp on the barby because we are about to have a natural gas blow-out! Accu-Weather says snow on 1/14 followed by 39 degrees on the 17th -- that's enough to make an energy trader shiver!

Aside from our pals at Chesapeake Energy Corp. (CHK) and EnCana Corp. (NYSE:ECA), we need to look at the integrated majors, many of which we already have puts on as they sell plenty of gas too. ConocoPhillips (NYSE:COP) is still miles above where they should be if gas is going below $4 but let's wait until tomorrow's inventory to see what shenanigans they will be up to in Nigeria this week.

Gold flew up to $640 while we were off but let's wait and see how the miners respond before we get back on that wagon.


I'm waiting to get my bearings on today's action before making picks and, if we don't break out of our levels, I am more likely to take a few more off the table but I'm hopeful we are gearing up for a sustainable rally here.

Nardelli resigned as CEO of The Home Depot Inc. (NYSE:HD), a real shame because we gave up our May $40s out of frustration on the 20th at just $2.45 (up 26%). The stock should respond favorably at first but pull back.

Let's watch the action on Intel Corp. (NASDAQ:INTC), Hewlett-Packard Co. (NYSE:HPQ), Google Inc. (NASDAQ:GOOG), Apple Computer Inc. (NASDAQ:AAPL) and Microsoft Corp. (NASDAQ:MSFT) to see if the Nasdaq can make real progress, but it will be all about the SOX today.