Options Trader: Thursday Morning Ideas

by: Philip Davis

Wow, I think I need a rest after yesterday...

We made 21 trades after starting the day with none -- once upon a time 21 trades was a busy WEEK! Still, we grab our opportunities when we can and we have a lot of open positions (albeit small ones as we went to cash 2 weeks ago) to manage in what looks to be a tricky market.

Let's try to keep some perspective today as you can't even call this a correction yet -- we had a 200 point drop the day after Thanksgiving and THAT wasn't even a real correction since it was the first real pullback in a 3 month run of 1,200 points. We are still up 1,500 points from mid-July, and if we are rotating out of commodities there is bound to be some pain in the process.

Chinese Economy Der Spiegel 4 1 07

China had a bit of a pullback this morning with a 387 point drop. But, like us, it's a drop in the bucket as they have gained 1,200 points since 12/22. We just had that discussion yesterday morning when I said:

"I'm looking for a top to short. If the markets are going to collapse, they will go first and they could drop $7 in a day easy. I'm thinking I'd rather take iShares Trust FTSE-Xinhua China 25 Index Fund (NYSEARCA:FXI) $120 puts when it tests that level than Diamonds Trust Series 1 ETF (NYSEARCA:DIA) puts as I think FXI has a LOT more room to fall." Too bad we were so busy with other plays as the index made a nice top out at $118, and I'm sure it will go way down this morning.

There may be a chance to grab FXI $114 puts early if we put a bid in for $4, so let's give that a shot pre-market. This is just a market trick you can sometimes get away with -- putting in an early high bid on something that hasn't opened yet but is gapping. With luck, you can scoop up sell orders from yesterday that haven't cancelled.

Not to worry about the Hang Seng -- they managed to hang onto the 20,000 mark where they sit a comfortable 40% ahead of the Dow on the 20-year chart. Of course that's nothing compared to the Nikkei, which gained another 127 today, bringing them to 17,353 -- outpacing the Dow by 150% over the past 2 years (notwithstanding the very nasty 50% correction they had early this year!).

Europe is pulling back a little more than half a point this morning -- still reacting to our Fed minutes which came out after they closed. The FTSE, for example, gapped down 40 points, lost another 20, but seems to be stabilizing (7am).

Our futures are down in pre-market so, sadly, it's time to turn our attention to bottoms to look out for. Yesterday's action wasn't bad and all we need to do is break those ranges by next week and we are back on the way to the moon, but running out of fuel at this stage may cause the entire mission to be aborted!

  • Dow 12,400 has to hold -- below that is no support until a very critical test at the 50 DMA at 12,300 that we'd rather not take.
  • Transports need to continue positive and must hold the 50 DMA at 2,625.
  • S&P must hold 1,410 or it will be testing the 50 DMA at 1,400.
  • NYSE 9,100 has to be a line in the sand, not getting back over 9,150 should be considered a problem.
  • Nasdaq MUST hold 2,425! If we are rotating out of commodities it will not be enough to move into transports, tech must take leadership.
  • The SOX blew it for us yesterday and let us know to short the Qs. They are still trapped in a range between 460 and 470 and whichever way they break out will determine the fate of the market!
  • Russell needs to pass 800 to lead us into a real rally and must not fail 780.

US Markets 4 1 07

Sinking Tanker 4 1 07Oil is just way too much fun this week! We are now watching my lowest low target for the week, $58.71, as UPSIDE resistance with $57.50 being the line in the Arabian sand that they dare not cross. As I said last week, it's all right there on the chart once you realize that manipulation has thrown up a lot of false data points.

Let's not forget that those manipulators are still out there, but the Democrats are coming and this may not be the best time to leave their greasy fingerprints on some very obvious bogus trading.

We'll see if the dollar can break over 84 today -- let's keep an eye on gold $630 to see where the sentiment takes us.

Oil Dollar Gold 04 01 2007

Phelps Dodge Corp.'s (PD) incredible drop yesterday indicates things are going very bad in the copper world, something I've been looking for since November 15th, when I said:

"You won't hear this from U.S. pumpers but Australians are very concerned about Chinese demand dropping rapidly! LME Copper stocks are up 38% since mid-October, at the highest level since May 2004, when copper was at $112 (now $312).

"Can copper pricing be sillier than oil pricing based on the same myth of infinite Chinese demand? Stay tuned!"

I was a tad early with that one as the PD purchase gave copper a BS boost, but it didn't last, and the way PD is trading, I'm not sure that deal can last if copper breaks below 225 (theoretical support).

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I'm sorry I don't have too many market picks but I'm a lot more concerned with keeping us out of bad trades than entering a bunch of new ones until we set a direction.

Last January we had a great first week followed by a huge sell-off and, as were are mainly cash now. I'd rather sit out another week until our stars come back in alignment. It is very tempting to jump on things (like Apple Computer Inc. (NASDAQ:AAPL)) that are finally pulling back a bit after running so far away from us but we haven't even really pulled back yet and it's important to keep perspective.

If I had to pick a perfect market move for this year, I'd say that we consolidate between 12,000 and 12,500 for a couple of months and then break 13,000 in April, moving on to our next pullback at 14,000 to set us up for a year-end run to 15,000 (which we won't make). So if my 'perfect market' is a 500 point drop, you can see why I'm very concerned about the possibility of an imperfect market!

  • Costco Wholesale Corp. (NASDAQ:COST) same-store sales were up 9% for December (try the shrimp -- it was a big hit New Year) but total sales were up 14%. This stock has barely budged all year, and falling gas prices will help them tremendously as it's a loss leader for them. Feb $55s are just .85 but will likely be higher at the open, we can always sell Jans against so I'll pay a bit more.
  • Chevron Corp. (NYSE:CVX) Mar $70 puts are $2.45 and there's a good chance you can sell the Feb $70 puts for more than that in the near future. Let's not go crazy with oil as it would be too easy if it all just falls apart right now but we don't want to miss out on some good plays either.
  • Santa Fe International Corp. (NYSE:GSF) is being unfairly trashed for being in the oil sector -- if natural gas doesn't collapse, they should bounce back and we will add them to the Valero group as a watch for now.
  • Cramer just made Transocean Inc. (NYSE:RIG) one of his 3 best stocks for '07. Halliburton Co. (NYSE:HAL) too. So let's keep an eye on them for a short entry today if his minions are actually that stupid!
  • How low can ExxonMobil Corp. (NYSE:XOM) go? Well, they were at $66 in September when oil was at $64, and I'm pretty sure XOM still sells oil and not iPods, so I like the Feb $72.50 puts at $1.80 as a pre-roll for our $75 puts, which are already a double at $3. I'm hoping they bounce so we can take a leap put as an income producer but I'm going to start with the Jan '08 $72.50 puts for $3.90 as they could work out great if this thing tanks. The ridiculously low price shows you how bullish most people still are on this stock, the Jan '08 $75 calls are $7.10 for comparison.

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Holy smokes with these builders! Can Lennar Corp. (NYSE:LEN) have said things could possibly be any worse? This is everything Prof predicted in 2005 finally coming to pass -- weak markets, cost overruns, orders drying up and land write-offs of hundreds of millions of dollars...

Earnings for LEN are 1/17 and this year should be $5.50 vs. $8.32 last year, while next year looks like $3 if they're lucky. Meanwhile the stock is trading at last year's lows. $3 per $50 share of a builder is a P/E of 17 -- a little high (double) what a top-notch builder fetches.

LEN was at $45(ish) for most of the summer and I think that was generous; the Aug $45 puts are $2.15 and can turn into a nice little income producer if we get a good dip and won't get hurt too badly if we're wrong (which would be quite shocking!).

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