Options Trader: Wednesday Wrapup

by: Philip Davis

Wheee! That was fun.... Can we do it again?

Unfortunately yes. The market is either consolidating for a breakout or getting toppy -- I'll let you know which as soon as we figure it out. But as I said this morning, I don't know, and, apparently neither do investors who rushed in and out of stocks today like the audience in a Bugs Bunny joke.

Much like Bugs Bunny pulling the lever that said "Intermission" and causing everyone to run out and crush Elmer Fudd, we played today's action pretty perfectly as we took our vacation on Friday long in the market and short on oil, and today (until 1pm anyway) those were both right on.

Bugs Bunny

The markets were indeed off to a fine start this morning and punched through record highs but pulled away from a fairly bearish Fed report that indicated the Governors aren't as wild about the economy as investors are. I think people are taking the minutes way out of context and the sell-off was unwarranted, even though I expected it to happen.

We were very comfortable with our choices today as the market failed us at pretty much all of our targets, so we got in and out of positions with pretty good timing:

  • Dow 12,550 fell at 1:20, giving us a great exit signal.
  • Transports gapped up today and stayed well above the 50 DMA -- our best sign of the day!
  • S&P did not hold 1,425, confirming the Dow drop at 1:20
  • NYSE did indeed lead us, falling below our 9,200 target at 11. How did they know the Fed minutes would be scary?
  • The Nasdaq was braver but also led the others down, turning under our 2,450 mark at 12:50 but giving us some small hope by closing slightly green.
  • The SOX gave a great start but finished soundly negative.
  • The Russell barely held the 820 mark after being soundly rejected from 830.

US Markets 4 1 07

Don't blame oil for this one, they did their best by dropping and dropping and then dropping some more finishing the day way down at $58.32 below my $58.71 wish-list target! Next stop may be $57.50 as the roaches scramble to leave the trap.

Roach Theory 4 1 07This is Roach Motel Theory in action as, after a week of weak volume, ExxonMobil Corp. (NYSE:XOM) and the others simply collapsed as quantity sellers tried to find other suckers buyers to join in the fun! 30M traded shares cost our pals at XOM $14B in market cap in just one day -- oops!

As is often the case, the front month contracts you can see got better support than the contracts you can't (if you can call a $2.53 drop support). February has it's own Roach City being built as just 41K contracts were traded with less than 8K contracts being shaved off what is now 291M barrels en route to Cushing in just 11 more trading days. Keep in mind that last month the contracts closed out with just 90M barrels slated for January delivery so, even ignoring the fact that February is a shorter month, there's still 200M contracts that need to get sold to someone -- any takers?

The March contract got few takers as they are already stacked up with 148M barrels and that cost the sellers $2.72 a barrel, dropping it all the way to $59,41, while April finished at $60.34 and May dropped a whole $3.03 to finish at $61.05. Our reference contract, Dec 2012, lost $2.10 to finish down at $62.41 -- even at that "discount" there were only 4 contracts snapped up by long-range bargain hunters.

Gold ran up to $642 in early trading but then got yanked back into negative territory and finished the day at $629, posting an $8 loss for the day. We were spot-on calling the top in gold when I pointed out, "Notice the miners are not doing well with gold at $642! That means we are very likely to get a dollar bounce here which will shove oil right off a cliff! I'm grabbing some XOM Jan $72.50 puts as a pre-roll for .50, ready to take some of my other Jan puts off the table on a bounce."

That call was a very nice moneymaker for all of us!

Oil Dollar Gold 04 01 2007

Boy I can't wait to see what happens tomorrow!

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