Options Trader: Thursday Wrapup

by: Philip Davis

Dow all-time high!

Rocket Ship 12 1 07Microsoft Corp. (NASDAQ:MSFT) shot up 3.5% today as Vista won the "Best of CES" award -- that's over $10B in market cap, so one could only hope someone on that design team gets a raise!

Genentech Inc. (Private:DNA) had huge earnings and Intel Corp. (NASDAQ:INTC) added 2% as poor AMD is firmly back in 2nd place. Apple pulled back a little but not much and Google is brushing back up against $500 again.

That means we have ignition on our main Nasdaq thrusters and we could get a major rally with all engines firing as they can once again burn a limitless supply of cheap(er) oil to propel the markets on to new heights.

It was another exciting day of trading as we jumped on another round of oil puts despite (or because of) a very big, and very fake, morning pump. Considering I started yesterday determined to cut back on positions, we sure opened a lot more of them as we certainly don't want to miss any of this!

At 1 p.m. news crossed that Cathy Minehan (Boston Fed -- voting member -- Dove) was resigning. I noted at the time that if the market didn't mind that uncertainty, we were probably going to have a huge rally.

US Markets 12 01 2007 Chart

"They" attempted to rally the oil sector ahead of the natural gas inventories, but the 10:30 report gave a paltry draw of 49Bcf, nowhere near enough to encourage buyers, and the whole "rally" was over by 11:15. As I said this morning as they were pumping oil up to $53.90 pre-market: "I don't know if there is anything they can do at this point to stop the slide with 150,000 February delivery contracts in need of selling, but we'll certainly keep a close eye on it!"

I guess there was nothing they could do -- Oil fell from a high, pre-inventory pump of $54.70 and blew right through my $52.50 target for the day to finish at $51.88 on huge volume.

Trading was again fast and furious at the NYMEX but they did manage to pare off another 25,000 contracts from contracts, bringing the total open down to just 226K with 6 trading days remaining. It cost them $2 to sell those 25,000 contracts, even though March was pushed up to 261K, a pretty hefty total this early in the cycle!

The front month contract was supported (if you can call dropping $2.14 to $51.88 support) while longer contracts collapsed at an accelerating rate. The March contracts dropped just $2.12 (as they were rolling Februarys into them) but the April contracts fell $2.26, May $2.46, June $2.62, July $2.73, Aug $2.82 and $2.90s through Jan '08 which are down to $57.87 after testing $55 in today's trading.

Remember in August when people were trading the Jan '08 contract for $80 a barrel on Goldman Sachs' recommendation? Ah, good times... Strangely this destruction of $800B worth of shareholder value in commodities and commodity stocks that were touted by brokers all summer has done nothing to hurt them as apparently every single brokerage and hedge fund on the planet was on the right side of this trade except Amaranth! Good job boys!!!

The dollar pegged slightly higher but, as I said, there are plenty of people on the wrong side of that trade! It finished the day at 85.28 and seems to be taking aim at a test of the 200 DMA at 85.5. If the dollar breaks through there... you know, I don't even know what will happen if the dollar breaks through there -- it's almost unfathomable! But it will be something, I can tell you that....

I can tell you that gold will fall right below $600 the minute the dollar takes out the 200, unless of course something blows up (other than the things that usually blow up in Iraq, Afghanistan, Nigeria...).

Oil Dollar Gold 12 01 2007 Chart

All in all, an incredible day to be in the markets -- hopefully the start of something really spectacular!


Our stops saved us from a tough morning in oil but we kept many plays open and at 11:35 I said: "...these are likely to be good buy-in spots for fresh moves so let's watch the Valero group for signs of a real downturn as crude is not holding $54.34, our last significant barrier" as we opened some fresh trades at pretty much the perfect spot.

I personally took a beating on the Hillenbrand Industries Inc. (HB) puts as I stupidly did not set stops on them and was too busy with other things until it was too late to fix! Oh well, they made good plunge protection, but I'll have to lighten up tomorrow if they keep going up -- silly though it is as the fundamentals for that industry haven't changed at all... Amazingly though (and I'll do a review on the weekend) we had amazing gains on virtually everything else we picked! I'm amazed and I picked them!

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