Options Trader: Friday Morning Ideas

by: Philip Davis

I can’t wait to get out of this week!

What a disappointment it’s been. We’ll have to wait until next week to see how much of this action is option pinning and how much is a genuine change in market sentiment.

Gravity LessonsAs is often the case, when I take a day to step back and objectively observe the markets, I still see a lot of underlying strength, but that doesn’t mean we can’t have a nice, healthy correction here. As I said on Wednesday the 10th:

"Are you prepared for a down 295 point day? Let’s remember I am a bull with a short-term target of Dow 11,500! I would like to say I would be pleasantly surprised to be wrong but I will not be able to really enjoy additional advances unless we get a long-overdue correction out of the way. As I said yesterday, if the iPhone can’t inspire people to get back into tech, then we really do have to lighten up at this point."

Did everyone cover themselves? I hope so, because it will be very hard to go through the weekend without a good mix of puts and calls as pretty much nothing is being rewarded this week and the sentiment shift could lead to that long-awaited correction. I said yesterday in comments that I have no idea what will happen next week - and I am prepared to stand behind that statement! While it would be a shame to turn back here, it’s all part of normal market action and very much a part of orbital physics as well!

Asia was mixed, with tech shares killing those markets too while Europe is off slightly, also on tech.

We won’t know until next week - whether this week’s action was natural or the result of a massive manipulation of stocks to force long-standing leaps out of the money (see Thursday's comments) so the best thing to do is wait and see.

* Let’s see if the Dow can hold 12,550.
* Let’s see if the Transports can hold 2,750
* Let’s see if the S&P can hold 1,425
* Let’s see if the NYSE can hold 9,100
* Let’s see if the Nasdaq can hold the 50 dma at 2,430
* Let’s see if the SOX can get back to the 200 dma at 461(our deadest canary!).
* Let’s see if the Russell can retake the 50 dma at 785

Cycle of Orbit
Anything less than this and it is very, very likely that we have not broken orbit and will need to take another pass around 0% gains for the year before we can take another run at new highs!

As you can see from the image on the right, all obits return to the primary ( the 200 dma) , the cycle repeats until you establish a higher or lower orbit but it takes a lot of work (money flow in) to break free and, with money flying out of the commodity sector, there just isn’t enough thrust to break us free of the gravity of market neutrality. The real trick at this point is to accept a pullback and just try to avoid a crash as we gear up to make another pass.

US Markets 22 01 2007 Chart

Newsflash for oil analysts: Demand is price sensitive! Yes, I know, imagine that! It’s true, all that stuff you slept through in economics class actually does come back to haunt you no matter how many times you get on CNBC and say it isn’t so. Developed nations (the OECD) used .6% LESS crude last year than the year before, the first decline in 20 years!

Even including developing nations (the dreaded China!) global demand growth slowed from 3.9% in 2004, to 1.5% in 2005 to .9% for 2006 - far shy of the 1.8% growth we’ve been told there was!

From the WSJ: Some analysts see larger, game-changing forces in motion. One is the rise of nonoil transport fuels. "Last year was a tipping point in a lot of ways," says Philip Verleger Jr., an oil economist who heads PK Verleger LLC. "Biofuels will take bigger and bigger bites out of petroleum demand," Mr. Verleger said, noting climate-change and security concerns relating to the supply and use of petroleum. "Alternate fuels will take up all the growth, leaving petroleum demand static in the next two or three years."

Forecasts by the IEA suggest biofuels output could rise to the equivalent of more than five million barrels of crude oil a day by 2011, close to triple output of such fuels in 2005. Global oil demand last year rose by 780,000 barrels a day to 84.4 million barrels a day, the latest IEA data show.


ROFL!!! I warned them, but noooooooooooooo, they didn’t listen to me! Too late now, wheels already in motion, demand destroyed, competition enabled, long-range policies enacted… thanks for playing Global Monopoly OPEC - better luck next time!

As I said yesterday, let’s not get too excited with the oil puts. We’ve already made enough money to make most people’s year and it’s only January so let’s hope these jokers can get some sort of BS pump going in order to give us some nice opportunities for new entries. Just as we embrace the pullback which gives us a chance to pick up great stocks like Apple cheaply!

We’ll see if $50.79 holds as a topside target today with $49.50 being my next projected support level but we need to shift our attention to the March contract, which turns active on Monday. The energy traders are still playing this wrong and if they can’t engineer some sort of crisis over the weekend that gets people back in oil, we could be seeing mid to low $40s by the second week of March.

Gold fell below the $630 level again and looks like it wants to recover but the CPI data takes out the inflation story and the strong US economy takes out the weak dollar story and $50 oil gives Iran something else to worry about besides building nukes (and what ever happened to Kim Jong Il? The things they ask us to panic about are so fleeting…) so it’s going to be hard to sell gold as a "safety net."

As with everything else today, we have to wait and see!

It’s all about the dollar and our old buddy, Tom2oc, agrees with me that the dollar is in an uptrend so we need to watch it closely for a possible breakout once we get this week behind us…

The best sign for next week we can hope for is a rally into the close but let’s be very careful out there!

Oil Dollar Gold 22 01 2007 Chart

I’m calling shenanigans on Bank of America Corp. (NYSE:BAC)! Their analyst downgraded ETFC despite a 37% jump in income, which beat estimates by a penny. Why? Because of the pressure brought to bear on trading companies by idiots like BAC who are giving away free trades. The fact of the matter is BAC has been running this program all quarter and has gotten little interest from serious traders because - surprise! - service and execution actually matter! This call represents a massive conflict of interest and explains a lot of what is going on with the brokers this week.

General Electric (NYSE:GE), as usual, is the greatest company on the planet with income up 113%, to $6.5Bn on $44.6Bn in sales. Sure it’s not as impressive as XOM’s $10Bn but Exxon has to sell $100Bn worth of product to make that. We’ll see who makes more money in 2007! One would think our June $37.50s would be in good shape but, the way this market’s been going, who knows? Possibly bears will focus on the one under performing division (out of 6), plastics - which they are looking to sell.

Motorola (MOT) will be dangerous because the headline will read that quarterly profit drops 48% to $624M but last Q1 had a one-time gain of $520M of the $1.2Bn so the real Q4 ‘05 number was $600M. No matter how you slice it though, 2006 ($3.6Bn) was still short of 2005 ($4.1Bn + the $520M). Units shipped were up 47%, indicating a sharp gain in market share but the question is - at these margins, do you really want this market?

Schlumberger (NYSE:SLB) had a big beat - we forgot about them as they were going to be our cover play into the weekend! Oh well, they’ll be a good indicator of oil industry sentiment as they forecast continuing growth.

Toyota Motor Company (NYSE:TM) is recalling 533,000 Tundra and Sequoia pick-ups due to steering problems - this could be the break we need to get an entry on this runaway stock so we’ll keep an eye on it! The last big recall they had was May ‘05 and the stock dropped from $80 to $70 (12.5%), this could be worse because, just yesterday, the company made a statement that they expected huge growth from the Tundra.

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