Options Trader: Wednesday Morning Ideas

by: Philip Davis

Which way Wednesday? I might have half my answer at 8:30 when the GDP comes out (see update below).

Asia had a big sell-off today as investors became concerned that China would turn its attention on the markets in general after taking steps to rein in the construction industry. The sudden jump in oil prices didn’t help matters either… just one day after gaining 4%, China Mobile Ltd. (NYSE:CHL) dropped 3% in overnight trading - reason #100 why I hate Chinese stocks!

The Hang Seng took a big 350 point hit while the Nikkei gave back 100 but we need to keep in perspective that the Shanghai Composite Index was up 134% last year, so small pullbacks in Asia are to be expected on any bumps in the road!

Honda (NYSE:HMC) had an 8.8% rise in net on "record U.S. demand" (at least we’re buying cars from someone) and raised guidance. This will be good for our calls but let’s be careful as today’s news may reverse a positive trend. Sharp (OTCPK:SHCAY) posted an 8.5% rise in net but what caught my eye was a 28% increase in sales in the A/V division. The company very cleverly went for the high-end market with their Aquos TVs but their chip business dragged the company down, as did Toshiba and Fujitsu, all three blaming price declines. As I said last night - bye-bye, SOX!

Europe is only having a mild decline ahead of the GDP report but they need to make a decision based on that alone as the Fed comes after their markets close. The credit card wars continue in Europe and we are still just too far ahead of the game on our MA shorts as they are trying to spin this so they RUN the new credit system but even if they do, rate and fee cuts are the primary goal of the EU.

Back home, we could easily go up and down 100 points today, so get ready for a bumpy ride I will be shocked if the GDP isn’t at least at my 3% mark, despite an expected drag in the auto sector:

• Dow range is 12,400 to 12,600 and we are smack in the middle of it, we don’t want to fail 12,500!
• Transports need to hold 2,700, below 2,675 would be very bad!
• S&P range is 1,420 is a big danger zone.
• NYSE range is 9,000 to 9,250 - I would HATE to give up 9,200 again…
• Nasdaq is in big trouble if the SOX crashes. Range is 2,400 to 2,500 but 2,430 needs to hold.
• We just need to hope the SOX can hold 450, on the chip news we’ve been getting, that will seem like a victory.
• Russell has been our shining star and needs to take leadership. Breaking 800 would be just the ticket to spark some further rally talk.

US Markets 31 01 2007 Chart

8:30 Update: 3.5% GDP, huge beat - This is great as only myself, FedEx (NYSE:FDX) and seven other economists were up this high in GDP, a huge beat in our Jan 2nd predictions! Big consumer spending, inflation not bad at all (drop in oil). Housing spending down 19% (watch TOL go up on this!) - these are huge numbers but they possible put the Fed back in tightening mode, which is something they should do, unpopular though it may be.

BA has great numbers and raised guidance but we knew that, that’s why we didn’t sell contracts against our leaps this month. We’ll keep an eye on this in case the buying gets irrational… Time Warner (NYSE:TWX) was good but not great with AOL losing another 8% in revenues. Their cable division supported the rest of the company (no surprise there looking at my bill).

Oil will do whatever it does today and we’ll follow our rules and not try to guess direction ahead of the game. I would love to see them push a test of the 50 dma at $58.50 but that’s not very likely (but neither was a $3 gain yesterday). Platts (a pro-oil data service that CNBC uses like a bible) is calling for huge builds of over 1.5M barrels in crude and gasoline with a decline in distillates as cold weather sets in. By setting expectations as very bearish, they are able to spin slightly bearish results as bullish!

$55 is still the level to watch on the downside with $54.60 being a point they can no longer afford to cross after yesterday’s firework show. We’ll be watching the contract movements closely today. ZMan calls for a two-week moratorium on short positions but I’m not going to set a timer just yet, let's see a two-day trend before we call it one. On the other hand, I’ve learned to think long and hard before going against our energy expert!

I sure don’t see any reason to sell the dollar in today’s report so we’ll see how we do at the 85 level, but we should at least get another test around 85.31 before there is any further pullback. Watch the Euro to break below $1.29 (also tested briefly last week) and gold at $640 for early signs of a dollar move (if ever).

Oil Dollar Gold 31 01 2007 Chart

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Purge, purge, purge! We have to start cleaning up our positions, we are left with a lot of losers after a spectacular early part of the month and it’s time to let go and move on. I’m having trouble letting go, and I can’t tell if it’s sentimentalism or the perfectionism I warned about in yesterday’s "Trading Vices" article.

We need to be nimble in late earnings season and we can’t be nimble watching too many positions. Today is a very good day to reflect on the difference between the long-term portfolio, where we put real money to work, and the short-term portfolio, for our "mad money." We will focus on money management next month as there is nothing more important in a choppy market than managing your positions - something that fell by the wayside as we racked up record profits at the beginning of the month.

Be very careful out there! We have potential market movers at 10:30 with inventories and again at 2:15 with the Fed so all directions are only until further notice….