Options Trader: Thursday Morning Ideas

by: Philip Davis

Fasten your seatbelts, we’re in for a wild one!

Asia saw something they liked this morning [perhaps it was D.R. Horton's (NYSE:DHI) CEO’s statement that 2007 was going to suck] and exploded out of the gate. With all due respect to the elloquent Mr. Tomintz, I think that our own Super Banker, Paulson, made all the right moves on his China trip as he turned around market after market on his world tour.

Boom and Bust

"Efficient, developed capital markets will allocate resources more effectively and efficiently, allowing China to continue growing at a healthy pace, while spreading prosperity throughout the economy and giving Chinese citizens a better return on their savings and investments," Mr. Paulson said in prepared remarks for a speech today at the Shanghai Futures Exchange.

Way to read them the riot act, Hank! (He was supposed to be there to push for currency reform, but turning around global markets is so much more fun).

The Hang Seng gained 256 points (24% retracement of drop), Nikkei up 325 (28%) and India up 435 (28%).

Speaking of Paulson, Goldman Sachs Group (NYSE:GS) boosted Toshiba’s stock 4% with a buy, citing "a likely bottoming in the price cycle for NAND flash memory in the January-to-March quarter." Nippon Steel gained ANOTHER 3.5% and like I said yesterday when Daewoo and Posco rallied, "people over there aren’t all that worried about a major slowdown."


Not much of note is going on in Europe (as usual) other than the fact that Russia is trying to give Iran a nuclear reactor but Iran can’t keep up with the payments ($25M per month). Atomstroiexport Vice President Yevgeniya Neimerovets said Iran hasn’t made any payments since Jan. 17, which "has put our partners and subcontractors in a very difficult position." Do I even have to mention how frightening it is that, not only are the Russians building reactors for other countries, but they do it often enough to have a company called "Atomic Exports."

The DAX is on a 30% rebound (6 AM), the CAC 40 has retraced 40% and the FTSE has come back 37% in the last three sessions.

Pure Fibonacci retracement levels are 38%, 50% and 62% so bear that in mind as we try to determine whether this is a rally, a bounce or just a minor interruption in a significant downturn. Once we get past a 50% retracement of the drop, we can pretty much assume this very wimpy pullback was nothing more than a downward spike - just one of those great coincidences where a relatively small foreign exchange sells off, an important person says something negative about the market (like Recession!) and the current Fed Chief says we are heading into a "deficit storm."

All this causes retail shareholders to panic, dumping all their nice gains so that institutions can come in and scoop them up prior to taking the markets up to the next level.

We went through the same sort of shake-out at Thanksgiving, but let’s not sound the all clear until we make and hold proper levels. It’s not even a recovery if we get to 50%, but let’s at least look for 33% on this "Global Rally:"

US Markets

US Markets

Is that really too much to ask?

We’ll see if oil really does defeat us by breaking $62 today. If it does, I think it will fizzle the rally and I was betting it wouldn’t because we got out of our oil calls yesterday as I called a top at 3:29 when I tried to buy Sunoco (NYSE:SUN) $65 puts but accidentally bought Suncor Energy (NYSE:SU) $65 puts. It turned out to be a good exit for our calls but it remains to be seen whether the put plays will work out today.

I’m only going to be comfortable with a "recovery" if it does not include the commodities. DHI’s assessment of the housing market should take care of the homebuilders but we need to NOT see the miners and refiners flying back up or we’ll just be playing the same old song as last year.

The dollar had another rotten day yesterday and we really don’t want to fall below 83.5, although we went form 85.5 all the way down to 82.5 around Thanksgiving and then had a nice stock and dollar rally after that. Gold may test $660 again.

Oil and Dollar

Speaking of Fibonacci retracements, Bush’s approval rating has slipped to near critical lows at 35%. Hillary still leads the Dems 47% to Obama at 39%, and Giuliani is trouncing McCain 38% to 24%. Only 16% of the people polled feel the economy will improve this year (talk about a wall of worry) and only 31% (not even all the people who like Bush) of the people polled favor sending more troops to Iraq and of those, 8% "do not feel strongly" about it. 33% means if you like Bush and you are sitting in a movie, chances are that the person on your left AND on your right (even the far right) doesn’t.


Lots of fun things to look at in a rally but let’s see where our portfolio concerns should be. These are things I will be looking to do if the averages continue up and at least two of them break our levels (likely NYSE, SOX and RUT):

Dell (NASDAQ:DELL) Apr $25s at .15

20% of profits trailing stops on all March and Apr calls!!!

The LTP will be reviewed over the weekend.