Options Trader: Wednesday Morning Ideas

by: Philip Davis

It’s time to talk about physics again.

Back in mid-December I wrote an article on stock market physics and we talked about how I like to think about market movements as astronomical events that are governed by the laws of physics, specifically, orbital physics relating to gravity, mass, force and acceleration.


I’m not going to go all over it again, but I will probably update it soon as have been many articles since then refining the concept. The key point for today is we have not yet fallen out of the orbital range we established in November, when we broke clearly away from the Dow 10K-11K range we had been in since early 2004.

Today is not a challenge for the bulls; we already expect a disaster. The Hang Seng and the Nikkei EACH gave up 500 points last night on a combination of the U.S. market melt-down, strong Yen performance and 2.7% inflation in China. Europe fared no better with 100 point drops across the board (2%) but weighted to the financial sector [it was HSBC Holdings (HBC) who started this mess].

So the onus is on the bears to show us what they’ve got today. The bulls have held the 12,000 line on the Dow since Nov 6th with only the briefest pinprick below it on March 5th. If the bears can’t take us below 12,000 on a day like today, I think it only PROVES that 12,000 is a real market floor we can count on. An orbiting body (let’s say the Dow) moves around its primary in an elliptical path, the "highest" point of the orbit is called the apoapsis (say 12,800) while the "lowest" part of the orbit is called the periapsis (say 12,000). Only by observing the highs and lows of the orbiting body can we get a true idea of the exact position of the primary (market neutrality).


Unless we get some really good downside follow through, I will be done with my short positions and keeping tight stops on our calls, but sitting mainly in cash and looking for some buying opportunities. To sum it up: At this point, if we don’t break down, it is very possible we WON"T break down! Let’s keep an eye on some true bottoms but, like that S&P chart from 2004 I posted yesterday, there is nothing healthier than a good double bottom test to shake out the weak hands - clearing the path for the bulls to run wild.

There is no hurry, though. If this is a real bottom we should flatten out a bit and slowly pick up speed as we whip around the primary. 12,800 is far away and we will miss very little by making sure we break 12,300 before we even consider buying more.

Here are the current levels we’ll be looking for today, but up is good, down is bad - simple enough?

Phil\'s US Markets

US Markets

Looks like we need to keep a close eye on the Nasdaq as our weakest canary as it is touching its November low already, perhaps 20 points away from a real breakdown.

We have oil inventories today, so that should be very interesting. Any net build in barrels would be devastating for energy traders, touching its November low already and, of course, tune in to comments around 10:30 and we’ll have plays lined up in both directions!

It’s all up to our friend the dollar today as it does battle with the Yen but the weakness in gold below $650 suggests that currency is turning west, not yellow. It takes time to unwind the carry trade, so expect the demand for dollars to build slowly (if it happens at all) but, as I’ve said before, if it breaks out - we could have quite a short squeeze on our hands!

Oil and Dollar

No picks today - let’s manage the ones we have!