Options Trader: Friday Morning Ideas

by: Philip Davis

Well, we're up 200 points for the week so far. Keep that in perspective if we drop 50 points and Don't Panic -- it will take a drop of more than 100 points to erase the week's very bullish tone.

Oil is printing (at 5:30) $55.79 in European trading but Brent crude is still higher ($58.23) and I imagine there's a difference in the contract. The Brent contract fell $3.07 yesterday as it was much higher than ours ($61.30).

It was 60 degrees in NJ last night and the 15 day forecast says no freezing temperatures until December 1st, but the warm weather IS breaking and we know how shocked energy traders are when it gets cold in the winter!

Of course today is options expiration day and only a fool tries to guess the markets today so here goes:

There's only 2 levels to watch today, amazing (almost any gain) and uh-oh, the point at which some panic will occur:

  • Dow 12,300 plus is great but below 12,200 will create doubt we can't afford as we try to achieve escape velocity.
  • S&P cannot be expected to break 1,400 on no news and doing so would be a major bull signal, but we'd really hate to lose 1,390 and even 1,395 will be a concern.
  • NYSE is losing its leadership and will be weighed down on commodity weakness as well. If 8,850 holds it will be a very good sign.
  • Nasdaq needs to take the lead and break 2,450, and 2,425 will be a problem already.
  • Russell must hold 790, and that's a lot to ask as it just got there and needs a rest but the floor is too weak to test.

The SOX are free to retest 480 without looking weak while the transports have earned themselves a free pass all the way to 2,675 (down 45) after gaining 150 points in 5 sessions.

TRANQ Chart 18 11 06

I hate to repeat myself but I will just reprint what I wrote on Wednesday which was a reprint of what I wrote the week before as it was exactly correct:

"You have to ignore the dollar amount on this chart as it's based on a continuous contract price but the moving average is fulfilling my prediction of last week: 'Oil could go either way today but showed real weakness at the $60 level of late as the rapidly falling 50 DMA races down towards it. My downside target remains $57.14 but first we have to get a close back below $58.56 first.'"

Oil Chart 18 11 06

Of course, during this week I ran a dollar adjustment on that $57.14 level, but we blew through $56.89 too and that is because the dollar rose .50 since then. That is a .5% gain, which takes an additional .33 off our target to bring the true 5% number down to $56.56.

That makes a new watch point for us there, while $57.14 still holds as a break point as we've noticed that many U.S. traders don't seem to adjust their programs for dollar changes, which is ridiculous but great for us!

The next 5% level down for crude is $53.72 while the 2.5% way-point is $55.14 -- couple that with the psychological value of $55 and we can expect a bounce there, likely back to $56.56 which has to hold if we are to get a real down move.

Of course this whole contract goes out the window this weekend so stay tuned for a new set of numbers!

Gold is going back to $600 so I maintain my tight stops on Metallica Resources Inc. (MRB) and Northern Dynasty Minerals Ltd. (NYSEMKT:NAK) despite the fact that they refuse to trigger! I almost got out yesterday but they remain good terror insurance into the weekend.

Earlier this week I said to watch platinum for a danger sign, and today we should get it as platinum tests $1,160. Copper has already failed its 200 DMA at $315 so the Phelps Dodge Corp. (PD) Dec $90 puts are fun at $2.55 with tight stops.

Platinum Chart 18 11 06

If the markets do not fall below our levels then (putting on my international currency trading hat) I do not short the dollar into the weekend because it is far, far safer than oil or gold at the moment!

As commodities collapse what do you think people need? That's right, they have to convert all those shiny bits of metal and all that black gooey stuff into... the dollar!

Hopefully I'll get around to expanding on this over the weekend, but the short version is that there are "just" $6.8 trillion dollars floating about and there are $4T "worth" of shiny metal and black goo stocks that want to be traded for some of those $6.8T too. This could get messy!

Speaking of messy, who let the President out? He's in Vietnam for one day and he already has to bring up the war! If I have learned one thing from John Cleese it's Never Talk About the War!


It's a sideline day for the most part so don't worry, be happy, and let's try to enjoy ourselves into the weekend as oil hopefully gives us our long awaited "Trading Places" moment!

I'll scout up some quick oil puts in comments but it's a monkey with a dartboard kind for market if oil breaks below $55.

Hewlett-Packard Co. (NYSE:HPQ) is now under "formal" investigation for that whole spy scandal with the board so the 300% gain in earnings (.04 beat) and the 7% rise in sales will take a back seat for a while. Their guidance left a bit to be desired but I think everyone, except for the manufacturers stockpiling motherboards and chips in Asia, is underestimating PC demand next year.

Harvard says backdated options pad CEO pay by 10% on the average so either the average CEO cheats or some of these guys are just raping the shareholders!

Baidu.com Inc. (NASDAQ:BIDU) won a case in China against the recording industry, who were trying to stop them from linking to copywrited material with its MP3 search engine. Let's hear it for home-field advantage!

It will be interesting to see how much is made of the John Edwards' staff person trying to buy a PS3 at Wal-Mart. Here's a fairly balanced account of the matter from Houston's Chronicle. Expect a very different take on this from Fox news and the financial networks who are on the attack against any Dem.

One of my favorite people, Milton Friedman, died yesterday. He was, of course, a great economist but he also had a great gift for explaining complex economic issues in very simple terms.

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