TEN Exclusive: Options Update – 12/27/09
Sunday, December 27th, 2009Written by Dan Micovic
The holiday gifts arrived early this year on Wall Street, as the major market indexes edged higher on strong earnings and positive economic reports. All three major market indexes finished the holiday-shortened week at their highest prices of 2009. The Dow finally cracked the 10,500 level, although it was on light trading volume, which leaves traders dubious and cautious. Regardless of the volume, the market finished the week firmly in positive territory, leaving investors to a long weekend filled with holiday cheer.
For over a month the SPX traded in the narrow range of 1085-1120, but in this past week, the S&P 500 Index (SPX) and the Nasdaq Composite (COMP) broke above the upper boundary of their respective ranges, and the Russell 2000 Index (RUT) advanced above its September and October highs. Ahead of this breakout, retail investor sentiment – which has been an excellent contrarian tool in 2009 – finally displayed a decline in bulls. Moreover, pessimism among option speculators reversed course, and evidence is growing that professionals could be tip-toeing back into equities, after being a small presence in recent weeks.
This is the 50% retracement of the index’s October 2007 high and March 2009 low, a “speed bump” that we had cautioned you about earlier. Many other technicians have also focused on this level as a potential resistance area. Therefore, [private_Options Update]bulls would argue that there is pent-up demand for stocks from traders who sat on the sidelines. This argument is logical and has merit.
Puts are being accumulated as traders are skeptical of this move higher and are expecting us to fall back below 1120 after the New Year. We’re not so sure. Should the market continue higher, they will be forced to unwind their bearish positions and that could really ignite this market.
As we head into the last week of trading in 2009, we see short-term support for the SPX at 1,115-1,120; should this area break, look for additional support at 1,100. On the upside, we view 1,140 as the next target.
Weekly Economic Calendar
Monday
- The Federal Reserve districts of Chicago and Dallas will release their November manufacturing indexes on Monday. There are no major earnings reports scheduled.
Tuesday
- The economic calendar remains light, with the release of only the December consumer confidence report. There are no major earnings reports scheduled.
Wednesday
- On Wednesday, traders will be treated to the weekly crude oil inventories report and the Chicago purchasing managers’ index (PMI). There are no major earnings reports scheduled.
Thursday
- The last of the economic data for the week will consist of the initial jobless claims report. There are no major earnings reports scheduled.
Friday
- The market is closed on Friday due to the New Year holiday. There are no earnings or economic reports slated for release.
New Trade Idea:
Buy Yingli Energy (YGE) Jan 16 Call (YGEAT) @ .95 or better
YGE had 3-4 solid trading days and was on the verge of a clear breakout before trading volume dropped due to the holiday. This is allowing us an excellent entry point. Expect some volatility this week as volume will be spotty but we expect a clean breakout in the near-term when volume returns. Use a closing price on the stock of $14.50 as a mental stop.
OPEN POSITIONS:
FedEx Jan 95 Call (FDXAS) @ .40: FedEx has attempted to rally several times last week only to be met by overhead selling. This selling should wear out, especially if the stock gaps and scares the sellers off. Continue to hold with $81 as a mental closing stop on the stock price.
Nordstrom Jan 36 Call (JDIAB) @ $1.90: Nordstrom has started to move and we are profitable in this position. Continue to hold as we think JWN will outperform this holiday season. Continue to use $34 as a mental closing stop on the stock.[/private_Options Update]
