EOT Position Update – July 16, 2008
July 16, 2008
Market Snapshot
The Dow Jones Industrial Average just closed at 11,239. The first time in a long time we didn’t close down from the prior week, though a huge end of day 276 point rally didn’t hurt either.
Yesterday the markets touched new a low not seen in more than 2.5 years. This also coincided with the Dow closing below 11,000 for the first time in a long time. Yet today we had a nice rally courtesy of Wells Fargo and Oil.
More Hot Air in Washington.
Big Ben Bernanke, you know, the Federal Reserve Chairman, was in Washington this week answering questions from our elected officials. He would have been more productive leaving an iPod on the stand and playing his commentary from his last few visits. It was the same questions over and over again . . . . Further proof our elected officials have no clue.
One thing did bear mentioning. At one point in the Q&A Ben highlighted both a threat of inflation and a threat of slowing growth. This is also known as “Stagflation” – and it’s not a good thing. News like this doesn’t bode well for the markets.
This last week we’ve seen Fannie Mae (FNM) and Freddie Mac (FRE) get hammered in the markets as investors were concerned about their liquidity. Then rumors circulated that they might be taken over by the government. Ben chimed in stating that these government sponsored entities (GSEs) were in fact solvent. Then Secretary Paulson commented that they would in fact make additional funds and liquidity available if it was required. Despite the news, both companies continued to fall. They’ve rallied recently, however both are trading at more than 80% off recent highs.
This is an important issue to watch. Nothing like the potential impact of $5 trillion (Yes, Trillion with a “T”) worth of mortgages needing to be backed by the US Government. As I’m sure you’d expect, the US Dollar fell to new lows on the news.
Oh, and lest I forget – our first good-old-fashioned run on the bank occurred this week. IndyMac Bank was taken over by federal regulators after depositors withdrew a record $1.3 billion of deposits from the bank in 11 days.
Now for the trade updates.
Position Updates
GT January 2009 $15 Puts (GTMC)
We just issued a new trade alert on Goodyear Tire (GT). The next day the stock fell to under $16, and our options traded up on the news. Today, the market rally has pushed GT higher. Everyone should have had the opportunity to get in on this trade. The company is set to announce earnings on July 31st. Support levels are 15 and 12.50. Resistance is 20 and 22.
ROST November 2008 $42.50 Calls (REQKT)
Ross Stores (ROST) continues to battle higher. Last week at this time it was sitting at just over 37.50. Today it touched the $39 level. Resistance is 40 and 45. Support levels are 34 and 31.50.
Parting Shots…
Fundamental vs. Technical Analysis
If you follow the Elite Option Trader service long enough, you’ll notice that we look at every trade in two different ways. On one hand we conduct fundamental analysis on the underlying stock. On the other we look at the technical indicators.
What’s the difference?
Most of “Wall Street” is focused on fundamental analysis. It’s analyzing the specific aspects of a company. Fundamental analysis takes many shapes but often focuses on revenue trends, earnings, costs, margins, competition, and industry factors. Basically you’re looking at the company and trying to determine if it’s growing or not.
Some investors focus entirely on fundamental analysis and only fundamental analysis.
Technical analysis is slightly different. Technical analysis looks at the price action of a security. Technical analysts look at a chart of the stock to see how it has moved over time. The idea is to profit by following patterns that repeat themselves on the chart. Technical analysis takes into account many things like high and low prices, moving averages, trading ranges, channels, and other patterns.
As you can imagine, some investors only use technical analysis. These investors believe that everything you want to know about a stock is reflected in its price action. They could care less if the company sells socks, tires, or medical devices. They’re only looking for patterns.
I’m a bit different. I like to combine the two types of analysis. I like to use fundamental analysis to identify major macro movements in the market. Then I use the technical patterns to confirm my analysis. It’s also a great way to determine entry and exit points for a trade.
Category: EOT Update
