The market opened with a bang on Tuesday as Wall Street got excited that Hurricane Gustav did not cause any significant damage or oil-supply disruptions over the holiday weekend. However, by the end of the day the Dow gave up a 250-point gain and ended the session down 26 to 11,516. Like a roulette wheel going from black to red, the market’s fortunes seemed to change on one spin yesterday. It wasn’t really the financial stocks this time around that did the market wrong, the Dow is simply running into very strong resistance at 11,800.

The S&P 500 jumped 25 points to 1303 but ended the day at 1,277, down five. The Nasdaq had gained over 45 points to 2,413 before finishing at 2,349, a drop of 18. Same story here. Both indexes tested serious resistance levels - 1,320 for the S&P and 2,450 for the Nasdaq.

Oil fell to a low of $107 before settling at $109 and change. While this was great news for the market, Gold got absolutely hammered. At one point, the yellow metal was down $40 and ounce but managed to close above $800 ($810.50 to be exact). Still, a $25 drop was worth mentioning. Of course, this was bad news for Gold stocks but good news for us. We have played the Gold bounces before and we are getting close again to playing another one.

September is historically a “not so good” month for the market and October follows. And we all know that some of the biggest market crashes, ever, have happened in October. Anyone remember October 19, 1987, other wise known as “Black Monday”? That was the day the Dow fell over 500 points, or 22%, to finish at 1,739. A crash of that magnitude would be like a 2,500 point drop for today’s Dow. That seems a little far fetched, huh? Now, I’m not saying that the market is going to crash or that we are going much higher from here but it’s important to step back and analize things.

Two years later (October 13, 1989) the market also suffered a “mini-crash” as the Dow fell nearly 200 points, or 7%, to close at 2,569. Back then, the debacle was blamed on a failed leveraged buyout involving UAL Corporation and United Airlines which was its parent company. Also adding fuel to the fire was the collapse of the junk bond market.

We have had a few “crashes” since then but you get the picture. With the mortgage mess the way it is, and the finacial stocks acting the way they are, all I am saying is that anything can happen. That is what makes the market so freakin’ awesome. We could bust through resistance and go on to new highs, stall at current levels and fade, or simply crash and burn. I certainly hope the latter doesn’t happen but as hard as it is sometimes, sometimes you have to “think outside the box.” You always have to remember the market doesn’t care what side of the trade you are on.

This ought to get interesting…

Rick Rouse
Rick@OptionsMentoring.com

The stock market may have been closed Monday but that doesn’t mean there wasn’t some action in other markets. Hurricane Gustav was expected to have an impact on the market and oil either way but now that it has hit land and has weakened dramatically, it could be a blessing for the market. Especially oil.

Over the weekend, forecasters said Gustav could reach a Category 4 when it hit land but has now been downgraded to a Category 1. Although we aren’t out of the woods yet, it certainly is a relief that we might escape the kind of catastrophic flooding Katrina brought us three years ago.

With Gustav weakening, oil prices fell to $111 a barrel Monday. During Friday’s trading session oil had gained nearly $3 to $118 a barrel in anticipation of Gustav’s hitting the Gulf Coast before settling at $115. This is certainly a good sign for the market but we still must remember that there was some disruption caused by Gustav.

Major oil companies such as Exxon Mobil (XOM, $80.01, down $1.17) and Valero Energy (VLO, $34.76, down $0.26) had already shut down production and evacuated facilities ahead of Gustav but we don’t know how much of this will have an impact on their bottom lines at the moment.

As far as the market itself, we had to adjust our positions as well because of the storm. We made some decent profits on the financial stocks and we closed half of our positions on Friday in each trade. If Gustav would have hit hard, it’s likely the market as a whole would have taken a hit.

When trading options I wanted to bring this point up because sometimes there are the “unknown” factors that could affect our trades. The financial stocks had a great week, especially Fannie Mae (FNM, $6.84, down $1.11) and Freddie Mac (FRE, $4.51, down $0.77), but they continued lower throughout the day Friday after the morning blog. I’m not saying they are done going up but we had to manage risk because of the storm and it forced us out of many positions that may or may not continue to go up.

For the option traders who assume more risk, they will be rewarded if the financials continue higher. But they will also be the ones giving back profits if the financials take a breather this week. The risk is a double-edged sword so to speak…it cuts both ways.

We will have more opportunities to get back into the financial sector but I wanted to show and explain to you how to manage one of the many areas of risk.

Rick Rouse
Rick@OptionsMentoring.com

Wow. Just when it appeared gold was “off to see the wizard..” and was headed for $1,000 an ounce it is now trading for under $800 an ounce. The 20% drop has happened in just six weeks. On July 1, gold was going for $940. This morning, gold was trading at $795. There is support for gold at $770-ish, but a break below $770 could take the precious metal down to $750.

Meanwhile, oil is down 25% from its high of $147 a barrel as it is going for $111. I had mentioned the $110 level as a battle line but I’m in the camp of oil going back to $120 before it tests the $100 level.

Then there is the dollar. In dollar has hit a six-month high versus the euro as the currency was down 0.7% to $1.47. The dollar has gained 5% this month and continues to rally as inflation will restrict the Fed’s ability to cut rates. The weaker growth in Europe has started to hit the euro hard and it could get worse before it gets better for the euro.

A firmer dollar typically pressures gold which is often seen as an alternative investment or safe haven to the U.S. currency. A stronger dollar also makes dollar-priced commodities more expensive for holders of other currencies. They work hand-in-hand and it’s good to know these things. When the market was tanking in early July and oil was rising, we were able to hop into the gold stocks for a quick bullish play on gold. We set stops, made money and got out.

I’m not ready to go long just yet on the gold stocks or call options but there will come a day when we do. Just be patient. Take a look at our gold watch list and see where we were then compared to now. The comparisons are from July 1 and the options are the ones we will watch. Do not take any action, yet.

Barrick Gold (ABX, $32.49, down $1.09), was $46. January 35 calls (ABXAG, $3.10, down $0.60).

Goldcorp (GG, $29.95, down $0.97), was $48. January 32.50 calls (GGAZ, $3.30, down $0.70)

Gold Fields (GFI, $8.83, down $0.26), was $12.70. January 10 calls (GFIAB, $0.88, down $0.17.

Newmont Mining (NEM, $41.92, down $0.98), was $53. January 45 calls (NEMAI, $3.35, down $0.60).

It will be interesting to see if the market can hold its recent rally if oil heads back up. Over the short-term, I still see a firmer dollar and lower oil prices. This means the outlook for gold remains cloudy.

Rick Rouse
Rick@OptionsMentoring.com

It’s hard to believe sometimes but I can remember when gas use to be under $2/ gallon. And it wasn’t that long ago. The fist time gas hit two bucks a gallon was in May 2004 (East Coast prices). Up until March of 2005 gas would hover around this mark but this would be the last month you could get gas for less than $2/ gallon. In September of 2005, gas hit $3/ gallon. As of this week the average price of regular ‘ol gas is $3.60/ gallon. Wow.

Well, back then it wasn’t too bad to drive your SUV because it may have only cost you $50 to fill-up for a week. Today it’s nearly double. A year ago oil was trading for around $60/ barrel. Today we broke $122. And according to a Goldman Sachs analyst, oil could be on its way to $150-$200/ gallon. That would put gas at $5 to $6/ gallon.

Some believe that oil supplies are strong right now with one analyst countering the $200 notion by saying oil could easily be at $40 over the next two years because supplies are “comfortable”. Here’s hoping for the latter because there will be many, many people who cannot and will not pay $6/ gallon.

And who’s to say this isn’t possible? Already there is strong demand for oil from countries such as China, India, and Russia. This demand from other countries will continue to support higher prices and will keep global oil demand on the upswing. On the flip side there’s also concerns about falling oil production in Russia and Mexico which are huge players in the oil industry.

So where does this all lead us? I certainly don’t know because I’m not an economist but I do know that $4/ gallon for gas is just on the horizon.

Rick Rouse
Rick@OptionsMentoring.com

Despite growing its net income 17% for the quarter, Exxon Mobile ($89.34, down $3.73) is down about 4% this morning. The company reported earnings for the quarter of $10.9 billion, or $2.03 a share, up from $9.3 billion, or $1.62 a share, from Q107. Revenue came in at $116.8 billion compared to $87.2 billion a year earlier. Both numbers missed Wall Street’s figures for a profit of $2.13 per share on revenue of $124 billion.

You would think with oil at record levels Exxon would have easily topped estimates. Not so. The problem was that the margins at Exxon’s refining operations such as gas weighed heavily on the bottom line. To put it in perspective oil prices averaged a $100 a barrel in the first quarter. A year ago it was at $58 a barrel.

“Analysts” have attributed the spike to growing global demand and “speculative trading”. Oh, and throw in a weak dollar too. So let me get this straight. Oil is at $120/ barrel and gas is hitting $3.60/ gallon on average. So not only are we using more oil, it’s costing us even more to drill for it. Something’s got to give.

Other oil stocks are mixed. BP PLC (BP, $72.57, down $0.22), Chevron (CVX, $94.44, down $1.71), and ConocoPhillips (COP, $85.90, down $0.25) are lower while Royal Dutch Shell ($80.01, up $0.31) is trading higher.

Rick Rouse
Rick@OptionsMentoring.com