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Bond YIELDS are down slightly

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Bond YIELDS are down fractionally this morning and equity futures are mixed. Currently S&P futures are down 4 points, NASDAQ futures are UP 12 and Dow futures are off 73. Fair value today for the S&P 500 is $10.62. Computers are set for program buying at $12.85 and set for selling at $8.19. Traders wanting more information regarding fair value can go to www.programtrading.com.

What to keep an eye on today

It may sound like a broken record, but watch those bond YIELDS. This morning they're down fractionally, but at some point we should see some profit taking in bonds, this should step up buying from some participants that are short stocks and we should see a relief bounce. Yesterday I thought shares of Adobe Systems (NASDAQ:ADBE) were set for a pullback and that didn't happen. This morning I'm looking at ADBE trading in the pre-market at $32.75, which is right where we shorted/put the stock yesterday. Yesterday I also thought traders should short/put the QQQs near $40.08, but with NASDAQ futures looking higher this morning, there too I'm seeing some strength. Both of these observations may have some traders holding a small loss and I'd be looking to cut that loss with a tight stop.

Moving down stops

Late yesterday I thought traders should hold both of the above securities short/put overnight, thinking we might be looking at a gap down situation this morning, but that is not the case. Therefore I would be LOWERING my stop in ADBE to $34.25 and lowering my stop in the QQQs to $40.25. We've taken a lot of money out of the QQQs to the downside over the past couple of weeks and I'm not looking to give much of it back if a rally takes hold. I would also not be willing to go long the QQQs until they break above the $42 level and bond YIELDS would have to be higher to get me to even consider being bullish.

Covered call question regarding Wal Mart

Dear Jeff B

I am long 500 shares of Wal Mart (NYSE:WMT) at $45. What is wrong with selling the Jan02 $50 Calls at $11.50 and selling the Jan02 puts at $10? Comment please.


My (Jeff Bailey) response would be as follows. I think it is a very smart idea to be writing some covered calls on a three lettered stock that is a component of the Dow Industrials under current market conditions, especially while the subscriber still has a gain in the stock. What a covered call writer in this subscribers position is saying is "I'm willing to hold 500 shares of WMT and reduce my cost basis in the stock from $45 to $33.50 and I don't think the stock will be trading above $56.50 come the Friday before the third Saturday in January 2002.

However, I would not consider selling a put at current levels. If I/you don't think the stock is going higher (selling the covered call is bearish) then I would not be looking to sell puts here at $48.31. If I want the OBLIGATION to buy shares of WMT, I'd rather take on that obligation at lower prices. How low? If I look at the point/figure charts and perform a bearish vertical count, perhaps that will give me an idea. A quick calculation gives me a long-term bearish price objective of $41. If a trader want to play the selling a put to take in some cash, I'd let the stock fall then do it. You see, selling the call is short-term bearish (thinking the stock will fall) so why not let it fall then take in more cash when selling the put?

Wal Mart Chart - $1 box

The point/figure chart of WMT looks troubling for a bull. I think the subscriber is wise to be selling covered calls in the stock. The triple bottom sell signal at $50 was the first sign of trouble and this latest double bottom sell signal at $47 is just another sign that supply is in control here, not demand. How low can she go? The bearish price objective using the vertical count indicates that $41 is a possibility. Here's one more thing to consider. A study performed by Professor Earl Davis of Purdue University addressed profitability associated with different chart patterns. In a bear market (I'd say we are currently experiencing a bear market) a double bottom sell signal is profitable (for a bearish trader shorting) 82.1% of the time for an average gain of 22.7% over 4.7 months. A triple bottom sell signal is profitable 93.5% of the time with an average gain of 23% in over 3.4 months. With these kinds of odds in favor of bearish traders, I'd have to agree with the subscriber that he/she should be selling some covered calls. I wouldn't be looking to sell any puts right now, but at $41 I might consider it depending on market conditions.

Don't believe in bearish price objectives? Here's a subscribers comment sent to IndexSkybox.com.


Couldn't agree with your market sentiment report more. Interesting to note that back on 12/22/00 Jeff Bailey mentioned that the P&F chart on the QQQ showed a bearish price objective of 36 (1700 on the COMPQ). On that day the QQQ and COMPQ were at 60 and 2500, respectively. I remember thinking "no way". Well, yes way.

Signed Subscriber

A wise trader once said, "forget what you believe, trade what you observe." I like that saying!

Jeff Bailey
Senior Market Technician

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