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Three months to the day

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Yesterday, I forgot to mention that yesterday marked the 3rd month since the terrorist attacks on the World Trade Center in New York and the Pentagon in Washington DC on September 11th, 2001. May we never forget those lives lost.

Stock futures show marginal gains

Stock futures are showing a rebound after yesterday's late session selling into the close. S&P futures are trading higher by 1 point to 1,137, NASDAQ futures are up 6.5 points at 1,662 and Dow futures are up 19 points at 9,909.

Fair value for the S&P 500 today is $0.36. HL Camp & Company has their computers set for program buying at $1.62 and set for program selling at $-1.00. Fair value for the NASDAQ-100 today is $1.25. For more information on fair value and buy/sell programs, subscribers are welcome to visit www.programtrading.com.

Dow components starting to warn

Earnings season must be just around the corner as "warnings" on earnings are starting to flow in. Yesterday's chain of events had Dow component Merck (NYSE:MRK) warning to the DOWNSIDE, then later in the day, Dow component Proctor & Gamble (NYSE:PG) warned to the UPSIDE.

This morning it's Dow component American Express (NYSE:AXP) warning to the DOWNSIDE, saying it expects to earn 34-36 cents during the quarter ending December. The average estimate among analysts is for the company to have earned 40 cents a share. American Express also said it would reduce its workforce by an additional 5,500 to 5,600. This would bring the total number of jobs eliminated at American Express to 13,700 since the beginning of the year.

IBM trades bullish price objective

Yesterday I was a little "frustrated" in my 01:00 EST Update, but today I'm euphoric! Not only did I get a lot of positive support from subscribers regarding bond YIELDS and the impact it has had on their trading accounts, but one subscriber wanted to let us all know that International Business Machines (NYSE:IBM) had achieved its bullish price objective from a vertical count on the point and figure chart!

OptionInvestor.com profiled IBM calls on October 30th when the stock was trading $108.56, but a subscriber beat us to the punch by hand-charting the stock on their own. Wow! That's dedication.

What impresses me is that this subscriber did something I thought had passed without notice. The trading strategy of starting out with a 1/2 position, then adding to that position on further bullishness. Real quick, lets review the trading strategy that this investor/trader used.

International Business Machines Chart - $1 and $2 box

I (Jeff Bailey) can take little credit for one of our subscribers that has seemingly traded shares of IBM (NYSE:IBM) so brilliantly. What makes me so "proud" is the discipline and trading strategy the subscriber used, based on market commentary that day along with point and figure techniques learned over time from our commentary. On October 3rd our market commentary had us observing what looked to be some equity bears moving off their stools in technology stocks and stepping up their short-covering. I didn't see the triple-top buy signal that IBM was giving at the $97 level that day, but one subscriber sure did and felt the probabilities of success for a bullish trade from Professor Earl Davis' study at Purdue University was worth 1/2 bullish position near $97. The "reason" for the 1/2 position was the trader just didn't like the near-term resistance that the bearish resistance trend (red +) might create at the $100 level. Sure enough, the stock did have some trouble at $100 and the stock pulled back several boxes to $95, but held above the trader's retracement bracket level of $94. Almost as if by "magic," the stock reversed higher several sessions later and had the stock breaking above the bearish resistance trend (red +) and flashing another "buy signal" at $100. The subscriber "averaged up" to a full position as the stock seemed to be saying "buy me" and the longer-term bullish vertical count to $122 was compelling.

Wow! Talk about a plan coming to fruition and unfolding almost to a bullish trader's dream. The subscriber wants to know what to do now? There are three "reasons" I'd look to take profits right now. One reason is that the stock has achieved its vertical count and bullish price objective. The 2nd is that the probabilities of gain from the triple-top at $97 was (profitable 87.9% of the time, for an average gain of 28.7% in 6.8 months). A 28.7% gain from $97 would be a target of $124.83 (do I want to risk current profits to perhaps get the $124.83, especially considering only two months have passed?). 3rd is the extension of the "old" bullish support (blue +) is right in here at the $122 level. If nothing else, I'd look to sell 1/2 position and book some profits.

I could come up with a 4th reason too! Is the extension of trend on the bar chart of IBM "reasonable?"

IBM Bar Chart -

Shares of IBM sure have some momentum behind them. This Dow component broke to a 52-week high yesterday and closed 10-cents above last week's closing high of $121.40. The point figure chart "tells me" to sell strength and take profits. However, a trader that thinks the stock has more upside and could still benefit from a "Santa Claus rally" could play the trend and use a trailing stop just under it at $115. This allows the trader to still trade the trend that's in place and risk just a portion of their profits.

Note: The retracement bracket on the above chart as I have/had it does show a retracement level near $94-$95 (where first pullback occurred after triple-top), but this was based off of retracement anchored to the 12/21/00 low of $80.06 and near several relative high "tops" near $119 in May and June of this year.

Option Traders: It's interesting to note that the open interest for the IBM DEC-125's (IBM-LE) has declined by about 1,000 contracts since first profiled on OI. May hint that some interest being lost among speculators. Open interest for the IBM DEC-120 calls (IBM-LD) is up about 1,400 and continues to be largest open interest on call side of expiration. Yesterday's put action saw heavy volume of 4,754 contracts in the IBM DEC-120 puts (IBM-XD), which was more than double previous day's open interest of 7,104. All of this action has me thinking settlement for next Friday might be pegged near in the $120-$122.50 range. Reasons for analysis might be "loss of interest" in the $125 calls, more open interest in the $120 calls and yesterday's volume more than double the open interest in the $120 puts.

Jeff Bailey
Senior Market Technician
Option Investor

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