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Stock futures slip lower after jobless data released

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When I went to bed last night at 03:00 AM EST, stock futures were mixed. When I woke up at 08:00 AM they were fractionally lower and by the time I've gotten to work and the jobless claims data was reported they're lower still.

Jobless claims for the latest week fell 55,000 to 438K, with the prior weeks data revised substantially higher to 493K from 460k. Both numbers appear to have bullish traders edgy as consensus for this week's number was for jobless claims to be closer to the 425K level. While the latest week's 438K number was higher than expected, the 55K decline will help sustain the MARKET'S assumption that this recent spike in jobless claims is temporary due to new filings for extended benefits, rather than due to new layoffs.

Note: On both OptionInvestor.com and premierinvestor.net, I had outlined a potential bullish trade in shares of TMP Worldwide (NASDAQ:TMPW) if the jobless data was strong. I do not think this morning's report is bullish enough to have a subscriber risking his/her hard earned money on a trade.

Stock futures have edged lower after the release of the jobless claims number and now finds S&P futures trading down 3.9 points at 1,128.10. NASDAQ futures are in the red, trading down 9.5 points at 1,356, while Dow futures are lower by 37 points at 10,350.

Fair value for the S&P 500 today is $1.63. HL Camp & Company has their computers set for program buying at $2.51 and set for program selling at $0.45. Fair value for the NASDAQ-100 today is $6.00.

Verizon downgraded by Merrill

Shares of telecom service provider Verizon Communications (NYSE:VZ) $43.90 were downgraded this morning by Merrill Lynch to "neutral" from "strong buy" due to the company's deteriorating outlook and the concern that valuation will not recover as hoped relative to the broader market. Merrill Lynch cutting 2002 revenue/EPS estimates to $68.4 billion/$3.13 from $69.8 billion/$3.22 and 2003 to $71.5 billion/$3.30 from $74.1 billion/$3.35. Merrill also lowers their long-term rating to "buy" from "strong buy."

Tighten down those stops!

If you're short/put some NASDAQ stocks, tighten down those stops! yesterday's trading has the NASDAQ-100 Bullish % ($BPNDX) from www.stockcharts.com showing a net loss of 3 stocks and the bullish percent has now fallen to 37%. In February, the NASDAQ- 100 Bullish % fell to a low of 28% just before a powerful rally took hold.

Here's what I'm seeing in the NASDAQ-100 Index (NDX.X) and what a bear needs to be alert to.

NASDAQ-100 Index Chart - Daily Interval

Late last night I was looking at the NASDAQ-100 Bullish % chart and noticed the bullish % levels were reaching similar levels found in February. While we could see further deterioration in the bullish %, it tells us that we may be reaching similar "risk" levels found in February, just when the NASDAQ-100 Index (NDX.X) reached a relative low of 1,329.93.

Yesterday's session was volatile. At the time of this writing (Wednesday night) I do not yet know what this morning's (Thursday) economic data looks like.

I just want traders to be on "heightened alert" right now.

Yesterday, the Morgan Stanley Cyclical Index (CYC.X) trader very strong. This is one of our "key" indexes that we wanted to at least monitor to get a feel for the MARKET'S perception of the economy going forward.

As discussed before, the deep cyclicals could indeed pull the NASDAQ out of a rut. A bull as well as a bear always monitors both ends of the snake to see what's going on. If the cyclicals are the "head" of the snake like I've thought they would be, then be on the alert!

If the Morgan Stanley Cyclical Index (CYC.X) breaks the $590 level, we could well see a massive bear trap unfold. There's just about as many bears shorting that group of stocks on the belief that the economy is going to "double dip" the recession. A break above 600 could have the wheels coming off a bear's wagon.

As such, a bullish move in the deeper cyclicals could have technology bears rushing to lock in some handsome gains. By snugging down some stops in profitable trades, we should all do OK.

We never know for certain what a MARKET will do. We could continue to see bullishness in the cyclicals and see institutions continue to rid their portfolios of technology stocks that don't look to be producing earnings for the next couple of quarters.

What we can do is stay disciplined. If we've shorted weak stocks in weak groups and have been systematically taking profits on stocks that get overextended (up or down) then all should be well.

The commentary below is educational. There is commentary regarding Renal Care Group (NYSE:RCI) that everyone may be interested in under the title "You've got to have a target!"

I didn't know, but neither did they!

Last night I was trying to tackle some of the e-mail from subscribers that has been piling up. I'm nowhere close to getting to all of them and I hope nobody is offended if I don't get a chance to reply in an orderly fashion.

The subscriber wanted to know if I knew of any books on trading like a market maker. I don't. I think it is some kind of "deep dark secret" that nobody wants to discuss.

However, I wrote some live market commentary back on February 20, 2001 that discussed how you could perhaps use retracement to "trade like a market maker." The Bailey's Basics article is labeled "Retracement levels." Here's the link Option Investor

I must say, I had no clue that the stock I used as my "guinea pig" was going to trade like it did. I don't think anybody did, including the market makers.

Take some time in the near future and read that article. If you do use retracement, it might just change your life, or at least the way you view trading.

It's one thing to simply read something and say "wow that's neat." However, I can't tell you the number of subscribers since February 16th that asked me about the stock discussed in that article.

At the end of that article (February 16, 2001) I left the subscriber (you) to make a decision that day as if you were a market maker and you had to control your risk in the stock.

While that article loses some of its impact today as you will surely recognize the name of the stock and the eventual outcome, on February 16th nobody new what would eventually unfold.

Who's driving the Ferrari? The bullish market maker or the bearish market maker?

Now, before you shrug it off as "hey, all stocks got creamed" try practicing on a technology stock like NVIDIA (NVDA) or Genesis Microchip (GNSS) during the same timeframes.

Hopefully you will find that ANY stock can do ANYTHING. All you have to do is trade the levels and the trends just like a market maker.

You've got to have a target!

Last night I also got this e-mail from a subscriber. He's got a nice problem right now. The "problem" comes into play because the trader didn't have a target. Now the stock is on the move, he's got a much quicker move that he had perhaps thought could happen. What can take place now is "hope" and "greed," two traits that can spell doom for a trader.

Question: I recently noticed Renal Care Group (NYSE:RCI) at a quadruple top breakout and went long with the stock at around $33.50 by buying the June $35 (RCEFG) calls at $0.80. Looking at the P&F chart I notice that the stock seems to be good for $2-$5 after breakouts. Further research shows that this stock has been a consistent gainer in this quarter over the past 5 years. How tight should I be setting my stops on the options? I didn't expect the move to be this quick and have a nice gain, but I hate to lose it if the stock has more room to run.

Renal Care Group Chart - $0.50 & $1 box

"Healthcare" and listed on the NYSE? I'm interested! Healthcare is "hot" and this is something we've talked about in recent weeks and months.

I only wish the trader had set a target for his trade. That way, there wouldn't be a question of "when should I sell." The trader was willing to risk $0.80/contract, but he didn't outline what type of gain he needed in order to take on that risk. Now the stock is on the move and we/I/you get the EMOTION that it might just be that juggernaut stock we always new we would one day get ahold of we/I/you don't want to sell it because it might be equivalent to throwing away the winning lottery ticket! Had I/we only set a target where we'd at least sell part of it to perhaps then remove our original principle from the trade, we'd all be much better traders.

Well... with a cost basis of $80.00 per contract, I'm guessing the subscriber may have bought at least 5 contracts for $400.00 and now finds those contracts are trading $1.55 bid, or $155 per contract and represents a nice 93% gain (excluding commissions).

If you did own 5 contracts (I don't know how many he bought) I could sell 3 of them for $1.55 (closing bid) and remove all risk from the trade, then let the other 2 ride, just in case it is a juggernaut.

Now we have that out of the way, but lets talk price objectives. According to Dorsey/Wright and Associates, the "healthcare" sector as a whole (a bunch of "healthcare" type stocks") is in a "bull confirmed" market at 54%. Make note of that, because in January of this year the sector reached the 62% level before reversing down to 46% in March, and now has just recently turned back higher at 54%. In essence, in mid-March or so, this group of stocks just resumed a bull confirmed phase.

Now, Professor Earl Davis' study from Purdue University found that the triple-top is profitable 87.9% of the time, for an average gain of 28.7% in 6.8 months on average.

OK... RCI gave the "triple-top" buy signal at $34 on March 15th. Lets be more conservative/pessimistic and "pretend" the stock just gave the triple-top on Monday. This has us looking at a time line of mid-November where we might look for a 23% gain from $34, so that would be ($34*1.287 = $43.75) $43.75. Again, this would be according to the statistical probabilities and not a guarantee that the stock will trade that level.

Should I expect the stock to trade $43.75 by June expiration? The answer is no. Did I/we buy enough time to perhaps fully benefit from the Professor Davis' study? The answer is no.

Do you see where I'm going with this? When the trader bought a June expiration, he must have had some other target in mind. Time and targets are so critical with options.

Here's one way we can set targets with the point and figure charts, then take those targets to our bar charts and then begin defining some levels of potential support and resistance.

Let's pretend that I'm an institutional mutual fund and I've determined that the "healthcare" group is a sector I need to be buying. One of my researchers has told me something about Renal Care Group (RCI) that I believe fundamentally will have the stock trading $43.75 by November.

Renal Care Group Chart - Daily Interval

After you read the "Bailey's Basics" article mentioned previously, what I'm doing above will make even more sense. I'm using the "fitted retracement" technique to try and find some levels that look to have been traded in the shares of RCI in recent past. All I've done is anchored to the bottom, then "fit" both the 19.1% and 38.2% retracement levels where it looks like a seller had been sitting. What "makes sense" at the 38.2% level of retracement is how nicely it "honors" the $34.00 level and ties in with the "triple-top" action point that a point and figure chartist would want to make note of.

I also like the "result" of the 100% retracement level. That $43.26 level is pretty darned close to the statistical probability that we figure out using Professor Davis' study.

OK, let's "pretend" we bought the stock at $34. Our first target would have been 50% retracement at $35.78. Hey! That target was hit today! Sell? If it was a June call option trader's target he would have. At least part of the position.

Why? Look at the trend I've drawn on the chart. This is a simple trend attached to the base, then projected upward. Think of this as your "timeline" of trend. Lets "pretend" that the stock is only in the "accumulation" phase right now and institutions are just going to accumulate a position over time. We know that institutions tend to sell a stock in a single transaction, but tend to buy stocks in smaller lots and accumulate over time.

If we look at trend, we might expect RCI to be trading at the $35.78 level on July 12th (that's where trend crosses the 50% retracement level).

Wow! We're only 3-days into the trade and it's already hit our first target! Is 97% in 3-days sufficient for the risk you were willing to take? No? Then perhaps $37.54 at 61.8% is your target.

Just assess your risk to trend, measure it against how much time you have left in the option. Will a pullback to trend make you wish you had taken some profit off the table? The most you can lose is the $0.80 per contract. The rest is simply opportunity.

What if a trader simply sold the entire position for $1.55 per contract. Then rolled some of the profits out into the RCI September $35 calls (RCIIG) at $2.80 offer? Would that make sense? If an option trader is playing the trend, does it make sense to follow the option with a stop? Nope, unless you over leverage and take on more risk than you can afford.

Well. This took me about 2-hours to write. Please believe me that I can't go through all of this on every trade I write up, but its a way you can combine both the point and figure charts and probabilities studies along with the bar charts to help make yourself a better trader.

I can't tell you if you should take a profit as I don't know your risk profile or how your account has been doing over the past year or so. I don't think a 90% + profit is that bad, whether its over a 3-day period or 3-month period. I always try to outline a target when I profile a stock or option trade. Now you know why. It's so very important and helps take the guesswork out of trading. Plan your trade and trade your plan!

Especially in a "boring" healthcare stock! Good trade!

Jeff Bailey
Senior Market Technician
Option Investor

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