Option Investor
Market Wrap

-307 points, just another Prozac moment in the market

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        WE 4-30          WE 4-23          WE 4-16           WE 4-9
DOW    10789.04 + 99.37 10689.67 +193.78 10493.89 +320.05  +341.33
Nasdaq  2542.85 - 47.84  2590.69 +106.65  2484.04 -109.01  + 99.68
S&P-100  675.65 - 11.76   687.41 + 18.76   668.65 - 12.69  + 31.42
S&P-500 1335.18 - 21.67  1356.85 + 37.85  1319.00 - 29.35  + 54.63
RUT      432.81 +  1.08   431.73 + 10.15   421.58 + 15.72  +  7.12
TRAN    3647.29 + 57.61  3589.68 + 60.98  3528.70 +158.30  + 61.24
VIX       26.07            23.96            25.48            22.91
Put/Call    .53              .59              .63              .54

-307 points, just another Prozac moment in the market

From the intraday high of 10,961, only 39 points from the 11,000 goal, the DOW dropped -307 points just after noon on Friday. Just when you thought we had another major market milestone in sight the bond bears slipped up behind us and scared the recent profit right out of the market. April will still go down as the best month in DOW history in terms of points gained. Over +1000! But with any major market move traders were getting more and more concerned about mounting profits at risk. The DOW did bounce from the -224 low to only -84 at the close as bargain hunters bought the dip.

The official reason for the massive downdraft on Friday was the very strong GDP numbers. With estimates at +3.3% the actual number of 4.5% was far above expectations. The number showed that consumers were spending at the fastest rate in more than a decade.

Only Thursday the Employment Cost Index showed almost no inflation and the lowest rise in employment costs since 1982. This report had sent investors off in a rush to buy financial stocks as fears that the Fed would raise rates soon, almost disappeared. Fridays very strong GDP immediately rekindled those same fears and may have actually strengthened them. Investor fled financial stocks in droves.

The bond bears hammered bonds for a full -2 points and the interest rate jumped from Thursdays 5.52% to a whopping 5.66%. The DOW finished April with a gain of +10.3% or 1002.88 points. The Russell finished April with a gain of +8% mostly on the backs of some soon to be removed Internet stocks.

The Nasdaq was in full rally mode on Friday after the midweek sell off ran out of steam on Thursday. The Nasdaq was up over +50 points when the GDP numbers were released and the DOW started giving back some of its recent profits. With the DOW dropping like a bunker buster in Belgrade the Nasdaq traders took a quick profit and ran for cover as the Nasdaq was caught in the DOW vacuum. However another Nasdaq sell off was not to be. The instant the DOW bounced off its lows at 10,654 the Nasdaq buyers, sensing another buying opportunity, flooded the market with buy orders and pushed the Nasdaq back into positive territory in less than thirty minutes. Many of the Internet stocks had double digit moves up, down and then back up again. A real day traders dream!

I wish I could say the DOW profit taking was now over but if you look at the charts of the OEX and SPX below you will see they started selling off three days ago while the DOW was still moving up for two of the three.

The S&P-500 (SPX) and S&P-100 (OEX) provide a better indicator for the overall market than the Dow. With only 30 stocks and such a high divisor a $1 move in a Dow stock amounts to a $4.60 move in the Dow average. Just a couple stocks making big moves can distort the daily number and hide the real direction of the market.

However, even though the SPX and OEX have been dropping the advance declines on Friday were not that bad. The NYSE had 1329 advances and 1662 decliners. With a -300 point drop you would have expected a more lopsided representation. The Nasdaq was positive with advancers leading 2085 to 1937.

The problem we face this week is the vacuum left by the lack of earnings excitement. With over 85% of the S&P-500 already reported the sheer volume of meaningful earnings announcements is dwindling. Without the earnings expectations to fuel the rise we could start to see pressure put on the market from sellers wanting to lock in profits from the +1000 points in April. There are a few major announcements left and many traders will be moving into these stocks and trying to squeeze a few more dollars out of this cycle. Dell reports on May-18th and Cisco on May 11th. Both could still have significant runs if the market does not correct this week.

The coming week is littered with potential economic reporting problems. Monday has Personal Income and Spending and Construction Spending to either fuel the inflation fire or douse it. Wednesday has Factory Orders but Friday is the killer with Non-farm Payrolls again.

This is retail week with many retail stores announcing earnings and analysts are sure to see inflation fears behind every robust announcement.

The big drop on Friday was a market-clearing move in some respects. What I mean by this is a lot of people had their stops hit and they were cashed out of their trades. This is positive because they will now be looking to put this cash back to work next week. The drop created another positive for us. There were many stocks that got hammered hard and the drop showed us where their support levels were. IBM for instance tested $204 again and did not hesitate to bounce. Many stocks we looked at this weekend retested support levels from the big Nasdaq crash on Monday two weeks ago. Those that held support and rebounded strong became good plays today. REMEMBER however that they are only good plays if the market continues flat or up. If the market decides to correct then you need to be in cash. It is imperative you are always market conscious and ready to bail out for a small loss if the market moves against you. The overall market is still positive and if we do correct then there will be a point where the buyers will step in and start the next up move. You need to decide now if you want to be a buyer when that happens OR do you want to be nursing a losing position that you held as the market fell. Who do you think has a better chance to win? Someone in cash or someone just wanting their position to get back to even again.

Have a great week!

Wait for an entry point! Sell too soon.

Jim Brown Editor


JIM'S PLAYS

I do not want to relive this week over again. The great move Friday happened after I had moved into cash and quit trading for the day. I sold everything except my Dell when the market appeared to peak on Friday morning. I was near a TV with CNBC so I got to live every tick of the afternoon drop but was no where near a PC and I could not trade it.

The week started off good with the Nasdaq up strong on the heels of the week ending rally from last week. I started several new plays and felt pretty good about the positions. Then the Tuesday sell off jumped up and bit me hard. It only went down hill from there.

The trades I started on Monday were closed with mixed results but then the problems started. You know what is coming. I bought the dip - too soon. On Tuesday afternoon I thought I saw the Nasdaq flatten and even show some support and I jumped back in with both feet hoping to hit the bottom. There was no bottom I quickly found out. Those trades were closed on Wednesday for a loss and I settled back and waited for the next opportunity. I decided to be more selective and not open more than one or two positions when the bounce came.

The brokerage stocks I had tried to trade on Mon/Tue were moving erratically so I looked for something that was maintaining an upward trend even though the Nasdaq was falling. The Knight Trimark (nite) play looked to be a perfect example.

Even though the Nasdaq had fallen, NITE had remained flat and even showed signs of upward movement. On Wednesday morning I bought NITE for $130 with the idea of writing calls on it. Within an hour the price was over $140 and the quick profit was too much to resist. NITE has a split next week and I thought the combination of Internet stock and split would insulate it some from the profit taking. I kicked myself later for not buying it back again Wed. night when the market dropped at the close but decided to go back to the original plan and buy it the next day and write some May calls. I waited until late afternoon on Thursday because the Nasdaq was still falling. When the Nasdaq appeared to firm at the end of the day I tried to buy NITE several times but it was moving faster than I could change the orders. I finally changed my limit buys to a market and got filled at almost the high of the day, $145. OUCH! Fortunately the chances for a technical bounce on Friday were borne out and we got the big open Friday morning. Again I saw NITE surge at the open to over $160 and I could not pass up the quick trading profit.

I bought Dell all week long at every false bottom I saw. I now have a larger position in Dell than I wanted but at $40-$41 Dell is a bargain with earnings still over two weeks away. I kicked myself all week also for not selling my Dell-May-50 calls on Monday for $1.88 when I had the chance. The greed factor got in the way. Knowing this was a free position in my eyes only clouded my judgement and I watched a very nice profit slip away to only a minor profit. For those of you who did not read last weeks column, I have a large number of contracts I stole on a dip the week before for $.44 each. A $1.44 profit on a $.44 option is a home run in my book but my target was a $2.44 sell. With earnings still over two weeks off I kept consoling myself with every Dell dip that it would come back with the market. THIS IS THE WRONG IDEA. THIS IS A CLEAR ERROR IN JUDGEMENT. I preach against this constantly but as you can see the teacher is still human. We all rationalize our losses and then suffer the permanent guilt from never regaining the previous profits. Enough said. I could have bought them back for $.75 several times.

I am not going to list how I got into and out of each trade this week but just the summary. I want to cut this short to respond to the many requests for "my" trading screen setup farther down.

Calls bought and sold this week. The day is the day I opened the position.



MON ATHM  MAY-150 AHQ-EZ @ $21.00 sold $19.38 loss   $  .63
MON EGRP  MAY-90  QGZ-ER @ $27.88 sold $32.00 profit $ 4.13
MON AMTD  MAY-110 TAZ-EB @ $31.00 sold $33.75 profit $ 2.75
MON NITE  MAY-100 QTN-ET @ $30.00 sold $42.00 profit $12.00
MON CMGI  MAY-300 GCB-EU @ $27.00 sold $29.00 profit $ 2.00
MON LXK   MAY-110 LXK-EB @ $16.63 sold $16.13 loss   $  .50

Dip buys on Tuesday (too soon!)

TUE QCOM  MAY-180 AAW-EP @ $27.13 sold $26.38 loss $ .75-
TUE MFNX  MAY-70  QFN-EN @ $17.00 sold $15.13 loss $1.87-
TUE EGRP  MAY-110 QGZ-ET @ $26.50 sold $23.25 loss $2.75-
TUE AMTD  MAY-110 TAZ-EB @ $28.69 sold $24.38 loss $4.31-

Stock bought and sold:

WED SHORT AMTD @ $127 bought @ $124.00 profit $ 3.00
WED BUY   NITE @ $130 sold   @ $140.00 profit $10.00
THR BUY   NITE @ $145 sold   @ $150.00 profit $10.00

Open positions:

DELL  MAY-50  DLQ-EJ @ $  .44    Target price $2.44
DELL stock @ avg of $41.38


TRADING CONFIGURATION

I constantly get requests for what do I look at when I am trading. Basically I have my realtime Interquote window open and a new program from www.Quote.com called Qcharts.

The Qcharts program has become my primary screen. The many features and realtime charts are just incredible. There maybe many more offerings on the net for professional traders but this program is great for the novice or intermediate trader. It appears to be idiot proof and simple to learn. It is still in beta testing but any quote.com user can still download it. It does take a subscription to get the realtime feed.

This is how I have my screen set up. I apologize for the size of this image but I wanted you to be able to read it. I use a 21" monitor on my trading system and that is how this was captured.

Each individual chart is adjustable for size, style, time, etc. I subscribe to the realtime feed so everything updates in realtime tick by tick. I load the charts for the stocks I am thinking about playing and I am ready to go. Every column in the quote frame is selectable. You can display over 100 different columns in any sequence you want including the comment field which is text you enter. I have the quote frame sort by the "net" for the day so the biggest gainer floats to the top.

On the top bar the "T&S" function is a time and sales list of all the trades for any stock. The "orange flame" produces a realtime watch list of dozens of different lists. I like the list of "very recent gainers" which produces a continuously updating list of stocks that have made big gains in the last couple of minutes. It will alert you to a stock that is breaking out of a pattern with a strong move just as it starts. When it quits moving it drops off the list.

The II is a Nasdaq level II quote screen. There are so many features it is impossible to list them all. The quotes are very fast since they are not browser dependent. I don't think I could trade without this program. You can't trade what you can't see! The charts also chart option symbols as well as stock and index symbols.

Next week my Interquote setup.

Jim

http://www.qcharts.com/qcharts/beta/

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