The Option Investor Newsletter Monday 10-02-2000 Copyright 2000, All rights reserved. 1 of 1 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/100200_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 10-02-2000 High Low Volume Advance/Decline DJIA 10700.10 + 49.20 10721.20 10631.30 1.03 bln 1264/1649 NASDAQ 3568.90 -103.92 3714.48 3559.84 1.79 bln 1424/2732 S&P 100 763.26 + 3.43 768.52 759.12 totals 2688/4381 S&P 500 1436.23 - 0.28 1445.60 1429.83 38.0%/62.0% RUS 2000 511.67 - 9.70 523.40 511.66 DJ TRANS 2464.42 - 57.22 2526.27 2460.71 VIX 23.43 - 0.42 24.12 22.34 Put/Call Ratio .72 ****************************************************************** Did I Hear Someone Say Divergence? I know I heard someone say it as the two major indices went their own ways today. Even as I awoke this morning to green futures' quotes, it just didn't feel right. How quickly can traders forget the drubbing that the markets took on Friday's quarter end? About a half hour. That's how long those positive feelings lasted after the open. Both the INDU and the NASDAQ slipped quickly and scrambled to recover their footing. While they both did turn around early on, only one of them would hang on for the day. The INDU managed to post a gain, while the NASDAQ went into a free fall, violating major support on the way. The story today was the NASDAQ's 2.82% decline on the first trading session of the fourth quarter. I heard market pundits all morning talking about what the past Octobers have done to the markets and so on and so forth, but only one thing is certain, October has a mind of its own. And today, traders picked up where they left off on Friday. The NASDAQ kicked off October by opening at the high of the day and closing just off the lows, giving up 103 points in between. Concerns from last Thursday's AAPL warning continued to plague hardware stocks, particularly DELL, which lost another 5% to close at $29.19. This is really unbelievable to see, especially considering that this once pre-eminent NASDAQ leader hasn't traded at this level since October 23rd, 1998! INTC also was a significant drag on the NASDAQ, and the INDU, trading below $40 for a brief moment, a level not seen since the first week of January 2000. With "the generals" falling left and right, there has been some significant technical damage done. With the NASDAQ's dominant downtrend and its moving averages high above its current level, traders and technicians were looking to recent lows as stopping points. I should say "support," but "stopping points" is more fitting after hearing other traders desperately saying "it's gotta stop here" throughout the session. The most recent low of 3614 set on September 22nd, the day after the INTC warning, couldn't stop the selling. Then, 3600 was next but that proved to fail as well. After that, it looked like clear sinking to 3521, the low from August. It would have been nice to take it down to that low and turn the market around on higher volume, but the NASDAQ wouldn't be so lucky. Regardless of how low the NASDAQ goes, we are going to need a high volume capitulation that leaves smoking skid marks. Volume was decent, but by no means heavy, coming in at 1.75 bln shares. Breadth on the NASDAQ was 2-1 in favor of decliners. The chart below is the same chart that I included in my Wrap from last Wednesday, same trendlines too. Notice that we did, indeed, get a oversold relief rally on Thursday the 28th, right up into the downtrend line. Today's trading resulted in a violation of 3614 and 3600, which represented key psychological support. After closing at 3566, we will be watching that 3521 low from August closely. Contributing to this breakdown were the Biotechs. Sparked by a Banc of America downgrade of MEDI, the BTK.X lost 7.5% today. The downgrade was to a Market Perform from a Buy, as analyst Eric Ende cut MEDI's 2001 earnings from $0.89 per share to $0.75 on fears of slowing sales of MedImmune's major drug, Synagis. As a result, Biotechs got hammered across the board. Bucking the trend at the NASDAQ were CHKP(+11.00), ADBE(+7.75), NEWP(+4.38), and RMBS(+4.06). Yet, in the world of diverging indices, not all was bad. The INDU held strong today after following the NASDAQ's bumpy lead. Driving the Big Board index were Financials and Oil Service stocks. Oil futures rose over a dollar today as traders speculated on a production interruption as Hurricane Keith drenched the Yucatan Peninsula and heads toward the U.S coast on the Gulf of Mexico. Traders continued to rally oil stocks which have outperformed the market handily over the past four months. XOM broke out to new highs, adding $2.38 to $91.44. Financials also were bid up as traders foresee a favorable interest rate environment for the next six months, given evidence of slowing demand in the form of earnings warnings. JPM(+5.13), AXP(+2.25), and C(+1.31) all had solid gains to help the INDU stay in positive territory. IBM(+5.19) also had a big day, and amazingly, CAT(+3.25) shook off its own earnings warning from Friday to rally. The chart below indicates that the INDU has been rangebound for the past two weeks between 10550 and 10900. It appears to be building a base at the 10550-10600 level. Today's trading was in a fairly narrow range as the INDU held 10650 solidly throughout the day. In the Financial arena, however less high-profile, it is worth noting that FleetBoston(FBF) announced that it will acquire Summit Bancorp(SUB) in a $7 bln deal. This deal is thought to be a strategic fit for FBF and would also provide them access to the wealthier New York/New Jersey market. FBF hopes to market its brokerage services and online banking to these customers. FBF lost $0.50 to $38.50, and SUB gained $3.75, a 10% gain. On the earning front, Walgreen's(WAG), a Chicago-based retailer, posted record results of $0.19 per share, in line with analyst estimates. Their rapid expansion was attributed to booming prescriptions and the healthy condition of the U.S. drugstore business. While WAG avoided an earnings squeeze, their stock couldn't avoid the sellers as it lost $0.81 to close at $37.13. The earnings loser of the day was XRX, which warned after the bell that things weren't as rosy as they thought. The company stated that earnings really won't be earnings as they look to post a $0.15 to $0.20 LOSS versus analyst estimates of a $0.12 per share GAIN. This is another chapter in the book of woes for XRX which just doesn't seem to end. XRX closed in NY at $15.31, but is down to $12.50 in after-hours. This may weigh on some of the old economy INDU stocks tomorrow. Looking ahead, the Fed will be meeting tomorrow. Huh? I know, it's funny how you don't hear about FOMC meetings when just about everyone has written them off for the rest of the year. The meeting is essentially a non-event as there are no expectations of any move on short term interest rates. Not even on the bias. In fact, there hasn't been a move since the 50 basis point hike on May 16th. Time sure flies. Keep your eyes peeled this week. We will continue to see volatility and maybe even some nice buying opportunities, if we can capitulate this downtrending NASDAQ. That is what everyone is waiting for so that we can get on with this expected strong 4th quarter. In this type of market, both the upside and downside can be played equally well, it just takes looking at things differently. In regards to my Editor's Plays from the weekend, I did not gain entry into the SEBL play as it broke down, yet the QQQ puts did break $88 for an entry. Good luck and when in doubt, stay out. Matt Russ Editor *********************** FREE ONE DAY TRADING SEMINAR Miami - Tuesday - October-10th. Phoenix/Scottsdale - Tuesday - October 17th *********************** OptionInvestor.com, Preferred Trade and E-Signal will hold a FREE seminar complete with handouts, freebies, door prizes and over six hours of solid information which can improve your trading results. Lightning trades, real time quotes, the best option strategies and a FREE BREAKFAST and LUNCH! How can you go wrong? It is free but you have to register so we can order food. http://www.OptionInvestor.com/seminar/free ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=535 ************************************************************** ************** TRADERS CORNER ************** Trusting Our Lying Charts By Austin Passamonte This is a true story laced with human emotion. Hope, fear, elation, overconfidence, chagrin, fear, relief and elation. Did I repeat myself? Just another week in the life of an option trader. It all started on Monday, September 25th as the markets rolled over yet again. We were following our 60/30 swing trade chart signals for the new IndexSkybox.com live-trading website. Even though it was still in the final stages of our test series, these trades have all the magnitude of public scrutiny to me. Our charts gave unmistakable entry signals and we bought QQQ Oct 90 puts, SPX Oct 1425 puts and OEX Oct 760 puts. Everything went our way into the close. The OEX put-play hit its profit target within two hours and we held the others over with equal measures of hope & fear. The way markets have roiled lately we prefer our trades to open and close within one session, thank you very much! All went well and our QQQ and SPX trades closed at their profit targets early into Tuesday. Nice way to start the trading week and to be honest, we were feeling a wee frisky for our own safety. Has that ever happened to you? Nice wins just clear the trading account and we're itching to do it again. If only the markets were as anxious to oblige. The absolute most dangerous time to enter a new trade is right after closing out the last winner. Especially if we're on a roll. So here I am watching the charts, scanning targets to spot the next entry. Common sense tells us if we were just playing the downside and got out, a reversal to the upside must be next. Then again, what does common sense have to do with options trading? Flipping through charts of the Dow, NDX, SPX and OEX showed most of their respective 60/30 chart signals buried in the oversold zones with no apparent sign of turning up yet. OEX charts surprisingly looked pretty good. Stochastic fast-bar values on the short-term charts were actually just turning up and MACD histogram easing from negative to the neutral line. High time to buy call options based solely on that. (60/30 min charts, OEX) Here's pretty much what I saw. And that's just what I did. Went and bought the Oct 780 calls @ $10 and set our stop-loss @ $8 to protect. I had the next two hours until close to reflect on where this play went wrong. The conclusion is: I flat-out made a poor judgment error and watched the market reverse from precisely the point we bought in to steadily slide towards bell where our stop at $8 was cleanly taken out. Where did I go wrong? Simple. I saw the OEX appear to flash an early buy signal while the Dow, NDX and SPX charts were flat to downright ugly. How in the world could the OEX go and rally by itself? Are its components not sprinkled across these other indices? Does it move contrary to all market natural law known to our universe? What in the world was I thinking? That's the problem; I wasn't. Thinking began after the trade was entered and I had time to watch it suffer, slowly bleeding to death until my stop order provided merciful relief. Has hindsight ever parted the seas of fog and allowed you to identify exactly what went wrong and how it could have been avoided? Where in heck is all this hindsight wisdom when we need it worst; times that foresight is all we have to work with would find hindsight most welcome indeed. ***** The week went on and Thursday morning came along. We had a few more trades and witnessed markets try to rally each morning only to stall as waves of anxious sellers greet each rally attempt. Even Maria and Carl were pretty skeptical on Thursday when pre-market futures were pointing up. I must admit, listening to their negative skepticism about how we've seen failed rallies each day did affect me. Now the night before I'd studied charts in the peace and silence of post-market action and felt pretty bullish for Thursday. All charts signals on the big four indexes were deep in oversold territory and curling up. The Game Plan sections of IndexSkybox.com were chock full of bullish news. Within five minutes and a few words spoken on CNBC, my confidence was shaken. Were the reporters right? Did they know more about today's market direction than my charts? Time would tell. Opening bell rang and the Dow took off with NDX trying to follow. Up went the Dow and then settled back. Up and back. The NASDAQs each went positive and negative...positive and negative. What would be our fate? (60/30 charts, SPX) Again, here is approximately what I saw under live fire. Decision time, point-blank. The 60/30 setups were screaming to buy calls on the QQQ, SPX and OEX. Darn those lying charts; didn't they realize everyone knew we'd see another market rollover today? Stupid charts anyways! For ten minutes, I agonized over what to do. Buy calls or stay flat, buy calls or stay flat. Ten minutes seemed like hours in a dental chair. Novocain please? To be honest with you, I almost didn't pull the trigger. The pressure of trading "live" in a public website only added to my indecision. My own money...I'd be in at the bell based on what the charts showed. The possibility others could follow suit really had me question what I saw. By now, CNBC was on mute and it was gut-check time. Finally, I took Ameritrade Stewart's advice and just bought. Clicked it in there. What pushed me over the edge? Prior experience numerous times ignoring chart signals, succumbing to that proverbial gut-instinct and paying the price for it. What's the worst that could happen if we were wrong? Our tight stops would get hit and little harm done. After all, small losses are an inevitable part of profitable trading. Bigger wins or more frequent wins being the other part, of course. For an hour, these trades went nowhere. That's easy to deal with when one can part themselves from the screens, but again it's an eternity waiting for live plays to inch out of danger. Just do something, for gosh sakes! Reassure me I was right or stop me out and end the suspense. Soon after 11:00am, the Dow caught fire and boogied up the charts. The OEX play hit its target with ease, as did the SPX calls. Too much ease in their case as we bought them at $20, placed our stop-protect order below entry at $15, and set a mental target to sell if the play reached $25. Risk one to make one unit with high-odds entry was our goal. Well, the SPX 1450 calls we bought at $20 reached $25 and slid, $25 and slid. We placed a sell-limit order on the first touch and exited at the next one. Nice 25% profit in less than half the market session. Eat your heart out, Buffett! What I noticed during this time were block trades of 50, 100 and 200 SPX contracts going through while my target was almost in reach. This should have told me to ride the trade just a smidge more, but we try to be objective and methodical as possible. That the trade was languishing a bit had me anxious to be out. Well, it didn't languish for long. One last dip after our sell stop was hit had me feeling pretty smug until the SPX turned tail and scampered up the charts, blowing past our exit at $25 to trade above 33 points before the close! We were grateful for the easy 25% gains but 65% was looking a lot better, I have to admit. Stick to the plan, stick to the plan I chant to myself. (60/30 charts; QQQ) Same story; next day. Friday followed one of the most bullish performances in quite some time, until Apple fell from the old earnings tree. Post-market futures dove and we prepared to buy puts near the open. Did the media help us out? Heck no, all they could talk about was the big intraday recovery after INTC the week before and how we could likely see that repeat today. Thanks for the vote of confidence in our put strategy, CNBC! Searching the charts for one key feature, one little signal to push me over the edge was found on the 60-min NDX and QQQ charts. Not only was everything curling down out of short-term overbought, but we had bearish stochastic/price divergence in front of our eyes. As many times as I've touted that signal right here with you, how in the world could I fade the signals and not buy puts? With that we loaded up on QQQ, SPX and OEX puts. You can guess the rest. The markets hovered and promptly tanked, sending them through our profit zones into the green. Moral of the story? Maybe these charts aren't really lying to us after all. Maybe when they converge to shout calls or puts, we should blindly listen and follow orders. Based upon last week's action, what do you think? ***** Housekeeping: We receive numerous emails and enjoy them all but for the sake of time conservation and repetitive questions, let me pre-answer the bulk of it here. We use Qcharts "Trader Package" for the system you see above but this is not an endorsement. Just our current choice, highly subject to change. All technical settings and signal interpretations have been covered in numerous OIN articles to be found in the "Education" section of this front page from the "Traders Corner" link. The answers to most questions are found within. We cannot comment on or discuss specific stock or option trade setups or opinions. Just methodology to approach generic trade situations. If you have further interest in learning more about this and other methods of trading options live, please visit us at: www.IndexSkybox.com You can follow the day's trading action live as it unfolds, watching over our shoulders as we wade into battle with the institutions and market-makers to glean our fair share and more. Hope to see you there and Best Trading Wishes until we meet again Wednesday! Contact Support ************************Advertisement************************* Attention Online Traders: NobleTrading.com has become the first online trading firm to offer both Direct Access Trading, and web based trading to its customers. Trade Direct using any ECN, SOES, and SelectNet, or trade right through your browser using our web based trading application. FREE DSL service for active traders. Visit our website and sign up for a Free real-time demonstration! http://www.sungrp.com/tracking.asp?campaignid=549 ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** CHKP - Check Point Software $168.50 +11.00 (+11.00 this week) Check Point Software is in the Internet security business. They develop, market and support Internet security solutions for enterprise networks and service providers, which also include Virtual Private Networks and Managed Service Providers. There are three main product lines for CHKP and they are security products, traffic control for bandwidth management, and finally management products. In a nutshell, Check Point delivers solutions that enable secure, reliable and manageable business- to-business communications over any Internet Protocol network including the Internet, intranets and extranets. Most Recent Write-Up SEBL has been dominant in overcoming resistance from the Tech bears during the last three weeks, which was epitomized Friday morning with a new all-time high over $118. Of course, the Strong Buy reiteration by Wit SoundView helped SEBL to its new 52-week high. But, try as it might, SEBL finally succumbed to the weakness in the Tech sector. SEBL was not along in its battle with the bears last week. Several counterparts, including ITWO, MSFT, and ORCL, felt the bears fury. However, despite the heavy selling that dragged SEBL lower last week, the stock is still in a clearly defined up-trend and should continue to rally as long as the NASDAQ cooperates. As such, SEBL's pull back last Friday could prove to be a profitable entry point as third-quarter earnings season approaches. If SEBL's month-long pattern of relatively higher lows continues, the lowest the stock should fall is right at its 10-dma, currently located at $106.44, which also happens to be the site of SEBL's last low. With that said, aggressive traders could look for a bounce off support just below at $110, of if that fails, watch for SEBL to bounce off the pivotal $106.44 area. A more conservative entry might be found if the NASDAQ strengthens early next week and SEBL rallies back above the $114 level. It might be worth monitoring the direction of SEBL's sector before entering new long plays. Watch the action in MSFT, ORCL, and ITWO before entering new positions. Comments Talk about bucking the trend! Not to mention, another high! As the NASDAQ accelerated to the downside throughout the session, CHKP's intraday chart was a mirror image. With no news, this move on more than double the ADV certainly turned our heads. To gain entry into this play, we would look for a pullback on some profit taking. A bounce from $160 or $155, site of the 10-dma, along with a return of buying volume would be playable. If the buyers return early on, look for a strong move through $170 for entry after amateur hour. As oversold rebound on the NASDAQ wouldn't hurt either. BUY CALL OCT-160 KGE-JL OI=649 at $15.88 SL=12.50 BUY CALL OCT-165*KGE-JM OI=362 at $12.75 SL=10.25 BUY CALL OCT-170 KGE-JN OI=915 at $10.25 SL= 7.75 BUY CALL NOV-170 KGE-KN OI=142 at $17.50 SL=13.50 Picked on Sep 3rd at $149.44 P/E = 198 Change since picked +19.06 52-week high=$170.75 Analysts Ratings 13-5-0-0-0 52-week low =$ 20.13 Last earnings 06/00 est= 0.21 actual= 0.25 Next earnings 10-20 est= 0.26 versus= 0.15 Average Daily Volume = 2.00 mln ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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