The Option Investor Newsletter Thursday 02-08-2001 Copyright 2001, All rights reserved. 1 of 2 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/020801_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 02-08-2001 High Low Volume Advance/Decline DJIA 10880.50 - 66.20 10965.20 10871.50 1.09 bln 1431/1642 NASDAQ 2562.06 - 45.76 2651.84 2562.02 1.85 bln 1681/2074 S&P 100 694.32 - 6.45 704.74 694.32 totals 3112/3716 S&P 500 1332.53 - 8.36 1350.32 1332.42 45.6%/54.4% RUS 2000 502.89 - 4.19 508.09 501.93 DJ TRANS 3025.24 - 9.43 3045.37 3012.35 VIX 24.09 - 0.43 24.48 23.57 Put/Call Ratio 0.71 ****************************************************************** Craving A Catalyst Following the big short covering rally Wednesday afternoon, the expectation going into Thursday's session was for higher prices in the broader market averages. However, in typical fashion, the averages popped just enough this morning to lead market participants astray before drifting lower due to a lack of a catalyst. The choppy, drifty action is making this tape a difficult one to game. Having said that, I reinforce that traders - both longs and shorts - need to practice nothing but discipline in the current market landscape. When translated, discipline means having sound risk management in place (read: stops). With no real catalysts to neither buy stocks nor sell stocks, the best game in town continues to be the fast and furious sector rotations that I, along with Matt Russ, have been mentioning recently. But even the sector rotation game was tough to discern during Thursday's trading. Of the 20, or so, sectors I follow each day, only three finished with gains. And of those three, two sectors finished only marginally higher. As you'll see on the sector watch list below, the three advancing groups were the Oil Index, Pharmaceutical Index and the Health Care Index. Worth noting, all three sectors are defensive in nature. Here's a quick list of some of the leading stocks within each sector. CBOE Oil Index (OIX.X): Exxon Mobil (NYSE:XOM), Chevron (NYSE:CHV), Texaco (NYSE:TX) and BP Amoco (NYSE:BP). There are obviously more components to the Oil Index, but these stocks are some of the bellwethers that are worth monitoring. AMEX Pharmaceutical Index (DRG.X): Merck (NYSE:MRK), Pfizer (NYSE:PFE), Eli Lilly (NYSE:LLY), American Home Products (NYSE:AHP), Alza (NSYE:AZA), Watson Pharmaceuticals (NYSE:WPI), Abbott Laboratories (NYSE:ABT) and Schering Plough (NYSE:SGP). Again, there are many stocks to watch within this group, but this list should serve as a good reference. S&P Health Care Index (HCX.X): Cardinal Health (NYSE:CAH), PacifiCare Healthy Systems (NASDAQ:PHSY), Healthsouth (NYSE:HRC), Humana (NYSE:HUM), Oxford Health Plans (NASDAQ:OXHP). The S&P Health Care Index has many sub-sectors within it, but the aforementioned names should serve as a good representation of the broader group. To reiterate, the three aforementioned sectors are defensive in nature and should capital flow back into the growth sectors of the market such as tech and finance, the defensive groups of stocks are likely to pullback. Nevertheless, the three sectors and some of the stocks within those groups should serve as a good reference in attempting to game the direction of the broader market going forward. What's more, the three defensive sectors I reviewed can offset some of the systematic risk associated with tech and finance; energy, drug, and health care stocks can act as hedges. But to make it perfectly clear, if tech and finance find some bids Friday, these three sectors are likely to decline. Now let us segue from defensive to offensive sectors. The Semiconductor Sector (SOX.X) has problems, big problems. As I mentioned earlier this week, I feel that the SOX is crucial in the progress of the Nasdaq Composite (COMPX). And unfortunately, as I had speculated on Monday, the weakness in the SOX is spilling over into the COMPX. I mentioned last Monday that, in my opinion, it was crucial for the SOX to hold above its 50-dma, which it did Tuesday and again Wednesday. However, the SOX, for the first time in a month, settled below its 50-dma. Keep an eye on shares of Intel (NASDAQ:INTC) and Applied Materials (NASDAQ:AMAT) to game the blue chip portion of the SOX. For the more aggressive portions of the chip sector, I like to watch shares of Xilinx (NASDAQ:XLNX), only because I trade the stock often and know its behavior in relation to the SOX. Along with the SOX and its impact on the Nasdaq Composite, I feel that shares of Cisco Systems (NASDAQ:CSCO) are equally important. The $30 level in shares of Cisco has acted as a floor for the stock following the company's earnings miss on Tuesday. If the $30 level breaks, and shares of Cisco begin to drift lower into the $20s, I think the COMPX will probably see the 2500 level in short order. Conversely, if the shorts begin to bring in their positions in Cisco, and the stock subsequently lifts from the $30 level, the COMPX may find a bit of relief and drift higher. But without a catalyst to cover shorts and buy Cisco, it's tough to say definitively which direction the stock will trade in. I'm not attempting to game Cisco here. Rather, the stock should be another variable to monitor when planning trades in the tech sector. One positive that I took away from the action in the COMPX Thursday was at least it didn't take out its day low from Wednesday, which was put in at 2554. If the rotation back into tech stocks begins early Friday morning, traders might attempt to pick a bottom near 2554, because the risk in doing so is pretty easy to quantify - a mental stop could be set just beneath the 2550 level in the COMPX. If the COMPX drifts below the 2550 level, it could very well make its way to 2500 as I don't personally see much support below 2550. The way to discern rotation back into tech stocks is to monitor price action in the SOX, shares of Cisco, and the defensive groups I alluded to above. These, of course, are just the variables that I follow, but should serve the purpose of monitoring rotations. The individual risk tolerances and time frames of traders should dictate the individual metrics they follow. By scaling into some tech exposure near the oversold levels in the COMPX, traders can position for a potentially high-rewarding bounce while containing risk to relatively small increments. However, this is a strategy that only active traders should pursue, who have the ability to monitor positions throughout the day. For those traders unable to actively monitor positions and manage risk, I wish I had a strategy for you to employ in the current marketplace. The fact of the matter is that I don't feel comfortable suggesting any sectors or stocks for intermediate-term trades - that is, trades that last longer than a day or two. However, as soon as I discern a trade that has the possibility of a prolonged move, I'll be sure to convey that message in my market commentary. Two trades that had been working for a prolonged period of time recently were in the finance and retail sectors. However, those money-making trades have come to an abrupt halt this week. Thursday morning, several retailers warned of lower profits and weak same-store sales in the month of January. Among the notable warnings, Gap (NYSE:GPS) said same-store sales were in the red across all of its divisions, which includes Gap Stores, Old Navy and Banana Republic - by the way, Banana Republic is a much-visited store by this consumer. I do my part in boosting Gap's sales in that division. The retail sector has run-up over the last several months in anticipation of lower interest rates. And up until this morning's warnings, the retail sector was still running as measured by the S&P Retail Index (RLX.X). The same-stores sales reports this morning gave traders a reason to take profits in the group, and I suspect that the sector will now settle into a consolidating trading range. However, with more interest cuts looming in the not-too-distant future, I think the retail sector has room to trade higher. The name of the game right now with the retail sector is to wait for the leading stocks in that group to base for a decent amount of time, and look for entry points during their next legs higher. Some stocks that have been acting well within the group include: Steve Madden (NASDAQ:SHOO), Christopher & Banks (NASDAQ:CHBS), American Eagle Outfitters (AEOS), Abercrombie & Fitch (NYSE:ANF), Costco (NASDAQ:COST) and Liz Claiborne (NYSE:LIZ). Here again, the list could go on, but these names are a good starting place. And to reiterate with the retailers, I would expect some consolidation so be patient with the group - but that's just my opinion. As always, refer to price action and not my opinions. The finance sector, like the retailers, is also pulling back on profit taking. There isn't a real good reason to sell the financials right now, other than to take profits. The financial stocks will trade higher this year as the preceding interest rate cuts work their way through the economy and the upcoming interest rates cuts get discounted into share prices. I think there will be a lot of upside surprises in earnings in the financial space in the coming six months, and for that reason the group still looks attractive to me for investment purposes. Keep in mind that there's a big difference between trading and investing! For trading purposes, I think it's difficult to game the short side in the financials. Although OptionInvestor is gaming the profit taking in a Goldman Sachs (NYSE:GS) put right now, I think any short in the financials should be approached with tight stops. The Fed is on the offensive, it's just that simple. In trading the long side in the financials, at this point, it's a question of when the profit taking subsides and the base-building begins. Once these stocks in the financial space build a base, look for breakouts, or even consider gaming bottoms. For a good case study on how to game profit taking, consolidation, and subsequent breakouts in the financial space, take a look at shares of Astoria Financial (NASDAQ:ASFC). This isn't a recommendation to buy the stock. Rather, a study on how to trade finance stocks. And with the finance stocks pulling back on profit taking, the Dow Jones Industrial Average (INDU) will have a hard time breaking the 11,000. I know the INDU has poked above that level this week, but has not closed above that level yet, which is key in my mind. Matt Russ called it pretty closely in his market commentary Wednesday when he suggested the INDU would pullback to 10,850 if it didn't plow above 11,000. The 10,850 level looks like solid support, but if it fails, a decline back down to 10,800 is likely. That might be the spot to leg into some financial exposure as the risk is pretty easy to quantify. And although I've suggested ways to pick the bottom on both the INDU and COMPX tonight, you must keep in mind that picking the bottom in any market operation is a difficult proposition. Realize that no trader can pick the exact bottom in any market consistently. However, a trader can attempt to pick the bottom by slowly scaling into exposure at clearly defined levels, after clearly defining risk parameters. I'd like to make it clear that the market is very difficult to game right now. I would suggest trying to game the sector rotations which have been so dominant this year. But, in doing so, it's crucial to know the levels of support and resistance in the sectors you're trading along with the individual mediums with which you plan on trading with. With the oversold condition of the tech sector, I would expect a relief rally beginning as soon as tomorrow morning. But I was of the belief that the Nasdaq would advance today, so it goes to show that my opinions, in the end, mean nothing to the market. Until a clear catalyst emerges to buy stocks, trading will be tough and choppy. We'll make sure to cover some potential catalysts in this weekend's market commentary. Also, I'd like to thank the hundreds of people who took the time and effort to send in their opinions and suggestions concerning my market commentary. I'm in the process of replying to each and every reader who was motivated enough to respond. If you haven't received a response from me, it's on the way. Eric Utley Assistant Editor ************************************ Spring Options Workshop and Bootcamp April 5th-9th, Denver Colorado ************************************ OptionInvestor is proud to announce our third annual Spring option workshop in Denver Colorado. This power packed five-day event is structured to fully educate you on advanced option strategies and will make you a better and more profitable trader. If you attended the March Denver Expo last year and thought it was the best function you had ever attended.. You haven't seen anything yet! Great food, entertainment, education and just plain fun in sunny Denver. The biggest complaint in March was the massive weight gain experienced by the attendees from the gourmet menu. We know how to put on a function. Ask anyone who came last March! We guarantee the speaker lineup to be second to none. In the October seminar not only did we have Jim Brown and over 15 of the OIN staff but Steve Nison, the father of modern candlestick charting. Also, Dick Arms, creator of the Arms Index or the Trin Indicator, Gregory Spear, author of the Spear Report, Stan Kim, founder of the Snail Trader System and Jim Crimmins, president of TradersAccounting.com. We promise the lineup this April will exceed your expectations again! This is not a beginner seminar but if you feel the need to brush up on the basic trading strategies then we have an optional boot camp the day before the four day seminar begins. If you have traded options before and you are comfortable with the basic strategies then this seminar will take you to a new trading level. If you have been trading options for sometime and are ready to broaden your knowledge and improve your trading results in all kinds of markets then this is for you. Meet and interact in a small group setting with the writers you have seen in OptionInvestor for the last four years. We are starting the seminar with an optional one day boot camp which will cover all the basic strategies, calls, puts, leaps, covered calls, naked puts, spreads, straddles, etc. This will help investors not familiar with all the basic strategies get up to speed before the intensive education and the advanced material in the main seminar. The boot camp will be 8 hrs of personal instruction by the OIN staff. The main seminar will begin with a reception, dinner and entertainment on Thursday night and continue non-stop until noon on Monday. We mean non-stop. We don't quit until you do and many optional sessions last until 10:PM or later. The detailed schedule will be posted in about two weeks. There will not be individual breakout sessions during the day. Each topic will be covered in 1-2 hr general sessions taught by one or more OptionInvestor staff and presented on three giant screens. In the evening we will offer five of our popular chalk talk sessions for that personal question and answer interaction. The list of instructors is led by Jim Brown and will include many OIN staff with outstanding guest speakers during lunch and dinner each day. The Spring Denver Expo seminars fill up fast and seating is limited! SIGN UP NOW or risk missing out on this opportunity. Unlike other seminars with only two or three instructors, you will get in-depth knowledge from many different instructors who are experts in their field. The cost for the four-day workshop, April 6th to 9th is only $2995 (spouse only $1495). This includes breakfast, lunch and supper each day. All course materials, a CD of all the presentations and a professional video package of the entire seminar so you can review the material at home in the comfort of your living room. There is also a $500 discount if you have attended a prior OIN seminar. This is not a prepackaged presentation that gets repeated over and over with stale information. This is a one-time production and everything is fresh, live and as current as we can make it. The videos will have your real time questions and answers and not some from a prior class. Where else can you get intensive yet personalized options education like this? Do not delay as seating is very limited. We guarantee you will not be disappointed! You can pay for your education one bad trade at a time or you can invest less money one time to learn how to do it right. Click here for more info: https://secure.sungrp.com/workshop/april01/index.asp *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1571 ************************************************************ **************** MARKET SENTIMENT **************** Barren Pastures Already? By Austin Passamonte A late-winter chill is settling over bullish pastures this week. Not long ago we were bombasted with rhetoric from CNBC and all directions around us of "Rally Ho". Have to admit, all that talk does have an effect on even the most objective technicians. If we were locked in a room with the message, "You're a green Martian.. you are a green Martian..." piped in for successive days on end and everyone in contact with us repeated that, we'd be checking the color of our own skin before long. Such is the effect repeated mantra has on the masses every time. Power of suggestion will break down even the toughest neutral opinions when repeated long & loud. Too bad it cannot do the same thing to market reality or we'd all be rich way before this. Now that media celebrities, clueless about market action have been squelched from emotionally-biased chatter, let's assess the situation once again from a technical and fundamental point of view to weigh the evidence in front of us. Fundamentals first. Interest rates are falling faster than Wal- Mart prices (referring to those TV commercials, not stock prices although both are applicable today) and a tax cut is promised for what that's worth. Bullish trader's only hope to avoid new market lows is the dangling golden carrot of another surprise rate-cut by the Fed at any given moment. Fool's gold? That in our opinion is the sole remaining leg this weakened market has to stand on and its knee is looking a bit wobbly from here. The economy is slow and will not V-bottom a recovery. Joe Average citizen's mind-frame does not change nearly that fast no matter what fiscal first-aid is applied. Traders used to changing emotions at the speed of sector rotation often fail to maintain touch with how the vast majority thinks, feels & reacts with economic change. Promise of rate cuts get all those exuberant momentum-bulls jazzed up but won't have the masses storming retailers to spend "excess" dollars any time soon. Energy providers will suck that money away long before then. False catalyst to pin bullish hope on right now. Inflation, stagflation and recession are not beyond the realm of possibility or even probability before economy improves. Traders forget to recall that markets continue to rise after the first few rate hikes in a tightening mode and continue to fall after the first few cuts in an easing mode. Takes time to work through our system in each event. Those who are certain January 3rd was an ultimate multi-year bottom may very soon discover otherwise. Technically speaking, mid-term charts are a mess. The Dow has failed to crack that venerable 11,000 ceiling and may have tested it for the last time this week and quite some time ahead as well. A triple-top failure pattern since October would be the result. Daily Stochastic, RSI and every other common oscillators are turning down from oversold as we speak. The NDX and Comp have reached the point of oversold on daily charts but it could be some time before a base and reversal occurs. Retesting previous lows at the least is highly possible. Keep in mind that the Dow and NDX have yet to trade at extreme lows together. Money has always chased from one to the other. The same scenario may repeat itself this time but should both indexes test lows together, we would see deeper SPX and OEX levels since 1999. The VIX/VNX have been posting lower readings since early October 2000. Too many call buyers spurred by false hope(and hype) tilting the ship. Commercial S&P 500 traders continue to short every rally and have been scoffed at lately for doing so. Right now that seems like a pretty wise idea, especially today! How many SPX puts or bear- call credit spreads would you like to be holding now since just last week when the cash index traded near 1380? The right answer to that question is, "Ten times the number I could afford at the time". What next? Market Sentiment has moved to staunchly bearish and will follow the only ones we see making money on the long side in current market conditions; sell every rally with both hands and the kitchen sink. Long puts have been profitable and bear-call credit spreads almost easier than finding a bag full of cash tumbled from the rear door of a security truck (current news event). We hope the person who snatched that half-million dollars off the street does the right thing and turns it in (?) but if not, please consider using it to buy long puts and/or sell call credit spreads for the next few weeks or so. Then return the original funds while keeping your much, much- bigger resulting share! ***** VIX Thursday 02/08 close: 24.09 VXN Thursday 02/08 close: 62.91 30-yr Bonds Thursday 02/08 close: 5.46% Support/Resistance Indicator The Index Support/Resistance(S/R)Ratio is a formula used to gauge possible support or resistance based on open-interest disparity. Ratio listed is percentage of calls to puts or puts to calls respectively. Support is factored from dividing puts by calls at strike levels beneath index closing price. Resistance is factored from dividing calls by puts at strike levels above current closing price. Thursday (02/08/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 740 - 725 11,957 1,046 11.43 720 - 705 9,617 8,317 1.16 OEX close: 700.77 Support: 695 - 680 2,915 8,888 3.05 675 - 660 312 7,280 23.33 Maximum calls: 720/3,860 Maximum puts : 700/4,702 Moving Averages 10 DMA 710 20 DMA 704 50 DMA 701 200 DMA 756 NASDAQ 100 Index (NDX/QQQ) Resistance: 70 - 68 87,629 9,843 8.90 67 - 65 65,117 37,298 1.75 64 - 62 74,151 41,867 1.77 QQQ(NDX)close: 60.60 Support: 59 - 57 11,759 23,518 2.00 56 - 54 7,267 24,268 3.34 53 - 51 2,142 22,795 10.64 Maximum calls: 70/60,740 Maximum puts : 60/41,413 Moving Averages 10 DMA 63 20 DMA 64 50 DMA 63 200 DMA 82 S&P 500 (SPX) Resistance: 1400 16,383 1,981 8.27 1375 9,306 6,302 1.47 1350 16,038 16,571 .97 SPX close: 1340.90 Support: 1325 10,897 11,633 1.07 1300 2,812 13,948 4.96 1275 586 10,962 18.71 Maximum calls: 1400/16,383 Maximum puts : 1350/16,571 Moving Averages 10 DMA 1358 20 DMA 1347 50 DMA 1335 200 DMA 1415 ***** CBOT Commitment Of Traders Report: Friday 02/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts on the Chicago Board Of Trade. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs are not. Extreme divergence between each signals a possible market turn in favor of the commercial trader's direction. Small Specs Commercials DJIA futures (Current) (Previous) (Current) (Previous) Open Interest Net Value -467 +426 -5599 -7528 Total Open interest % (-6.18%) (+5.66%) (-22.99%) (-30.35%) net-short net-long net-short net-short NASDAQ 100 Open Interest Net Value +1810 +1262 -6642 -4061 Total Open Interest % (+11.61%) (+8.36%) (-10.94%) (-5.90%) net-long net-long net-short net-short S&P 500 Open Interest Net Value +73434 +69952 -93215 -91053 Total Open Interest % (+39.86%) (+37.54%) (-12.53%) (-12.11%) net-long net-long net-short net-short What COT Data Tells Us ********************** Indices: The disparity between Commercials and Small Specs remains intact on the S&P 500. Small Specs have moved from net- long to net-short on the DJIA while the Commercials have increased their net-short positions on the NASDAQ 100. Interest Rates: Commercials are moderately short T-Bond and T-Note futures. (mildly Bearish) Currencies: Commercials continue to build heavily short Euro futures while small specs build net long. Small specs are betting on interest rate reduction while commercials remain skeptical. (Bearish) Energies: Commercials are net-long crude & oil products at one year extremes. These producers are hedgers and almost always take the opposite side of expected market action to lock-in production prices. They expect lower prices from here (Bearish) Metals: Commercials are moving to net-long in Gold, Silver and Copper from short positions. This has happened quickly and they expect higher precious metals soon.(Bullish) COT/CRB: This commodity index measures the entire spectrum of commodities in overall bullish or bearish outlook. It is now at a one-year high for commercial bullishness, meaning the outlook for commodities is long-term positive while equities as a mirror are considered long-term negative. Data compiled as of Tuesday 01/30 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://www.OptionInvestor.com/marketposture/020801_1.asp ************** TRADERS CORNER ************** How's the Trading Going? By Molly Evans Tonight we need to clear up a couple of questions written in to me by readers. The first concerns my last Trader's Corner article of January 25th, "Making Rational Decisions..." One reader astutely yet very kindly confronted me for obviously violating my own business plan discussed in my "The 2001 Trading Plan." In the Making Rational Decisions article, I had lamented that I held a bullish trade even though I had turned bearish for the day and for that stock in particular. I had wanted to give my trade time and room to let the market noise do as it will and not be stopped out. As our reader pointed out, this is in direct conflict to my business plan which states that I will trade strictly by the charts, thereby taking the emotion out of it. This would imply that no profit is too small to take if the chart has turned against the trade. As he so aptly states, it was "interesting to see how greed took over discipline that you set out in your business plan." Indeed interesting! And DUMB! I'm embarrassed but will confess to how this trade has turned out. Those were SUNW(Nasdaq:SUNW) calls. My entry point was just under $30 and I STILL have the March calls. TERRIBLE! You say? Not really - I altered the plan and am trying a little experiment with these. Yes, I broke my rules in the business plan but have been extremely loyal to it before and since this mistake. The plans work very well if one will stick to it. I've been selling February calls against these March calls every day based on the thirty and sixty minute charts. It's absolutely amazing how lucrative it is to be the seller. I'm following the plan to a T - i.e. - trading the chart and profiting anywhere from a half a point to a point and a half on these calls. Still, I'm not quite even but I anticipate that I'll own the March calls free and clear before next week's Options Expiration day as I'm not far off. IF this works out nicely, I'll add it to the business plan as a strategy to generate consistent returns. The negatives of doing this are the commissions, obviously, and I could have something get away from me very quickly. For example, I have the March 30 calls and have been selling the February 25s. That's not exactly the way one should do it. I know this and am willing to assume the risk that should SUNW suddenly zoom up the chart, I'd have to buy to close the position at a loss so as to not be assigned a whole lot of SUNW stock at $25.00. For now, it's working and it's been a learning experience for me. That can't be all bad. So, a trading plan doesn't have to be written in stone and I did leave room for that in my original format. The reader further asks: Q) How have I fared using the disciplines set forth in the business plan? A) Very well! Much better year. I've stuck to my own loss limit on any one position and if I see that I'm wrong before that - then all the better, I've gotten out. The worst loss came on a gap against me resulting in a 32% loss. I already squawked about that in a previous article. And would you believe that just yesterday I bought Microsoft (NASDAQ:MSFT) puts just TEN minutes before that story about a potential settlement with the DOJ hit the wire? That thing was on the verge of breaking down and going to close its gap at $55 in my estimation. Then, POW. Quickest 25% hit I've ever taken. And then of course, the thing spent the entire session red today. Anyway, in addition to my lost discipline, I've stuck to the allocation of a set amount in any one position and trade only a set portion of the portfolio - profits go to the bottom line but are not then used as trading risk. Q) It would be helpful to see the decision making process of your trades. A) Ahh. Well, I've become much more patient. My rules state that the entry may be to the long or short side of the market but must be based upon compelling technical and/or fundamental setups. I'm all technical though. As Austin says, it's certainly better than a toss of the coin! It's working for me whereas fundamental analysis is fraught with subjective interpretations and reactions, and unfortunately, downright dishonesty. Therefore, my trades are based on the technical indicators and my market bias. Yes, as many of you could guess, I keep a lot of puts in my account and I'm all too quick to flip out those calls - err - well, except for SUNW. Q) You mention that if it's overbought and the trend is down, that you buy puts. What technical indicators will you use to determine the underlying equity is overbought? What other technical indicators do you heavily rely on in making your trades? A) No magic formula here. I look for support and resistance lines - anything I can draw a line across, I do. I use Fibonacci retracements a lot too. On Qcharts you just hit the retracement tool and draw from a low point to a high point of an equity's move and the retracement levels paint themselves in. It's amazing how price bounces off or will consolidate on the 38.2% and other levels so often. But by far, my favorite is the stochastics indicator - with the %K length set at 10, the %K smoothing set at 3 and the %D smoothing set at 5. I look hard for divergences in the thirty, sixty and daily charts. You might recall a blurb I wrote one time about taking some knocks in Lehman(NYSE:LEH)? Well - I never forget who owes me. LEH owed me. Take a look at the chart. I found this one on a daily over last weekend. I hope my explanations are satisfactory to show how I see a setup. If I'm bearish on the market for the day - I try my darndest not to see bullish plays unless it's SO obvious that everything is turning and we've got the makings of a good run in progress. I don't want to enter into a bullish (or bearish if I'm bullish on the day for that matter) trade going against the general market current. I do my homework the night before and form my opinion as to what the potential scenarios might be and how they might unfold. When things seem to be going against what I thought - I try to step back and be objective, determine if my own thinking was flawed or if the actual "lines in the sand" have convincingly been crossed. Let me give one example of that. Today, LEH spent most of the day in the green. However, I'm bearish on the market through today and into tomorrow, maybe Monday for a variety of reasons. So, last night, I thought LEH was looking a little oversold on the thirty and sixty minute charts. I ask myself - is this a chart I would buy if were bullish the market? Oh yes indeed it is. So I should sell my puts right? No. Why not? Because I think LEH's intermediate trend is down. So what can I do while I have to suffer it's upward gyrations against my position? Then, I drew a trendline down the slope - it's all very easy - and simply waited to see if it would bump its head again - and indeed it did. I got one point per contract in just that short time frame and then watched smugly as LEH got on with its business of going on down the line. Q) What is scalping? A) Scalping is just what I did with LEH and what I'm doing in selling those SUNW calls - just going in for a short time to shave off a point or a fraction of a point while the iron is hot. Usually that term is applied to daytrader's methods of buying big blocks of shares - say 1,000 shares and selling it for an 1/8th of a point higher for a gain of $125. They make money (or lose it) by doing this many, many times over the course of a day. I wrote that into my business plan with the intention of doing it with stock on breakouts or breakdowns - but I seem to have no talent for that so I've written that right back out of the plan. Whew! This article has gone on much longer than I thought it would and I didn't even get to the other reader's question about reading divergences in indicators. Darn. I'm sorry but that one is going to have to wait for next week. I've taken up enough of your good time as it is. Go watch ER. See you next week. MKE ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1585 ************************************************************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** AEOS $53.63 -4.63 (-2.24) Shares of AEOS sold off today amid broad sector weakness in the retail specialty apparel sector. We can blame it on the Gap, which reported disappointing January sales, and predicted lower-than-expected fiscal fourth quarter earnings. While AEOS is still expected to beat expectations, it sold off in sympathy, as did LTD, and ANN. Since AEOS closed below our stop level, we are dropping it tonight. LU $16.89 -0.12 (-0.84) In the wake of the CSCO fallout, many related players are still suffering, including LU. While the damage has been relatively contained, LU, as well as the broader market, is desperately seeking the next catalyst to drive it higher. Today's drifting took LU below our stop loss level of $17, if only by a fraction. LU may continue to consolidate its recent gains as it waits for the next catalyst. In the meantime, we will take our 16% profit in the stock tonight, wishing it would have been more. NKE $55.18 -1.50 (+0.23) NKE's bullish disposition was evident in Wednesday's session with the share price edging upward to $57.50 on respectable volume; although, there wasn't a significant breakout to entice traders to take positions. The broad marketplace simply wasn't advantageous for our call play on NKE. The negative bias and profit taking that ensued as the price level approached the 52-week high of $60.06 took its toll. Today, NKE opened to the negative and saw clear violations of the 5-dma ($55.72) and 10-dma ($54.74) before it rebounded in the last hour of trading. The stock's weak upside recovery from $54.12 barely positioned it topside of our $55 protective stop and leaves us no choice but to close the play on NKE this evening. PUTS: ***** SCMR $24.94 +1.25 (-2.06) Sycamore offered fast profits for put players on Wednesday, with a drop from $26 down to $23 in the morning. Thus, we revised our stop level to $25 on Wednesday. On Thursday, Sycamore dropped from $25 to $23.88 by mid-day, but rallied at the close. This afternoon rally may just be short covering, as the stock had trouble at the $26 level where sellers stepped back in. The shorts may be reasserting themselves for another down turn, yet we are taking our profits and dropping SCMR tonight. IDPH $59.50 +1.38 (+2.28) It looks like the roller coaster ride in shares of IDPH has reached bottom and is attempting to establish a new upward trend. After reaching bottom near $55 early Monday morning, the stock has been gradually ticking higher, and has been flirting with our $60 stop for the past 3 days. In fact it actually breached that level on an intraday basis today, and that, combined with a series of higher lows this week, severely weakens the bearish case for IDPH. Throw in the refusal of the Biotech index (BTK.X) to proceed lower, and it seems like it is high time we throw in the towel on IDPH before it really moves against us. *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1579 ************************************************************ 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. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Thursday 02-08-2001 Copyright 2001, All rights reserved. 2 of 2 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/020801_2.asp *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1572 ************************************************************ ******************** PLAY UPDATES - CALLS ******************** CIEN $82.94 +1.06 (-0.81) Although the NASDAQ continued to stumble today, the bears couldn't dominate the action on CIEN. After dipping to $79.44 shortly after lunch, buying volume came back in a rush, pushing the stock up by more than $6 in the space of an hour. Aggressive day traders could have made a quick buck during the sharp rise, but needed to be nimble to lock in those profits as the bears came out of hibernation in the final hour, pushing our play down to test intraday support near $82 at the close. So where do we go from here? Nimble traders will continue to rule the day with CIEN in the near term, as they target shoot dips near the $80 support level. Just keep in mind that CIEN is trying to buck the broader NASDAQ trend, and so the stock is likely to be volatile. One encouraging note in today's session was the fact that the stock managed a positive close on volume in excess of the ADV, on a day when the NASDAQ closed negative. Although this is an aggressive play, more conservative entry points may be possible as the bulls become dominant again and push CIEN through resistance near $85. Keep in mind that this is a short-term play, as the company will be reporting its quarterly earnings next Thursday before the open, and we will want to be out of the play the night before. DELL $26.06 -0.44 (+0.88) Technology selling continued to plague the bulls today, and all things considered, our DELL play held up rather well. Although the stock ended the day with a fractional loss, it came on volume that was only about half of the ADV, indicating that there is not a rush for the exits. Rather, investors are holding their breath and waiting for the next catalyst to drive the stock one way or the other. We're hoping that anticipation of the company's earnings next Thursday (February 15th) after the close will provide a nice upside bias over the next few sessions. We would like to see the bulls hold the line near today's $26 intraday support level and make another run higher, as we are getting rather close to our $25 stop at this point. Intraday dips to $25 are still buyable for traders that can tolerate a bit more risk, but the more cautious approach will be to wait for buying volume to come back and push DELL back up through the $27.50 resistance level. Make sure the NASDAQ is moving up before playing, as DELL will have a hard time bucking the market trend. RE $63.11 -0.92 (+3.61) That's about what we expected RE to do today, as it seemed unlikely that it would be able to plow through its upper Bollinger band on a day when all of the major indices lost ground. Given the fact that the stock was a bit overextended as of yesterday, it was encouraging so see the bulls hold the loss to less than $1 and keep our $62 stop at a comfortable distance. While we don't have an entry point yet (we need to see buyers step in to support the stock first), $62 looks like a good level for initiating new positions, provided support holds and RE heads up from there. Adding strength to our notion that today was simply profit taking, the stock only managed a paltry 211,000 shares of trading volume today, 40% of the ADV. As long as there is no rush for the exits, it seems the bullish trend has good odds of continuing. There ought to be a couple more weeks in which to play the stock, as it heads towards its earnings announcement, scheduled for February 21st, after the close. Watch the Insurance index (IUX.X) for an indication of the direction of the broader sector before playing - any serious weakness in the broader sector will eventually be felt by even the strongest stocks, and we don't want to get caught unaware. ******************* PLAY UPDATES - PUTS ******************* AETH $30.63 -6.23 (-12.99) Heavy selling continued in shares of Aether today, as two Wall Street firms issued downgrades. Lehman Brothers revised their year end price target downward, and Robertson Stephens downgraded Aether from a long-term Attractive to a Buy. According to the Robertson Stephens report, it will be difficult for Aether to deliver substantial upside surprises this year. Aether gapped down nearly four points at the open, and rallied up to $34.31, at which point the sellers took control and pushed the stock below support at $32 and $31. If support at $30 is broken, the next support levels are $29 and the 52-week low of $28.50. Traders can take positions at current levels, or at a roll over from $32.00. Watch the wireless sector for weakness, and set stops at $35. HGSI $51.81 -0.44 (-3.63) Mirroring the broader Biotech index (BTK.X), HGSI is gradually coming back to earth. The sharp rise Tuesday morning, which was due to a nearly 10% move in PDLI, gave us a great entry point into puts on HGSI. Our play shot as high as $56, before beginning the long steady decline that has characterized the remainder of the week. Each bounce has less life in it than the one that came before it, and support between $51-52 is just about to give way under the bears' assault. Volume is a bit of a concern at this point though, as it dropped to just about 50% of the ADV in today's session. Aggressive traders can still attempt to grab a better entry point on failed intraday rallies, so long as our $55 stop remains intact, but a more conservative approach will be to wait for support to fail on heavier volume. Just below the current support level, the bears will have another downside obstacle in the form of the support at $46-48. If they are successful in breaking this support level, it could be a quick trip to the $40 level, especially if the BTK.X continues to weaken. Keep in mind that we have earnings looming just around the corner; unofficially they are set for February 13th, but the company will neither confirm nor deny the date. Take this into account when considering new plays and stops on existing ones. IDTI $38.19 -0.31 (-4.38) Well, it hasn't exactly been a thrill ride, but IDTI is continuing to deliver daily drops to keep the bear happy. Intraday rallies keep running out of momentum at resistance, keeping our stop (now at $41) intact so that we can ride the play again tomorrow. The intraday chart is instructive, showing the formation of a bearish wedge forming, with horizontal support resting at $38, very near today's lows. Entry points should be fairly easy to gauge, with aggressive traders targeting a rollover near the descending trendline ($40.50). More conservative players will want to wait for $38 support to fail, and enter new positions as this level is penetrated on increasing selling volume. The collateral damage in the Networking group is still being priced in, as we can see by the continuing weakness in stocks like CSCO, NT, JDSU, and GLW. Until the selling in these stocks winds down, IDTI is going to have a hard time holding its ground. One note of caution on the play is of a purely technical nature. With the convergence of historical support at $36, the lower Bollinger band at $37, and daily Stochastics flattening out in oversold territory, IDTI could be due for some short covering in the near future. Keep this in mind when planning and managing your trade. STT $108.71 +0.40 (-2.03) The first day of our new Financial play was a big yawn, as STT traded in a narrow $1.50 range all day, before actually closing positive with a fractional gain. This is interesting, as the Brokerage index (XBD.X) managed to move in a 3% range, ending the day with a slight loss. So STT was actually stronger than the underlying sector - not exactly what we are looking for in a put play, now is it? But with the bearish trends still intact on both STT and the XBD, it looks like today may have just been a low volume day, with little interest. Our entry strategy looks intact as well, with aggressive entries materializing on a failed rally between $110-111. Waiting for support near $108 to fail may be the more prudent strategy at this juncture, with the broader markets unsure of which way they want to move. The technicals are still in our favor, as Stochastics are continuing their rollover, and MACD is just about to turn negative. Wait for selling volume to pick up, and then jump aboard for the next leg down. Keep stops set at $111. GS $105.95 +0.75 (-8.01) A rough day of trading for financial stocks yesterday translated into a good day for our put play in GS, as the stock fell sharply in sympathy with its sector. News that two of the largest investors of GS, Sumitomo and Kamehameha, filed to sell about 3 million shares of its stock only added fuel to the fire sale. Today, GS attempted to bounce back from oversold conditions in the early going but encountering resistance from the 5-dma at $109.23, the sellers returned with avengeance. While the stock did close up fractionally, there was little for the bulls to cheer about. A break below $105 on good volume could allow for an entry on weakness as it appears that GS may be headed lower to test its 50-dma near $102. For higher risk players, look for another failed rally above resistance at the 5-dma as well as our stop price at $107 as a potential entry point. In both cases, confirm with peers BSC, LEH, MWD. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1586 ************************************************************** ************** NEW CALL PLAYS ************** AGGRESSIVE: FDC - First Data Corporation $59.91 +0.41 (-0.39 this week) First Data is the remarkably efficient, often invisible engine powering today's global shift to a cashless economy. They process and safeguard every type of electronic payment method: credit, debit and stored-value cards, electronic checks and cash. They also provide Electronic Funds Transfers to 75 percent of the world and provide card issuer services for 1,400 financial institutions and 396 million consumers worldwide. And, through their visionary Internet Commerce Group, they are developing advanced services and solutions that help financial institutions, merchants, business and consumers access the power and possibilities of the Internet. There's nothing like relative strength to keep a stock going. Since bottoming out last October, shares of FDC have been rallying relentlessly, with occasional visits to the 50-dma providing rare but ideal entry points. It appears that the buying interest from late last year has carried forward to 2001. Positive comments from analysts have also helped the stock to move ever higher. Merrill Lynch upgraded the stock early in the year while First Union Securities re-iterated their Strong Buy rating and $70 price target on the stock based on accelerating revenue growth and attractive valuation. US Bancorp Piper Jaffray has been especially diligent in their coverage, maintaining their Strong Buy rating but upping their target price from $60 to $65, then from $65 to $68 post-earnings and most recently, from $68 to $72, also citing attractive valuation along with predictable profitability. Reporting record earnings recently, the company provided a bullish outlook during the conference call, raising its guidance for 2001 EPS. The stock recently pulled back on low volume but finding horizontal support at the $58 level, appears to be on the verge of making new all-time highs. We are placing a protective stop at $58 support. Confirmed bounces off this level as well as $59 could allow aggressive traders to take a position, while a break back above its 5 and 10-dmas, converged near $60, could allow for a more conservative entry. Keep an eye on rivals FISV and PAYX to gauge sector sentiment. ***February contracts expire next week*** BUY CALL FEB-50 FDC-BJ OI= 261 at $10.30 SL=7.25 BUY CALL FEB-55 FDC-BK OI=2025 at $ 5.20 SL=3.25 BUY CALL FEB-60 FDC-BL OI=6257 at $ 1.25 SL=0.00 BUY CALL MAR-55 FDC-CK OI= 10 at $ 6.50 SL=4.50 BUY CALL MAR-60*FDC-CL OI= 272 at $ 3.00 SL=1.50 http://www.premierinvestor.com/oi/profile.asp?ticker=FDC ************* NEW PUT PLAYS ************* AGGRESSIVE: GLW - Corning Inc $43.05 -3.45 (-8.03 this week) Corning is a global communications technology company that operates in three primary business segments: Telecommunications, Advanced Materials, and Information Display. They are the world's top producer and pioneer of fiber-optic cable, which it invented over 20 years ago. Corning also owns the well known crystal maker, Steuben Glass. The company operates 40 manufacturing plants in 10 countries. The fiber optic stocks continued to buckle under the pressure this week as lingering uncertainty in the market effectively drove share prices near their respective lows. At the end of January, Corning reported better-than-expected 4Q results with revenue up 52% and earnings of $0.34 beating the consensus estimate by $0.06. However, the world's largest producer of optical fiber and cable concurrently announced it had seen some softening in orders from several existing customers, Lucent (LU) and Nortel (NT) in particular. Corning's tempered guidance for 2001 combined with JDS Uniphase (JDSU) also singing the blues incited a strong sell-off across the board in recent weeks. The broad negative marketplace certainly isn't boosting investors' confidence either. Yesterday, GLW caved in late afternoon and violated the $50 support on accelerating volume levels. The bearish activity extended into today's session with further technical breakdowns effectively driving the downward momentum. GLW is currently well below the near-term 5 & 10 DMAs of $48.43 and $52.42, respectively. These measurement devices can realistically be used as entry/exit gauges, depending of course on your personal risk portfolio and trading style. Going forward, we're keeping a tight lease on our GLW play considering the attractive buying opportunity. Although we have our protective stop firmly set at the $46 mark, the more aggressive types might enter at a higher level if there's evidence of a strong rollover in a declining market. A safer approach is to buy into further weakness below $43 and $42.83, the stock's 52- week low. The fiber optic stocks tend to exhibit volatile direction changes and wide variances in price, so it'll be important to not only pay attention to GLW, but also to keep track of others in the sector such as JDSU and its merger partner SDLI, ALA, CYTC and NEWP. ***February contracts expire next week*** BUY PUT FEB-55 GLW-NK OI=7920 at $12.40 SL=9.25 BUY PUT FEB-50 GLW-NJ OI=9630 at $ 7.30 SL=5.00 BUY PUT FEB-45*GLW-NI OI=4474 at $ 3.20 SL=1.50 BUY PUT FEB-40 GLW-NH OI= 383 at $ 0.85 SL=0.00 http://www.premierinvestor.com/oi/profile.asp?ticker=GLW GSPN - GlobeSpan, Inc. $29.25 -3.15 (-5.01 this week) GlobeSpan is a company focused on DSL technology. They are a leading worldwide provider of integrated circuits (chip sets), software, and system designs for Digital Subscriber Line (DSL) solutions that enable the high-speed transmission of data, voice and video over the World Wide Web at rates over 100 times faster than today's 56 Kilobit modems. Using existing copper telephone lines that run to nearly every home and business, GlobeSpan's products create the functionality and speed that makes DSL a reality. A growing call for high-speed, low cost Internet access has produced an enormous demand for GlobeSpan's products. Like many Semiconductor issues, GSPN had a great January, as the Chip stocks across the board broke through and closed above their 50-dma lines for the first time since Autumn of last year. Looking more closely at the charts however, reveals that relative to its sector, shares of GSPN have lagged during the recent Chip run. With the Semis looking likely to move lower in the near term, it appears that relative weakness could weigh heavily on the stock, allowing our put play to potentially flourish. Having just fallen below its 50-dma support, this moving average, now at $33.87, has acted as resistance. This has happened in spite of a blowout earnings report and positive comments from Prudential Securities, who re-iterated their Strong Buy rating. What's more, the stock has been unable to close above its 5-dma (currently at $32.86) so far this month. Look for a failed test of these two moving averages as aggressive opportunities to initiate a play, but make sure that selling volume returns before doing so. Horizontal resistance can also be found at $30, $31.50 and our stop price of $32. For an entry on weakness, look for GSPN to break below its recent lows, below $28.50, on strong selling volume before making a play. In doing so, use the Philadelphia Semiconductor Index as well as fellow DSL player RBAK as potential guides for direction. ***February contracts expire next week*** BUY PUT FEB-30*GLQ-NF OI=488 at $2.88 SL=1.50 BUY PUT FEB-25 GLQ-NE OI=438 at $0.88 SL=0.00 http://www.premierinvestor.com/oi/profile.asp?ticker=GSPN ******************************************** Do you like OptionInvestor? Then vote for us as a favorite site: http://www.investorlinks.com/vote.html Thanks for your support! ******************************************** ********************* PLAY OF THE DAY - PUT ********************* HGSI - Human Genome Sciences $51.81 -0.44 (-3.63 this week) Possessing one of the largest human and microbial genetic databases, HGSI licenses its database of knowledge to pharmaceutical heavyweights like GlaxoSmithKline and Merck. Management has chosen to forgo the race to decode the entire human genome, and has instead focused on finding and patenting genes involved in developing gene-based therapeutics. Its four compounds currently in clinical trials are intended to limit the toxic effects of chemotherapy, promote the repair of damaged cells, stimulate antibody production, and spur regrowth of blood vessels. Most Recent Write-Up Mirroring the broader Biotech index (BTK.X), HGSI is gradually coming back to earth. The sharp rise Tuesday morning, which was due to a nearly 10% move in PDLI, gave us a great entry point into puts on HGSI. Our play shot as high as $56, before beginning the long steady decline that has characterized the remainder of the week. Each bounce has less life in it than the one that came before it, and support between $51-52 is just about to give way under the bears' assault. Volume is a bit of a concern at this point though, as it dropped to just about 50% of the ADV in today's session. Aggressive traders can still attempt to grab a better entry point on failed intraday rallies, so long as our $55 stop remains intact, but a more conservative approach will be to wait for support to fail on heavier volume. Just below the current support level, the bears will have another downside obstacle in the form of the support at $46-48. If they are successful in breaking this support level, it could be a quick trip to the $40 level, especially if the BTK.X continues to weaken. Keep in mind that we have earnings looming just around the corner; unofficially they are set for February 13th, but the company will neither confirm nor deny the date. Take this into account when considering new plays and stops on existing ones. Comments HGSI rolled over from resistance at $54 and offered a great entry into this put play. If the selling continues in the broader market and HGSI, look to enter on a break on Wednesday's low of $51.63. Keep in mind that buyers stepped in around $50.50 on Monday. If the stock moves higher in the morning, entries can be attained on a rollover from intraday resistance at $53 or $54. Watch the BTK.X for sector sentiment. ***February contracts expire next week*** BUY PUT FEB-55*HHA-NK OI=412 at $4.88 SL=3.00 BUY PUT FEB-50 HHA-NJ OI=761 at $2.75 SL=1.50 BUY PUT MAR-55 HHA-NJ OI=256 at $8.88 SL=6.75 http://www.premierinvestor.com/oi/profile.asp?ticker=HGSI *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1580 ************************************************************ ************************ COMBOS/SPREADS/STRADDLES ************************ Another Disappointing Day... Technology stocks retreated again today as investors found little reason to open new positions in light of the dismal forecasts for future earnings. Wednesday, February 7 Technology investors ran for the exits today after the meager quarterly profits from Cisco Systems (CSCO) incited new fears of an economic slowdown. The NASDAQ closed down 56 points at 2,607. The selling pressure spread to the Dow industrials, causing a 10 point decline in the blue-chip average. The S&P 500 index ended 11 points lower at 1,340. Trading volume in broad market issues was light at 1.14 billion shares, with winners beating losers by 1,634 to 1,452. Activity on the NASDAQ was average with only 2 billion shares exchanged. Technology declines outpaced advances 2,228 to 1,489. In the U.S. bond market, the 30-year Treasury fell 15/32, pushing its yield up to 5.53%. Tuesday's new plays (positions/opening prices/strategy): Luminent (NASDAQ:LMNE) APR12C/7P $0.25 credit synthetic Weatherford (NYSE:WFT) FEB45P/50P $0.55 credit bull-put Cabot Micro (NASDAQ:CCMP) FEB65P/70P $0.56 credit bull-put All of our new combination positions offered favorable entry opportunities today. The synthetic position in Luminent was very active with 90 contracts traded, and it appears that the most common credit achieved was $0.25. Weatherford and Cabot Micro were also popular positions and the target prices were observed in both plays. Portfolio Plays: Technology stocks slumped today after Cisco Systems (NASDAQ:CSCO) announced a shortfall in second quarter earnings. The networking giant also indicated that the demand for telecom equipment has declined and that minimal growth is expected in the coming months. Analysts used the opportunity to downgrade a number of issues in the group and the selling pressure in other sectors soon followed. Internet and semiconductor shares fell precipitously and telecom stocks also experienced substantial losses. Industrial sectors were less affected by the news as investors rotated into cyclical and defensive issues. Blue-chip technology stocks International Business Machines (NYSE:IBM) and Microsoft (NASDAQ:MSFT) were the surprise winners of the session, with both issues climbing higher in opposition to the overall trend. In the broader market, new buying interest surfaced in biotechnology, utility, natural gas and retail stocks while oil service, major drug, paper and gold issues generally retreated. Our portfolio saw a mix of activity with most technology shares moving lower while select industrial stocks rallied. Among the popular cyclical issues, Clorox (NYSE:CLX) added another $1.15 to close above $36 and our bullish calendar spread profited from the stock's upward movement. At the same time, another stock in that section; Cabletron (NYSE:CS) was doomed by the "Cisco Affect" and we were forced to close the time-selling position in the interest of capital preservation. However, many of the technology sectors were not included in today's sell-off as the gains in Microsoft demonstrated. The software maker advanced $2.12 to $64 after the appeals court overseeing the company's antitrust lawsuit invited lawyers on both sides to debate whether the judge who ordered the company's breakup made inappropriate and biased comments to the public. Rumors of a settlement and speculation that the court might throw out the government's case helped the stock attract new buyers and also benefited our Covered-calls with LEAPS play. Qualcomm (NASDAQ:QCOM) was another big mover, up almost $4 to a recent high near $86 and the issue was one of the leaders in the Wireless Telecom sector. In contrast, Motorola (NYSE:MOT) moved in the opposite direction and traders in the long-term calendar spread should roll to March options in the short position before the premium erodes further. Among the bullish synthetic plays, Household International (NYSE:HI) and Landry's Seafood (NYSE:NY) continued to rally and both issues are trading at yearly highs. The Straddles section has experienced very little activity as of late but the recent movement in Triad Hospitals (NASDAQ:TRIH) is worth noting. The issue continued its recent rally today and the move provided sufficient premium in the call option to make the play profitable for those who traded the cycle. Thursday, February 8 Technology stocks retreated again today as investors found little reason to open new positions in light of the current forecasts for future earnings. The NASDAQ Composite index finished at its session lows near 2,562 and the selling pressure helped push the Dow down 66 points to 10,880. The S&P 500 index closed 8 points lower at 1,332. Trading volume on the NYSE reached 1.08 billion shares, with losers beating winners 1,643 to 1,435. Activity on the NASDAQ was light at 1.8 billion shares exchanged. Technology declines beat advances 2,074 to 1,688. In the bond market, the 30-year Treasury fell 16/32, pushing its yield up to 5.56%. Portfolio Plays: Stocks edged lower today as technology selling continued in the wake of Cisco's earnings shortfall and a slump in retail shares weighed heavily on the industrial group. Losses in the telecom sector were heavy while chip and chip equipment companies ended the session with mixed results. Some positive moves were seen in the Internet group but the upside activity was limited by losses in Yahoo! (NASDAQ:YHOO) and Amazon.com (NASDAQ:AMZN). Networking shares also continued to slide and computer software issues fell amid some profit-taking in Microsoft (NASDAQ:MSFT). Among industrial stocks AT&T (NYSE:T), Wal-Mart (NYSE:WMT), Home Depot (NYSE:HD) and International Paper (NYSE:IP) were the big losers. Inside the broad market, retail, chemical, paper and airline issues declined while utility, biotechnology and select oil service shares edged higher. Traders said the rotation in major market sectors is expected to continue and the activity will keep the market in a small range until an economic catalyst changes the current outlook. Valuation experts suggest that investors use the current weakness to accumulate positions in capital goods, consumer staples, cyclicals, financial, utility and energy stocks, since all of these groups remain attractive in the long run. There were only a few significant moves in the Spreads Portfolio today as stocks continued to trade in a relatively small range. One of our new speculation positions, Luminent (NASDAQ:LMNE) provided a nice surprise, climbing to a midday high near $11. The move provided a $0.69 premium in the synthetic position and combined with the initial $0.25 credit, the play yielded a $0.93 profit in just two days. Obviously we didn't plan to close the the play so soon, but it's nice to have the opportunity with a favorable early-exit return. Clorox (NYSE:CLX) was the leader in the industrial group, moving above $37 for the first time in two months as traders continued to rotate into defensive shares. Utility Company AES Corporation (NYSE:AES) also climbed back to the top of a recent trading range near $58 and the consolidation may eventually be resolved to the upside. Our bullish position in Atlantic Coast Airlines (NASDAQ:ACAI) appears safe for now as the volatile issue is again testing its all-time high near $47. On the downside, Advanced Energy (NASDAQ:AEIS) is returning to a recent trading range near $20, and traders who are still in the bullish credit spread at $22.50 should consider closing the play for a small gain (unless they don't mind owning the issue). The cost basis, if assigned, would be just below $22. Fortunately, the renewed selling pressure in the broad market benefited some of our bearish plays including; Aflac (NYSE:AFL), Union Carbide (NYSE:UK) and Digene (NASDAQ:DIGE). Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - One of our readers asked for some new speculation plays in the small-cap group and based on recent technical indications, these issues are excellent candidates for future upside activity. ****************************************************************** DAVX - Davox Corporation $11.50 *** Bracing for A Rally? *** Davox (NASDAQ:DAVX) provides customer interaction management solutions to more than 1,000 customers through superior and proven software, services, and support. Financial institutions, utilities, airlines, telecommunications providers, insurance companies, retail organizations, and other companies worldwide benefit from the enhanced agent productivity, optimized customer service, more effective management control, and rapid deployment advantages provided by Davox's customer interaction management solutions. These solutions help organizations build profitable customer relationships and lower the costs of interacting with other businesses. Davox shares have been gradually recovering over the past few months and the company has an optimistic outlook for the future. The CEO believes the increased demand for its Ensemble customer contact suite and professional services offerings, as well as continued demand for its Unison call management system will help bring the company back to past valuations. The balance sheet continues to improve and Davox generated positive cash flows of over $3 million in the most recent quarter. The company also secured 22 new-account customers, and existing customers placed 114 orders, demonstrating Davox's continued ability to deliver reliable, easily integrated, and rapidly deployed solutions that help its clients build and maintain strong business relationships. In the coming year, total revenue is expected to increase above the $100 million mark with earnings per share of $0.32 to $0.36. Traders who agree with the optimistic outlook for the company's share value can speculate in its performance in the short-term with this bullish position. PLAY (speculative - bullish/synthetic position): BUY CALL MAR-12.50 VQ-CV OI=59 A=$0.75 SELL PUT MAR-10.00 VQ-OB OI=0 B=$0.38 INITIAL NET DEBIT TARGET=$0.00-$0.12 TARGET ROI=25% Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $350 per contract. http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=DAVX ****************************************************************** SOI - Solutia $13.70 *** On The Move! *** Solutia NYSE:SOI) and its subsidiaries produce and market a wide variety of high performance chemical-based materials. Solutia creates solutions and products for customers in the consumer, household, automotive and industrial products industries. Their products include SAFLEX plastic interlayer, adhesives and window and industrial films; liquid, powder and waterborne resins; and VYDYNE and ASCEND nylon polymers, chemical intermediates, and nylon fibers. This position surfaced in one of our primary charting programs in the category of "Bullish Breakouts." Indeed the move above a recent trading range near $13 appears to suggest that further upside activity will occur. In addition, the excellent support near our cost basis limits the risk in this position, providing a great speculation opportunity for traders who are bullish on the issue. We will target a lower debit initially, to allow for a brief consolidation in the issue. PLAY (speculative - bullish/synthetic position): BUY CALL APR-15.00 SOI-DC OI=324 A=$0.80 SELL PUT APR-12.50 SOI-PV OI=735 B=$0.40 INITIAL NET TARGET DEBIT=$0.00-$0.15 TARGET ROI=25% Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $475 per contract. http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=SOI ****************************************************************** - TECHNICALS ONLY - These plays are based on the current price or trading range of the underlying issue and the recent technical history or trend. The probability of profit from these positions is also higher than other plays in the same strategy based on disparities in option pricing. Current news and market sentiment will have an effect on these issues. Review each play individually and make your own decision about the future outcome of the position. ****************************************************************** APOL - Apollo Group $38.94 *** Disparity Play! *** Apollo Group (NASDAQ:APOL) through its many subsidiaries; the the University of Phoenix, the Institute for Professional Development, the College for Financial Planning Institutes Corporation, Western International University, and Apollo Learning Group, is a provider of higher education programs for working adults. The company currently offers its programs and services at 51 campuses and 80 learning centers in 35 states, Puerto Rico and Vancouver, British Columbia. A scan of option pricing disparities identified this position and based on the technical outlook for the underlying issue, it warrants further consideration. While the premium received for the (post-split) credit spread is rather small, the overall risk is as well. Those of you who favor this strategy and agree with a bullish outlook for APOL may find the position to be a suitable candidate. PLAY (conservative - bullish/credit spread): BUY PUT FEB-33.38 POU-NY OI=87 A=$0.12 SELL PUT FEB-35.00 OAQ-NG OI=25 B=$0.38 INITIAL NET CREDIT TARGET=$0.31-$0.38 ROI(max)=23% B/E=$34.69 http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=APOL ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1549 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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