The Option Investor Newsletter Monday 02-12-2001 Copyright 2001, 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/021201_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 02-12-2001 High Low Volume Advance/Decline DJIA 10946.80 +165.40 10953.60 10771.60 1.01 bln 1950/1133 NASDAQ 2489.66 + 18.69 2508.27 2435.36 1.75 bln 2007/1780 S&P 100 692.06 + 9.71 692.32 682.11 totals 3957/2913 S&P 500 1330.31 + 15.55 1330.96 1313.64 57.6%/42.4% RUS 2000 505.35 + 8.30 505.36 495.51 DJ TRANS 3039.23 + 25.81 3039.28 3010.15 VIX 24.55 - 0.60 26.31 24.30 Put/Call Ratio 0.64 ****************************************************************** Waiting For Greenspan The Dow Jones Industrial Average (INDU) advanced towards the elusive 11,000 level on strong buying across nearly every sector of the market. Meanwhile in the Nasdaq Composite (COMPX), traders were reminded of the prevalent risks in the technology sector. Late Friday, Emulex (NASDAQ:EMLX) said it was experiencing a slowdown in sales. The maker of fibre channel hubs and switches, used in the data storage business, held a conference Friday evening in which its executives effectively warned of lower revenue growth for the fiscal third-quarter. The company's executives said that their customers were pushing orders back, which is consistent with the overall slowdown in capital expenditures by corporate America. Following the warning from Friday, US Bancorp analyst Ashok Kumar slashed his rating on shares of Emulex to a hold from a buy rating - the stock lost nearly half its value in Monday's session. While I normally try to look forward and not focus on the past and report old news, I feel that it's prudent to examine the Emulex blowup a little more closely. The warning by Emulex reinforces that great risks remain in the tech sector, especially in the highly-valued segments of tech. Companies like Emulex trade with extremely high valuations because the expectations built into these types of stocks are so high. For a long, long time these high-flying companies blew away estimates and kept raising the bar - they couldn't lose! But as we've witnessed recently with the likes of PMC Sierra (NASDAQ:PMCS) and now Emulex, the slightest misstep is extremely detrimental to both the company and its shareholders. My intentions here are not to blast Emulex or its stock. Just know that the tech sector still has plenty of risk. Now let's look forward. Fed Chairman Alan Greenspan will be testifying before the Senate Banking Committee Tuesday morning at 10 a.m. EST. The Fed's semiannual report, formerly known as the Humphrey Hawkins testimony, is closely watched by the market because it includes the FOMC's official forecasts for growth, inflation and unemployment. The report Tuesday morning is all the more important in light of the current condition of the U.S. economy. Just three weeks ago, Greenspan said that growth was close to zero and the economy was walking a fine line between recession and recovery. Greenspan opined that consumer confidence was crucial in preventing a recession - the data that followed Greenspan's remarks suggested that consumer confidence was slipping. There are several scenarios that could unfold following Greenspan's testimony tomorrow morning, and here are three possibilities that might help to generate trading ideas. If Greenspan hints that the Fed will stage another intermeeting rate cut before its scheduled gathering near the end of March, interest rate-sensitive sectors will advance sharply. Pay special attention to bank, broker, retailer and cyclical stocks. However, if Greenspan speaks in a convoluted way and does not give a clear indication of the Fed's future policy on interest rates, we'll likely witness choppy, difficult trading in the aforementioned sectors and it might be prudent to stand aside. A third possible scenario to watch for is if Greenspan says the economy is not all that weak and recession threats remained subdued. If Greenspan indicates that the Fed will not be cutting interest rates as aggressively as the market has discounted, then the aforementioned sectors are likely to pullback as an aggressive easing policy has already been factored into the respective stocks. I don't think the third scenario I've set forth is likely, but it should be known nonetheless. Before I give a list of stocks in each of the aforementioned sectors, keep in mind that these names should ONLY serve as a reference. The individual stocks you choose to trade should depend upon your individual risk profiles and not my lists. In the broader finance sector, keep an eye on Citigroup (NYSE:C), J.P. Morgan Chase (NYSE:JPM), US Bancorp (NYSE:USB), Mellon Financial (NYSE:MEL), American Express (NYSE:AXP), Merrill Lynch (NYSE:MER), Lehman Brothers (NYSE:LEH) and Goldman Sachs (NYSE:GS). In addition to the aforementioned individual names, traders might want to take a look at the trends and support and resistance levels in two indexes: Philadelphia Bank Sector Index (BKX.X) and Amex Securities Broker/Dealer Index (XBD.X). To monitor the retail sector, watch the CBOE Retail Index (RLX.X). Some individual companies include Wal Mart (NYSE:WMT), Home Depot (NYSE:HD), Kohls (NYSE:KSS), Gap (NYSE:GPS), Costco (NASDAQ:COST) and American Eagle Outfitters (NASDAQ:AEOS). And for the cyclical stocks, it might be worth while to watch the Morgan Stanley Cyclical Index (CYC.X). In this industry group, keep on an eye on International Paper (NYSE:IP), General Electric (NYSE:GE), Georgia Pacific (NYSE:GP) and General Motors (NYSE:GM). Keep in mind that the strong rally in the INDU, led by the three aforementioned sectors, could prove to be a buy the rumor sell the news event, depending on exactly what Greenspan says tomorrow morning. Since the risk is very real in the three sectors, make sure to have a risk management plan in place before entering any trade, i.e. stops! Additionally, retail sales for January are scheduled for release before the bell tomorrow, with the market expecting a bit of a rebound. The market expects retail sales to have risen by 0.7 percent in January. A weaker-than-expected number could throw the retail sector for a loop so be cognizant of the number. As I previously mentioned, the three aforementioned sectors helped to carry the INDU back towards 11,000. If Greenspan delivers pleasing comments tomorrow morning, the INDU has a shot at closing above 11,000. Keep in mind, however, that the INDU has failed on four separate occasions to close above 11,000 thus far in 2001. For the more risk averse traders with the inability to quickly maneuver in and out of positions, it may be more prudent to wait for the INDU to settle above 11,000 before initiating positions. I still think the Nasdaq is a bit more difficult to gauge and operating in the tech sector requires far more on the part of the trader to manage risk. However, I was encouraged with the Nasdaq's ability to shrug off bad news and close higher today. The Emulex blowup was far reaching and dragged down shares of QLogic (NASDAQ:QLGC) and Brocade (NASDAQ:BRCD) - those two stocks got whacked. On top of the Emulex-related badness, the Nasdaq was able to digest bearish comments bestowed upon the optical networking sector, with CIENA (NASDAQ:CIEN) taking the brunt of the selling. Let's step back for a minute: huge losses in shares of Emulex, Brocade and CIENA yet the COMPX closes higher. From where I sit, today's action in the Nasdaq was very constructive. But be cautious in the tech space, if you're going to venture into the Nasdaq in an attempt of trading the long side, I think it's most prudent to stick with the names that have come down to earth and try to avoid the high-flyers. I think the risk/reward is much more favorable in the downtrodden tech names as opposed to the highly-valued stocks, but that's just my take. In my humble opinion, the best place to look for downtrodden tech stocks is in the chip sector. I'll beat the SOX.X to death until I discern a better risk/reward opportunity in the tech sector. But for the time being, I think the SOX.X represents the best opportunity in tech. Some might disagree with me on that view, but for what it's worth, Thomas Weisel Partners boosted their ratings on several chip stocks this morning, which included Applied Materials (NASDAQ:AMAT), Lam Research (NASDAQ:LRCX), Novellus Systems (NASDAQ:NVLS), Teradyne (NYSE:TER) and Micron Technology (NYSE:MU). Applied Materials, the chip equipment giant that it is, will report earnings after the bell tomorrow - plan any trades in the chip sector accordingly and take into account that although the semis acted well today, overnight risk remains. I still think the best strategy to employ in the current market is to be nimble and quick to take profits. The Nasdaq continues to be a tough market to trade and will be until the visibility in corporate America improves along with the fundamentals in the tech sector. But if you must trade the tech sector, from the long-side that is, I would argue to stick with stocks that are trading at modest valuations and have already fallen. Moreover, rather than aggressively pursuing breakouts in tech stocks, a more prudent strategy might be to wait for pullbacks to support levels. The blue chip, old economy stocks continue to produce profits for traders with patience and discipline. Entering on pullbacks in sectors such as finance and retail has been working recently and will probably continue to work as long as the Fed stays on the offensive. Greenspan can act either as a catalyst tomorrow morning, a non-event, or a detriment to the market. But whatever transpires, know your risk profile and profit objectives before entering any trade. 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=1573 ************************************************************ ************* NEW CALL PLAY ************* BRCM - Broadcom Corporation $80.44 +3.25 (+3.25 this week) Broadcom Corporation is a provider of highly integrated silicon solutions that enable broadband digital transmission of voice, video and data to and throughout the home and within the business enterprise. These integrated circuits permit the cost-effective delivery of high-speed, high-bandwidth networking using existing communications infrastructures that were not originally designed for the transmission of broadband digital content. Shares of BRCM have certainly seen better days, but strong support below could make this play a bargain hunter's dream. Between rival PMCS' bearish conference call, BRCM's own narrowing of revenue growth estimates for the near term and a lukewarm reception on the part of analysts, the stock has been bombarded by bearish sentiment and selling pressure. Lehman Brothers initiated coverage with a Market Perform while WR Hambrecht maintained their Buy rating, but reduced their price target from $200 to $125. CE Unterberg followed Lehman's lead, also maintaining their Buy rating and cutting their price target to $125. UBS Warburg maintained their Strong Buy rating but cut revenue estimates. However, we are initiating coverage on BRCM as an aggressive call play in anticipation of a bounce off key support. Since slipping below its 50-dma ($106.68), the stock has headed lower, with pressure from the 5-dma, now at $82.36. The $75 support level has been twice tested successfully late last year, providing aggressive traders with an entry point for a highly profitable play. It is here that we are placing our protective stop, so make sure BRCM continues to close above this level. A bounce off key support would be an ideal entry point, with additional support at $80, but confirm with volume. For the more conservative, look for a break above the 5-dma with conviction before taking a position. From there, it could be a quick trip up to resistance overhead at $90 and the 10-dma at $93.60. Correlate entries with strength in the Philadelphia Semiconductor Index (SOX) as well as the NASDSAQ 100 (QQQ). BUY CALL MAR-75 RDZ-CO OI= 633 at $13.38 SL=10.00 BUY CALL MAR-80*RDZ-CP OI= 568 at $10.75 SL= 8.25 BUY CALL MAR-85 RDZ-CQ OI= 404 at $ 8.38 SL= 6.00 BUY CALL MAY-80 RDZ-EP OI= 216 at $16.50 SL=12.00 BUY CALL MAY-85 RDZ-EQ OI= 70 at $14.63 SL=10.75 SELL PUT MAR-70 RDZ-ON OI=1156 at $ 5.00 SL= 7.00 (See risk of selling put in play legend) http://www.premierinvestor.com/oi/profile.asp?ticker=BRCM **************************** NEW LOW VOLATILITY CALL PLAY **************************** WM - Washington Mutual Inc. $52.49 +1.49 (+1.49 this week) With a history dating back to 1889, Washington Mutual Inc. is a national financial services company that provides a diversified line of products and services to customers and small and mid-size businesses. On December 31, 2000, Washington Mutual and its subsidiaries had assets of $194.72 billion. Washington Mutual currently operates more than 2,000 consumer banking , mortgage lending, commercial banking, consumer finance, and financial services offices throughout the nation. Like many other savings and loan institutions, Washington Mutual has performed exceptionally well since last fall. WM has stayed above its 200 dma since last June, and only dipped below its 50 dma briefly in January. Investors continue to stay attracted to these stocks, as they offer a combination of stable, high earnings growth, and low volatility, which is an added bonus for options traders. In addition, the ongoing program of interest rate cuts by the Federal Reserve will directly impact these companies earnings, by reducing the rate at which they borrow money. On January 16, WM reported record fourth quarter and annual earnings of $3.54 per share, as well as an increased cash dividend. However, the really big news is the fact that the Office of Thrift Supervision approved WM's proposed takeover of Bank United Corp on January 22. Bank United Corp is the largest publicly traded depository institution headquartered in Texas, with $18.3 billion in assets, and $8.7 billion in deposits. Bank United Corp's shareholders overwhelmingly approved the deal, which will net the shareholders 1.3 shares of WM for each share of Bank United. On Friday, the transaction was completed, and the investment community expressed its approval by trading three times the average daily volume of WM. Today, the buying continued with strength in the financial sector, and particularly the saving and loans institutions. Traders could take positions at current levels, or possibly at a pullback to $52, after assessing the market's reaction to Chairman Greenspan's testimony tomorrow. If the S & L sector retains its strength, WM could make a push for its 52-week high at $55.93. Watch others like ASFC and GPT for sector strength, and set stops at $50. BUY CALL MAR-45 WM-CI OI= 1 at $8.10 SL=5.75 BUY CALL MAR-50*WM-CJ OI= 810 at $4.00 SL=2.50 BUY CALL MAR-55 WM-CK OI=1061 at $1.30 SL=0.75 BUY CALL APR-50 WM-DJ OI=1967 at $5.00 SL=3.00 BUY CALL ARP-55 WM-CK OI=1553 at $2.40 SL=1.25 http://www.premierinvestor.com/oi/profile.asp?ticker=WM ************ NEW PUT PLAY ************ FCEL - FuelCell Energy $56.31 -3.19 (-3.19 this week) Poised to benefit from the world's increasing thirst for power, FCEL is a developer of electrochemical technologies for electric power generation and has developed a proprietary patented fuel cell known as the Direct FuelCell. A fuel cell is a device that electrochemically converts the chemical energy of a fossil fuel, such as natural gas, into electricity without the combustion of fuel or the production of any harmful emissions. The company produces carbonate fuel cells, generally on a contract basis. Under pressure over the past several months, along with the broader Technology sector, FCEL has been valiantly attempting to keep its head above water. The bulls have been fighting a losing battle though, as the rallies can't seem to break through the formidable resistance near $80. The latest move down got started on Friday with a more than $8 drop. Heavy volume accompanied the decline, and based on today's additional $3.19 loss, the bears are not done having fun. After falling through the $65 and $62 support levels on Friday, sellers continued to rule the day today, pushing our new play below the $57-58 support level and even deeper into the lower Bollinger band. The recent selling has dragged the daily Stochastics into oversold now, but there really isn't any indication that the stock is done falling. Current downside targets that we can focus on are the 200-dma (currently $53.75), followed by $51. Finally, we have the December low of $45.25 as the stock's final hope of support before heading into territory not seen since August of last year. Earnings are approaching on February 27th (unconfirmed), but it appears unlikely that event will provide any hope for the bulls. FCEL is another of those companies that doesn't have any earnings yet, and is currently projected to lose 32 cents this quarter. Last year, investors were willing to ignore losses and focus on growth potential, but not this year. As long as the broader technology market remains under pressure, not even FCEL's association with the energy market is sufficient to provide a lift to the share price. Conservative traders can consider new positions on a drop through today's low of $56 as an opportunity to open new positions, but beware of a bounce due to the proximity of the lower Bollinger band. A bounce up to the $60 level (now acting as resistance) may be a better choice for new entries, so long as sellers show up to keep the impatient bulls in check. Set stops at $62, and watch the direction of other fuel cell stocks like BLDP and PLUG for confirmation of weakness in the sector. ***February contracts expire this week*** BUY PUT FEB-60 FQG-NL OI=609 at $4.88 SL=3.00 High Risk! BUY PUT FEB-55 FQG-NK OI=831 at $1.94 SL=1.00 High Risk! BUY PUT MAR-60*FQG-OL OI=441 at $8.63 SL=6.00 BUY PUT MAR-55 FQG-OK OI=317 at $5.88 SL=4.00 BUY PUT APR-55 FQG-PK OI= 62 at $8.38 SL=5.75 BUY PUT APR-50 FQG-PJ OI= 76 at $5.88 SL=4.00 http://www.premierinvestor.com/oi/profile.asp?ticker=FCEL ***************** STOP-LOSS UPDATES ***************** SDS - call play Adjust from $51 up to $53 MERQ - put play Adjust from $79 down to $74 GSPN - put play Adjust from $30 down to $29 ISSX - put play Adjust from $72 down to $69 BOBJ - put play Adjust from $80 down to $78 ************* DROPPED CALLS ************* CIEN $73.63 -6.25 (-6.25) So much for support. After a week of flirting with support near $78 (also the location of our stop), shares of CIEN took a big tumble this morning, likely in response to Friday's negative conference call on Friday. The negative impact was felt across the storage sector and select Optical stocks felt the pain today. Although there was no CEIN-specific bad news, there was a block of 135,000 shares sold at $74, and that kind of selling volume is bound to have a negative effect. Earnings are confirmed for Thursday morning, and with the technical violation and plunge through our stop, CIEN is obviously a drop tonight. LGTO $15.38 -1.13 (-1.13) Up until today, shares of LGTO were holding up well relative to the rest of the storage sector, which has selling off on downgrades and valuation fears. However, the signs of an impending rollover were already present last week, with the stochastics curling lower and the cross below the 5 and 10-dma (at $16.70 and $17.17). The price action volume action of the last two weeks reveals a neutral wedge formation. Today's drop has resulted in a break out of this pattern to the downside. With continued negative sector sympathy and deteriorating technicals, we are dropping coverage of this play. ************ DROPPED PUTS ************ HGSI $53.94 +2.88 (+2.88) After riding HGSI down for some tidy profits, it looks like it is time to move on. The $50 level seems to have provided support, and the stock rallied sharply today on heavy volume. Although it fell back from its highs just below $56, the strength that allowed it to trade through our $54 stop makes it hard to keep as a put play. Combined with the fact that they are unofficially set to release earnings tomorrow, we think the most prudent course of action is to book our profits and move on. AETH $32.00 +3.38 (+3.38) Aether offered strong opportunities for put players since we picked it at $36.84. However, the stock regained some strength today in the overall market rally, and investors' positive response to the introduction of a new product. While volume was not as heavy as it was on the days which experienced selling last week, Aether has closed above our recently lowered stop price at $31, so we are dropping it tonight. ******************************************** Do you like OptionInvestor? Then vote for us as a favorite site: http://www.investorlinks.com/vote.html Thanks for your support! ******************************************** ************** TRADERS CORNER ************** The Easy Part: Calling Tops & Bottoms By Austin Passamonte The biggest mistake I make trading options is picking my own plays. Problem is that I know too much; I'm my own biggest liability. If I were smart, somebody else would pick my trades for me. Someone who knows nothing about market action and wouldn't drag an educated bias into the process would be perfect. My darling wife Wendy comes to mind. Now here's a girl who couldn't be less interested in day to day nuances of market action. Just buy cheap and sell dear or vice- versa is her opinion. Wait until conditions are right, place the trades and cash out solid profits. Why haven't I thought of that before? The tricky part would be getting her to actually look at charts. If I taught her some simple rules in a five-minute lesson, that might be all it would take. Maybe I could print out some daily charts and slip them inside the latest Victoria Secret catalog lying around, then ask her to show me which three dresses she has in mind next. She unwittingly flips to the charts and bingo... I've got her attention and opinion along the way! Here's what I'd tell her to look for; stochastic values that reached/entered oversold or overbought extremes now reversing away. Simple divergence where price action and stochastic action aren't moving in tandem would be icing on the cake. If prices are moving one direction and stochastic values another while at or within extreme value zones, immediate reversal of that price direction is likely. We want to go bullish when emerging from oversold and go bearish when emerging from overbought. Got that, Wen? Let's peek at some recent daily charts I plucked from archived Market Wraps at IndexSkybox and see how these simple rules devoid of all other noise may have treated us. (January 21st IS Market Wrap) "An idea of where we'll go from here is the first step. Let's look over the big picture together and compile a plan of action together, shall we? (Daily Chart: NDX) Nasdaq 100 now rests at a critical point. It managed to close above both the long-term descending trend line (black) and 50 DMA (pink) for the first time since September 4th. That move could have now converted both values from resistance to firm support. What it must do is hold the line from here. An intraday retest is allowed but a close below would be bearish. Of great interest are the stochastic & MACD values. Stochastics are currently posting higher highs than mid-December while prices are posting lower highs in relation. Any divergence that occurs between oscillators/ price action in overbought territory is bearish, but this pattern is not yet complete. Price action must reach or exceed the 3,000 level to negate such bearish divergence. Higher price highs that justify higher stochastic highs means there is underlying strength in the market. Should that stochastic slow bar (red) roll over and turn down below 80% oversold before we reach or break 3,000+ it would warn us early of another failed rally. We have the setup in front of us to keep an eye on, now we let price action prove itself from here. (Daily Chart: SOX) The Semi-Conductor Index has lead Nasdaq for a few years and will continue to do so for awhile. Two closes above solid support near 700 looks bullish, as do stochastic & MACD lines pointing straight up. No signs of weakness although any close below 700 might fall straight to 628 area where 20 DMA (red) and 50 DMA (pink) converge." (February 4th IS Market Wrap) "Daily chart signals clearly warned us for longer than a week that downside correction lies ahead in the not-too-distant future. The future just might be now. If our charts are as predictive into the future as they were in recent past, what could the week ahead portend? (Daily Chart: SPX) The S&P 500 is rolling over and needs to find strong arms below it fast. 1341 is a critical area as we'll see later on. Daily stochastic values have just begun to tip over and could cover lots of ground." (02/10 IS Wrap...Daily Chart: Dow) The old index is in trouble..." Well now, what did we see? Clear signs slowly developing in front of our eyes that all but pounded us on the head to follow. All markets behaved according to forecast. If only successful trading were that easy. I have the luxury & privilege to hang out with a bunch of veteran traders who've forgotten more about fundamental analysis than I'll ever know. They are fine technicians on top of that; well rounded, experienced people I have the utmost respect for. Add Jim Brown to the mix who's always correct on picking market direction exactly half the time... when it's going up! (Sorry Jim, we all love you dearly but markets sometimes go down too, ya know). Anyway, several of us were having a discussion a day or two after the last FOMC meeting and I was asked why I still felt near-term bearish. Fed's easing rates, stocks are shrugging off bad news left & right, etc. By the end of our friendly debate I was feeling pretty uncertain to say the least. When asked where I thought the Nasdaq might pull back to if indeed bearish forecast was correct, I pointed out the 20-DMA for first stop and lower Bollinger bands for the second. I'm not sure anyone present thought I was actually serious, to be honest. Those prices were hundreds of index points lower than where we sat that night. These respected friends of mine had numerous valid points about being bullish and all I had were two or three very basic facts based on some of the simplest and widest-used technical tools to rationalize my position. 1. Daily chart stochastic values in the SPX, NDX, SOX and COMPX were all near or buried above 80% overbought extremes. This tells us we are due for a correction soon. 2. VIX & VNX were posting lower lows than anytime since early October, 2000. Tells us we are due for a correction. 3. Tech indexes failed to rally on the .50 basis-point reduction and were treading water at best. If no rally after that, what will be the upside catalyst? Two of those three were incidental. Daily stochastic action was enough to convince me a top was in place. Just because I was convinced doesn't mean profitable plays are automatic. I kept trying to buy OEX & SPX puts and was getting stopped out on every final-hour rally that suicidal bulls insisted on staging. Retail or institutional buying, call it what you will, they all got creamed on that last-hour rally spike into CSCO's earnings. Before then I was convinced the charts weren't lying this time (they seldom do), so I sold a triple handful of SPX at-the-money call credit spreads for a lot of premium and bought them back one week later for a pittance. During that time I experienced the emotional gamut of listening to CNBC and other media types (clueless about market action) steering conversations in a bullish direction. Advertising dollars are way down so they need to "pump up the troops". While I understand, sympathize and forgive their transgressions it still does not make harboring contrarian views any easier while listening to this. Here I am holding massive (for me) shorts and bullish mantra surrounds me. You try sleeping 8.5 hours a night under conditions like that! Hindsight cleared the fog as it always does and again, chart signals prevailed. Markets fell and the trades worked out. The absolute toughest part of calling market turns and using this knowledge for great gain is actually acting upon the chart signals at that time without hindsight. I promise you that each time with no exceptions a market is pressing overbought range on its daily chart, everyone around you will be bullish. Every time a daily chart is pressing oversold, guess what sentiment will be? Bearish! Can you buck the crowd, trust those charts and stake your claim against the grain? It will be one of the most difficult things we will ever attempt to do in the trading arena. Today's action is a prime example. The Dow's daily chart looks very vulnerable to me. When it traded near 10,900 today I sold a passel of DJX March 108/114 call credit spreads for 2.50 net- credit. My total risk on these plays is 3.50 or 58%/42% risk/reward ratio. The Dow needs to close below 10,800 on March 16th for maximum profit or below 11,050 for breakeven. Waiting for an intraday rally to sell into has been the plan since Friday, but pulling the trigger into a rising market still isn't easy. Will it work? No way to tell from here but I intend to blindly trust the charts and see what happens next. Meanwhile, tech index daily charts are all beginning to look pretty bullish buried in oversold range and trying to emerge. See anyone on CNBC anxious to buy techs? We may be closer than they think. Daily charts in the strongest leading sectors will tell us when a stealth rally is about to begin. But I shouldn't be making these choices anyway. Let me print out some Nasdaq and tech-index HOLDR charts to slip inside that Vickie Secrets catalog on Wendy's nightstand. There... we stuck them right next to Tyra in the leopard print jammies. "Hey Wendy, you got a minute? I need you to show me that new swimsuit you have in mind. While you're at it, should I be looking to buy calls soon or not?" Best Trading Wishes, austinp@OptionInvestor.com ************************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=1587 ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** IFIN - Investors Financial Services $86.00 +0.19 (+0.19 this week) Investors Financial Services Corp. provides asset administration services for the financial services industry through its wholly- owned subsidiary, Investors Bank and Trust Company. The company provides global custody, multicurrency accounting, institutional transfer agency, performance measurement, foreign exchange, securities lending, mutual fund administration and investment advisory services to financial asset managers, including mutual fund complexes, investment advisors, banks, and insurance companies. Offices are located in the United States, Canada, Cayman Islands, and Ireland. Most Recent Write-Up Shares of IFIN have demonstrated uncharacteristic strength in a bear market, and have stayed firmly above their 200 dma for the last twelve months, dipping briefly below the 50 dma in January. For the fiscal year 2000, IFIN's net income rose 58%, as their net interest income rose 64%, driven by increased client deposits. As a small cap value stock, IFIN is benefiting from a sector rotation out of large cap growth stocks, which suffered serious losses last year. IFIN's earnings are driven by assets under management, which shields the company somewhat from the earnings fluctuations found in the other financial sectors. After reaching a 52-week high of $96 in December, IFIN dipped to $60.75 on January 21, but has since then re established the upward channel which commenced last summer. Investors responded very enthusiastically to the news that IFIN had completed the purchase of the Advisor Custody Unit of Chase Manhattan Bank's National Customer Services Division on February 2, and this week, IFIN burst through its converged 5 and 10 dma of $81.53, which had been a sticking point for the stock for nearly two weeks. IFIN now appears determined to make a run for the next resistance level at $90, and possibly its 52-week high at $96. Traders could take positions on a pullback to $85, or at current levels. Watch the investment management sector for an indication of sector strength, and others like AC and STT, and set stops at $80. Comments IFIN spent the day consolidating its recent gains Monday. The stock is now poised to breakout on the heels of positive remarks from Greenspan Tuesday morning. Watch for a high-volume breakout above resistance at $87.50. Additionally, pullbacks to support near $85 could provide a solid entry point. BUY CALL MAR-80 FLQ-CP OI= 0 at $10.88 SL=8.00 Wait for OI! BUY CALL MAR-85*FLQ-CQ OI=87 at $ 7.75 SL=5.50 BUY CALL APR-80 FLQ-DP OI= 0 at $13.50 SL=9.75 Wait for OI! BUY CALL APR-85 FLQ-DQ OI= 1 at $10.50 SL=7.75 http://www.premierinvestor.com/oi/profile.asp?ticker=IFIN ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1550 ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. 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