The Option Investor Newsletter Tuesday 03-26-2002 Copyright 2001, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 03-26-2002 High Low Volume Advance/Decline DJIA 10353.36 + 71.69 10432.86 10276.76 1.19 bln 1953/1205 NASDAQ 1824.17 + 11.68 1843,96 1807.47 1.46 bln 1999/1566 S&P 100 575,17 + 3.50 580.14 571.67 Totals 3952/2771 S&P 500 1138.49 + 6.62 1147.00 1131.61 RUS 2000 501.66 + 5.27 501.74 496.39 DJ TRANS 2875.37 + 58.14 2878.05 2814.92 VIX 19.79 - 0.73 20.38 19.38 VXN 37.68 - 1.50 39.57 37.64 TRIN 1.10 PUT/CALL 0.66 ************************************************************ When is a rally not a rally? When a +71 point gain follows a -354 point loss! This is what we saw on Tuesday when the Dow rallied back from a serious oversold drop of -354 points from the 10635 close on March 19th. The four-day drop culminated with a -146 point dive on Monday and set the stage for today's gains. The positive headline economic numbers prompted some short covering but volume buyers were still absent despite the news. Economic reports prompting the minor short covering included Consumer Confidence and Durable Goods. With consumers thinking the recession is over the headline numbers soared +15 points. The expectations index rose to 109.3 with 25% of the respondents believing that conditions will continue to improve. This is the strongest number since 1993. The present conditions index at 110.2 is up significantly since the 84.9 low in October but far from the 144.5 number just last August. Unfortunately the internal components declined. The numbers of consumers planning to buy a home, auto or major appliance fell. The consumer held up the economy during the recession but that spending appears to be slowing. This decreased spending was also shown in the Durable Goods Orders. The headline number showed a larger than expected increase but the main contributors were aircraft and aircraft parts as well as defense orders. These orders will not continue and do not represent a rebound in the business economy. Semiconductor orders fell -8.9% and computers fell -3.1%. When the aircraft and defense orders are subtracted from the index the real durable goods orders fell last month. While the levels are still over the Q4 recession levels they are still not healthy. You can see from those two reports that the real health of the economy may be improving over the long term but the rate of improvement is very much in question. This should make most investors look at the minor market gains today with skepticism. The bounce was mostly short covering on the headline numbers and very little real investor buying. Another reason for the gains came from a set of mixed comments from three Fed members. Two of them said the Fed was in no rush to raise interest rates while one, Blinder, said rates should go up soon. In balance the market paid more attention to the positive comments than the comments by Blinder. Homebuilders jumped for some good gains on the assumption that mortgage rates could remain low for longer than previously expected. The Fed funds futures fell to only a 60% chance of a 25 basis point hike in June instead of the more than 80% chance last week. The big winner by far was NVR which gained a whopping +$22 to $322.25. Sorry guys, it is not optionable! There was still the normal run of story stocks impacting specific sectors with major moves. Network Associates (NYSE:NET) said the SEC had launched an investigation into the way the company booked revenue in 2000. The company said the inquiry was probably based on the resignation of the CEO, CFO and President in Dec-2000. Each resigned just as NET announced a change in accounting practices and a revenue shortfall of $120 million for that quarter. This announcement put the MCAF acquisition on hold after NET shares fell -2.77 or -11%. EDS fell over -$4 after Sanford Bernstein lowered its rating on worries that EDS would miss earnings on April-22nd. The analyst said new business from current clients would not be enough to offset the lack of new customers in the 1Q. Merrill Lynch called the drop a "beautiful buying opportunity" and said they believed the company would hit its earnings target. IBM failed to hold the opening bounce and closed -$3 off the days high. IBM gets a substantial portion of its revenue from services contracts as well and any concern about EDS would be a concern for IBM. Rumors are starting to fly that IBM may be challenged and could miss estimates. They have been meeting estimates by cutting costs and buying back shares for over a year and that tactic only lasts so long. Remember, HWP may also have a shortfall in services income for the quarter. Waste Management (NYSE:WMI) was all over the map today as the SEC filed suit against the former WMI management for cooking the books and inflating profits. The company was quick to point out that this was against the "old" Waste Management and not relative to current conditions. The stock ended the day down only a penny. Unfortunately ROOM fell slightly more than a penny, -8.59 to be exact, after Travelocity said it was buying Site59 for $43 million in cash. The acquisition is directly aimed at EXPE and ROOM and capturing market share from these companies. CIEN said it was cutting 650 jobs (22% of its workforce) and said it would take a $360 million charge. They will also take a charge of as much as $225 million for excess inventory in an effort to return to profitability. Let's see, if you write off $225 million in inventory and then sell it for $50 million at fire sale prices, can you claim that $50 million as "profits"? Carrying this to the logical extreme why not write off everything in one quarter and then claim profits against a zero book value from then on? Don't laugh, it is not that far from reality. Show me the money. This is what real buyers will be saying before they commit capital to this market. With the first quarter earnings cycle only two weeks away the uncertainty about results is keeping the volume very low. The markets are trending down despite the economic headlines. In Greenspan's speech tonight he mentioned the quality of corporate earnings several times. With the Enron, Global Crossing, Network Associates and Waste Management accusations still flying regulators are questioning new accounting rules. Some of these rule would seriously cripple "earnings" for many tech stocks. A PE of 50 could become a PE of 200 overnight if the rules were changed. This accounting cloud will depress the markets for sometime. Speaking of clouds there is a huge thunderstorm brewing in the deep south. DEEP South. Argentina is quickly self-destructing. This has been underway for some time but it is quickly getting worse. The currency is barely suitable for wallpaper and unemployment is well over 20%. The government is in chaos and has no plan. One analyst today said the current civil unrest is likely to turn into serious trouble soon. Because this has been coming for many months most of the impact to the U.S. markets has already been seen, factored and forgotten. However the severity of the current crisis appears destined to impact all the surrounding countries even more than previously anticipated and that could ripple all the way back to Wall Street. Several multinational companies have already warned that the economic weakness in South America would impact their 2002 earnings and more will follow. I don't think the Argentina crisis is over for us. Just an opinion. Many traders are not convinced the market bottom is behind us. The short interest on the Nasdaq rose to 4.01 billion shares in the report released today. Considering the very light volume the last week or two the majority have not decided to cover just yet. Still there is a very strange divergence occurring in the market place. The VIX hit another new 52-week low intraday despite the -146 point Dow drop on Monday. Not a good sign. However the internals are showing some positive indications. The new highs continue to beat new lows despite the down trending markets. The NYSE highs beat lows 113/79 and the Nasdaq was even stronger at 131/42. Advancers also beat decliners 5:3. On Sunday I warned about buying the Nasdaq under my entry point of 1875 and suggested shorting it under 1825. It closed today at 1824, right at the support level I mentioned. I suggested staying out of the S&P until it traded over 1155 and to short it under 1140. It closed today at 1138. Confused? The market internals are positive but the markets are still trending down along with the VIX. You should be confused. It is clear there is considerable confusion among investors, retail and institutional alike. Not enough confusion however to put volatility back into the market. Complacency reigns! Most investors feel the markets will go up as the recovery continues. They are just divided on when that recovery will occur. Most analysts are now pointing to 2003 instead of 3Q/4Q this year. The complacency comes from indifference. Despite the increase in the Nasdaq short interest it appears that most investors are content to just sit on the sidelines and wait. Their volatility is zero. Others are content to simply nibble on every dip and slowly add to their portfolios, confident in a future recovery. Their volatility is minimal. This picture is vastly different from the February bounce when optimism abounded. Reality is slowly sinking in and investors are beginning to realize the rebound may be lethargic instead of robust. The lack of buyers is simply due to a lack of interest. Historically a sell off occurs between April-15th and May-15th more often than not. Recently 52-week lows on the VIX produced a -10% to -20% drop in the S&P over the next 45 days. A low VIX prior to the spring sell off? Hmmmmm. Last three 52-week VIX lows: 8/28/00 18.13 S&P = 1523 dropped by -218 (14%) to 1305 in 45 days 7/16/99 17.70 S&P = 1418 dropped by -151 (11%) to 1267 in 23 days 7/17/98 16.78 S&P = 1188 dropped by -249 (21%) to 939 in 43 days (7/2/2001 low was omitted due to 9/11 distortion but 13% drop had occurred prior to attack) The first key point here is that extreme complacency is followed by prolonged selling. The second key point is that we only know these were 52-week lows by looking backwards in history. The current VIX at 19.75 is still above these historical numbers and still dropping. This means we have not hit the bottom on the VIX yet. It could be next week or it could be next month, we don't know. This is exactly what large institutional investors are waiting for. They pay millions for long term technical analysis in order to time their entries into the markets. That technical analysis is suggesting that a better entry point lays ahead. Therefore they are content to sit and wait. It is interesting to note that the VIX low may be occurring significantly earlier this year than in the last four years due to the recession impact and positive investor expectations. Does that mean it could drop below established norms? Could be. Armed with the above knowledge what should an informed investor be doing? Protecting long positions and waiting patiently for the coming entry point. Until then should a rally break out we need to wait for confirmation before boarding the train. That confirmation would be a break above 10500/1875/1155, none of which is likely to happen tomorrow! Remember my comments on Sunday about buying the close on Thursday. I would only buy it if there is a post 3:PM rally underway. The light volume today after the -354 point four day drop is worrisome. The Thursday close strategy should only be undertaken by nimble traders. Historically bullish post Easter trading can evaporate instantly should earnings warnings prevail. Enter VERY Passively, Exit Aggressively! Jim Brown Editor@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** What's New? "Nothing that I have to say" would be my regrettable answer. Yet another day where no trend or follow through is evident, and traders need to take life one session at a time. (Weekly/Daily Charts: XAL) Looking at the three top performing sectors on Tuesday brings us to a trio of the usual suspects lately, and airlines are leading the pack. All those funds who tossed our airline stocks last September in fire sale fashion must be wailing & gnashing their teeth right now. I can see throwing ELAN and similar "nothing" companies away at times when they disappoint but Southwest Airlines and others? Not a good investment move, but the masses always sell low and buy high. I did nothing with the airlines myself but if I had to make a choice back then, selling would not have been an option. Today may be a different story. XAL is one red-hot sector coming off artificial lows but nothing flies to the moon. Well, poor analogy there but you know what I mean. Price action recently failed at channel resistance, is trading below trendline in daily chart and weekly oscillators warn of serious correction ahead. If that lower channel line (red) gives way, time to short the dickens out of this one. Weekly oscillators down near oversold extreme and turning higher will be my cue to go long when it inevitably happens! (Weekly/Daily Charts: DTX) Look familiar? #3 performer today is of course Dow Jones Transports, of which the airlines are it’s best component. Mirror charts, and I’ll personally play DTX puts if/when this trendline of support gives way ahead. When both long-term chart signals turn bullish again from oversold extreme, call plays will have my attention then. (Weekly/Daily Charts: SOX) Hot money SOX is usually our most dynamic sector on any given day. Who in their right mind even pays attention to all the inane upgrades & downgrades both ways EACH WEEK for years now? Plenty of momentum players due, which is why it’s such a volatile sector. Nothing on this chart compels me to go long right now, either. Stochastic values are bearish, it might be forming a bearish triangle (muddy pattern) and has struggled for 2.5 weeks worth of red candles now. Again, I’ll play calls when both of these chart’s stochastic values align in oversold extreme and turn higher from there, but not before. Conclusion This week is controlled by big money pushing the markets around to trap little money and are doing a fine job of it so far. It’s easier to lose money than make it under current market conditions so please trade smaller than usual or wait until next week. Those who venture forth these next two days might just experience intra-session adventures indeed! Best Trading Wishes, Austin P ************************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.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** **************** MARKET SENTIMENT **************** On Edge By Eric Utley The bulls appear a bit skittish. Monday's meltdown definitely snuffed a lot of optimism. But that good mood was found again this morning following the release of March's consumer sentiment number. The index shot up to 110.2, well above the market's expectations. It was the highest reading since last August's 114. The upside surprise resulted in a sharp, big rally in stocks early Tuesday, but something gave way later in the day. Stocks were unable to continue higher after the early buying spree, which some suggested was a combination of short covering and heavy futures buying. The necessary demand to carry stocks higher never materialized Tuesday afternoon. Instead, the bids disappeared and stocks headed lower. The Nasdaq-100 (NDX.X) slipped into negative territory before a last minute effort by the bulls lifted the tech-heavy index back into positive territory into the close. The daily sector winner and loser were about as bifurcated as sectors get. The recent run in the Gold and Silver Index (XAU.X) necessitated a pullback in Tuesday's session, leaving the XAU 2.78 percent higher. Meanwhile, the broader transport sector came roaring back, led by the 3.57 percent pop in the Airline Index (XAL.X). The energy, telecom, and drug segments of the market were especially weak. While financials, cyclicals, and technology led to the upside. The fear gauges of the market continued to tick lower, epitomized by the new yearly low in the CBOE Market Volatility Index (VIX.X). In my view, the longer the VIX trades below 20, the greater the downside risks grow. The put/call figures confirm the lack of fear in the marketplace as calls continue to swamp puts. The short-term ARMS reading is ticking towards an extreme, which reinforced the short-term oversold way of the market going into Tuesday's session. Coupled with the four consecutive down days in the Dow, Tuesday's consumer number may have been merely an excuse to cover shorts and blow-off some upside risk. Finally, the Nasdaq-100 Bullish Percent ($BPNDX) shed five more percent Tuesday to a reading of 59 percent. That move reinforces our bearish stance on technology shares and won't be shifted until we see some improvement in the indicator. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 10353 Moving Averages: (Simple) 10-dma: 10488 50-dma: 10090 200-dma: 9988 S&P 500 ($SPX) 52-week High: 1316 52-week Low : 945 Current : 1138 Moving Averages: (Simple) 10-dma: 1153 50-dma: 1127 200-dma: 1143 Nasdaq-100 ($NDX) 52-week High: 2071 52-week Low : 1089 Current : 1440 Moving Averages: (Simple) 10-dma: 1475 50-dma: 1485 200-dma: 1541 Airline ($XAL) The XAL rebounded in Tuesday's session after a big down day Monday. The XAL finished 3.57 percent higher for Tuesday. Fears over pricing strategies were squelched when Delta Air Lines (NYSE:DAL) announced lowered fares for certain destinations. Leaders included Southwest (NYSE:LUV), Delta, Continental (NYSE:CAL), Alaska Air (NYSE:ALK), and United (NYSE:UAL). 52-week High: 153 52-week Low : 59 Current : 104 Moving Averages: (Simple) 10-dma: 106 50-dma: 97 200-dma: 103 Gold and Silver ($XAU) The XAU pulled back in Tuesday's session after hitting a new 52-week high Monday. The XAU finished 2.78 percent lower in Tuesday's session. Leading to the downside included Gold Fields (NASDAQ:GOLD), Harmony Gold (NASDAQ:HGMCY), Placer Dome (NYSE:PDG), and Anglogold (NYSE:AU). 52-week High: 70 52-week Low : 46 Current : 68 Moving Averages: (Simple) 10-dma: 65 50-dma: 64 200-dma: 57 ----------------------------------------------------------------- Market Volatility The VIX traced yet another new yearly low in Tuesday's session at the 19.38 mark. Tuesday's close was the third below 20 in the last four days. The VXN spiked higher in Monday's session following the steep drop in the Nasdaq-100 (NDX.X). It rolled over at the 10-dma in Tuesday's session. CBOE Market Volatility Index (VIX) - 19.75 -0.73 Nasdaq-100 Volatility Index (VXN) - 37.68 -1.50 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.66 398,033 268,367 Equity Only 0.59 345,232 205,205 OEX 0.79 11,245 8,840 QQQ 0.26 34,435 9,066 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 64 + 0 Bull Confirmed NASDAQ-100 59 - 5 Bull Correction DOW 77 + 0 Bull Confirmed S&P 500 74 - 1 Bull Confirmed S&P 100 76 + 0 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.25 10-Day Arms Index 1.20 21-Day Arms Index 1.06 55-Day Arms Index 1.23 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when the do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals Advancers Decliners NYSE 1953 1205 NASDAQ 1999 1566 New Highs New Lows NYSE 163 44 NASDAQ 152 24 Volume (in millions) NYSE 1,199 NASDAQ 1,470 ----------------------------------------------------------------- Commitments Of Traders Report: 03/19/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. 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 tend to be wrong. S&P 500 S&P Commercials maintained their relatively higher net bearish position in the prior week by dropping a significant number of longs and a small number of shorts. The group's % of OI, however, increased by a larger amount. Small traders maintained their yearly high net bullish position. Commercials Long Short Net % Of OI 03/05/02 361,254 445,989 (84,735) (10.5%) 03/12/02 396,050 483,606 (87,556) (9.9%) 03/19/02 322,938 410,494 (87,556) (11.9%) Most bearish reading of the year: (111,956) - 3/6/01 Most bullish reading of the year: ( 36,481) - 10/16/01 Small Traders Long Short Net % of OI 03/05/02 161,711 60,941 100,770 45.3% 03/12/02 179,825 75,025 104,800 42.6% 03/19/02 145,262 43,066 102,196 54.3% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 104,800 - 3/05/02 NASDAQ-100 NDX commercials dropped a big chunk of their long position, resulting in a drastic climb in the group's net bearish stance. Small traders went the opposite direction by shedding a larger number of short contracts, establishing a firm net bullish position. Commercials Long Short Net % of OI 03/05/02 33,549 35,419 (1,870) (2.7%) 03/12/02 37,415 42,942 (5,527) (6.9%) 03/19/02 24,792 33,699 (8,907) (15.2%) Most bearish reading of the year: (15,521) - 3/13/01 Most bullish reading of the year: 7,774 - 12/21/01 Small Traders Long Short Net % of OI 03/05/02 11,961 11,214 747 3.2% 03/12/02 14,571 13,045 1,526 5.5% 03/19/02 11,637 5,527 6,110 35.6% Most bearish reading of the year: (9,877) - 12/21/01 Most bullish reading of the year: 8,460 - 3/13/01 DOW JONES INDUSTRIAL Dow commercials shed a significant number of both long and short positions. The result of their actions was a drastic drop in the group's net bullish position. Small traders reduced their total position, too, resulting in a modest drop in the group's net bearish position. Commercials Long Short Net % of OI 03/05/02 37,036 25,554 11,482 18.3% 03/12/02 35,080 23,204 11,876 20.4% 03/19/02 20,858 13,283 7,575 22.2% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 03/05/02 6,589 13,057 (6,468) (32.9%) 03/12/02 6,400 13,070 (6,670) (34.3%) 03/19/02 4,651 10,367 (5,716) (38.1%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********************** INDEX TRADER GAME PLANS *********************** Index Trader Swing-Trade Game Plan: Tuesday 03/26/2002 Up & Down Again News & Notes: Would you believe we had yet another volatile day chopping up & down? Of course you would... what else do we endure more sessions than not? Featured Markets: [60/30-Min Chart: OEX] OEX burst thru this channel as shorts covered in panic today, only to drop back inside by the bell. 30-min chart shows Bullish Reversal “Morning Star” candle pattern and stochastic values rounding up from oversold extreme. In this channel if it breaks above 575 look for 580 to be reached in a hurry. Otherwise, 567 area is next. [60/30-Min Chart: SPX] We’ve redrawn the channel lines in this chart for a varied perspective. I’m not sure which measure is valid, the old channel or this one. So we’ll use both! Aggressive traders could go long the break above resistance right at 1139 and look for 1150 to 1160 area next. Passive traders might wait for 1142 instead. Failure near channel resistance line (blue) or higher open and drop thru this close is a short to play. Look for the point of today’s wedge as resistance as well. [60/30-Min Chart: QQQ] Qs look overbought and weak... which gives us bearish tint for all the indexes on Wednesday. But price action here is midway within its channel and flat coil to end Tuesday’s session was entered on the upswing, a bullish implication. Summation: Mixed picture tonight. Volume is thin, investors are out of the market and big traders are pushing the pile around at will. Only fit for adept intraday traders with advanced risk management skills and trading vehicles. Nothing but day trades until next Tuesday or so in my opinion. Trade Management: Option traders may choose listed In-The-Money (ITM) or Out-The- Money (OTM) contracts by personal preference. They are selected based on volume, open interest and "Delta" values in that order. Our preference is usually OTM contracts except for the last few days of expiration when ATM or ITM contracts are preferred. Index Trader Sector-Trade Game Plan: Tuesday 03/26/2002 Flopped & Chopped News & Notes: Indexes opened flat, soared to session highs on wild, short- covering squeeze, sold off and rallied back a bit to recover half of Monday's loss. And there you have it... another volatile day. Featured Plays: None Summation: Open shorts improved late in the session or merely tread water, one of the two. No changes to note of interest tonight. Trade Management: Entry triggers are points where plays are tracked when price action breaks above for calls or below for puts. Stops are the exact opposite of that. Sell targets are points to exit based on index levels or %gain on share price as noted. No entry targets listed mean the model is idle at that time. Asterisk means symbol has listed options New Play Targets: None Open Long Plays: None Open Short Plays: ---------------- XLB ** XLP ** Short: 23.75 Short: 26.00 Stop: 24.50 Stop: 26.75 XLV ** XLY ** Short: 29.00 Short: 29.90 Stop: 30.25 Stop: 31.00 IYD IYK Short: 45.25 Short: 45.90 Stop: 47.00 Stop: 47.00 IYR IYE Short: 84.75 Short: 49.70 Stop: 86.00 Stop: 52.00 IJJ Short: 97.00 Stop: 99.00 DIA **[DJX] IYM Short: 105.90 Short: 42.00 Stop: 103.50 Stop: 41.00 03/25 Listings -------------- QQQ ** SMH ** BBH ** Short: 36.60 Short: 46.25 Short: 126.25 Stop: 36.50 Stop: 46.50 Stop: 124.00 OIH ** MKH ** RTH ** Short: 65.50 Short: 58.50 Short: 100.00 Stop: 69.00 Stop: 58.50 Stop: 101.00 TTH ** FFF ** IWD Short: 38.50 Short: 82.25 Short: 57.50 Stop: 41.00 Stop: 83.25 Stop: 58.80 IWM IWS IYC Short: 99.75 Short: 82.75 Short: 57.00 Stop: 100.75 Stop: 84.00 Stop: 59.50 IWW IYY IVE Short: 73.70 Short: 53.00 Short: 55.50 Stop: 77.00 Stop: 56.00 Stop: 58.00 XLE IYM XNG (options only) Short: 28.40 Short: 41.50 Short: 193.25 Stop: 31.00 Stop: 42.50 Stop: 203.00 ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** 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 ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Tuesday 03-26-2002 Copyright 2001, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. **************** 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: ***** ROOM $60.00 -8.59 (-9.00) ROOM's CFO expressed concerns at an investor meeting today about Travelocity's intentions to establish its own hotel merchant product, potentially severing ties with ROOM. Despite the CFO's reassurance that Travelocity was locked into its contract until 2005, investors didn't take the news kindly and punished ROOM for it. The stock blew past our stop on its way to breaking its short term trend. If you weren't stopped out during today's sell-off, look for any signs of a bounce early tomorrow to take losses. CEPH $64.34 -1.29 (-3.66) CEPH announced today that it had increased the number of authorized shares to take advantage of such things as stock splits, acquisitions, and issuance. Investors didn't like the idea for the potential of the latter two. In addition to the news, the broader Biotech Sector (BTK.X) traded relatively weak during the day. The stock did settle around its 200-dma. That level could attract buyers tomorrow and result in a bounce that can be used as an exit point. EXPE $65.12 -1.81 (-3.25) Travelocity announced this morning that it was acquiring Site59. The acquisition is expected to give Travelocity an in to the travel business, possibly competing with the likes of Expedia. The news weighed on shares of Expedia throughout today's session as the stock slipped down to its 10-dma. Volume picked up during the decline. Given the potential for increased competition, we're dropping coverage on EXPE ahead of potential downside. Look for an early bounce tomorrow morning to cut losses. GENZ $48.79 -0.46 (-3.01) The bulls built up quite a head of steam last week as they propelled GENZ right up to the 200-dma as the Biotech sector (BTK.X) flirted with a breakout over the $540 level. Alas, it wasn't to be, as the BTK pulled back sharply the first two days of this week, pressuring shares of GENZ below our $49 stop on Tuesday. Despite the late-day bounce off the lows, we're dropping the play tonight as it looks like the bulls are taking a breather. TXN $33.52 +1.47 (+0.36) Our TXN play was a long-shot play, where we were looking to profit from a rebound in the Semiconductor sector that would propel some of the stronger names higher. Well, that rebound never really materialized, as the SOX broke down yesterday. Even with today's rebound, it wasn't enough to get the bulls out of their defensive mode and TXN, while higher on the day appears to be finding resistance near the $34 level, which looked like support last week. While our stop is still intact, we're removing the play from the call list tonight due to the deteriorating technical picture, both for the stock and the sector. PUTS: ***** None *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue BAC 69.12 -0.50 0.97 One of the strongest bank stocks IDPH 67.99 -2.05 0.84 Gaining relative strength vs. BTK CEPH 64.34 -2.37 -1.29 Dropped, biotech under pressure GENZ 48.49 -2.55 -0.46 Dropped, rolled at the 200-dma COF 62.75 -2.83 2.21 Hanging tough in volatile market EOG 40.16 -0.24 -0.58 Pulling back after break, entry? EXPE 65.12 -1.44 -1.81 Dropped, not performing as expected TXN 33.52 -1.11 1.47 Dropped, slipping lower with SOX.X KLAC 65.13 -0.88 0.75 Could go either way in coming days CAH 69.27 -1.34 -0.68 Bouncing between $68 and $70 levels ROOM 60.00 -0.41 -8.59 Dropped, negative developments LH 93.61 -0.66 2.36 New, breakout to new highs and more THC 65.53 0.51 0.33 New, new all-time higher, leading PUTS ISSX 25.89 -0.69 -2.13 Positive developments for the bears MIL 44.51 -0.97 0.62 Battle between bulls and bears GDW 62.52 -0.75 0.80 Consolidating recent leg lower TMPW 32.99 -0.01 0.80 Inability to break above resistance FLIR 44.64 -3.44 3.39 Back and forth trading, no trend EMLX 29.80 -1.79 0.04 Intraday highs are lower and lower GNSS 25.00 -1.12 -1.81 New, poor performing chip play IBM 102.90 -2.04 -0.66 New, service sales under pressure ************************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.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************** PLAY UPDATES - CALLS ******************** CAH $69.27 +0.56 (-0.68) CAH pulled back in yesterday's session along with the broader market. In the recent past, we've seen the health care stocks get a boost when the broader market sells off, but didn't see that develop in yesterday's session. After trading slightly lower early in today's session, CAH rebounded and held onto its gains despite the rollover in the broader market. That was more like it! We like to see relative strength in this stock during weakness in the broader market. However, yesterday's move placed CAH well below its 200-dma for the first time in six sessions. The stock's rebound today took it back above the 200-dma on an intraday basis, but CAH had some trouble advancing above the 200-dma near the late part of today's session. The 200-dma currently sits just above the $69 level and could serve as short-term resistance. That being said, the 200-dma could also be used as an action point for those traders looking for new entry points. An advance above today's intraday high at the $69.45 mark would confirm a break above the 200-dma. From there, we'll look for a move above the $71 mark. Otherwise, look for entries on intraday pullbacks above the $68 level. IDPH $67.99 +0.84 (-1.21) IDPH managed to trade well in today's session despite the weakness all day long in the broader biotech sector. The AMEX Biotechnology Sector Index (BTK.X) finished lower for the third consecutive session, but it did manage to settle off of its day lows. From a technical standpoint, the BTK.X traded slightly below but managed to close above its 50-dma. That technical bounce could reveal a reversal in the short-term descending trend. For IDPH's part, it was encouraging to see the stock finish strongly higher despite the weakness in its sector peers. The stock fell back down around the $67 level but managed to inspire buying interest once again near that level. The stock's reluctance to breakdown bodes well for its bullish prospects going forward, but no matter its strength, IDPH needs the BTK.X to participate if it's going to breakout above its near-term resistance. Additionally, the stock traced an inside day in today's session, a pattern indicative of either a pause in trend or a reversal of recent trend. If IDPH is going to breakout above its short-term resistance, it could start the move with an advance past the $68.85 level, which was Monday's high. Make sure to confirm buying interest in the BTK.X if using the inside day technique, or use further intraday dips to the $67 support level as entry opportunities. COF $62.75 +2.21 (-0.62) COF reiterated its financial guidance yesterday. The company said that it expected to spend more than $1.1 billion in marketing this year, and that it expected to grow its earnings by 20% over last year's numbers. The news of increased marketing expenses may have added additional pressure to the stock in yesterday's session, but more likely was the broad weakness pressuring shares lower. The stock did however rebound in a big way during today's trading, along with the bounce in the broader financial measures including the Bank Sector Index (BKX.X) and the Securities Broker/Dealer Index (XBD.X). With the recent trading range that appears to have been established in the last week, traders might look to intraday weakness near support for entry opportunities instead of trying to chase the stock higher. Bounces just above the $60 level have been followed with rallies up to the recent relative highs, which is a pattern that could repeat in the coming days. The better entries might come on such bounces near support. The stock could breakout if the broader financial measures continue advancing. Look for that sector sponsorship before attempting to enter plays on a breakout above resistance at $64. BAC $69.12 +0.97 (+0.47) Like the Energizer Bunny, BAC keeps going and going. Each brief dip seems to be met with eager buyers near the $68 level, as they jockey to be in position for the eventual breakout over the $69.50 resistance level. An it looks like that could be coming along sooner, rather than later. See how the daily Stochastics appears to be starting a short-cycle bullish reversal and is heading back towards overbought? The near-term overbought condition of last week has been relieved, giving the bulls room to run. The price action in the Banks index (BIX.X) is confirming that bullish intent, once again holding above the $670-675 support area. As long as the BIX can maintain altitude, we can continue to use the dips in shares of BAC to initiate new positions in anticipation of the pending breakout. EOG $39.30 -0.58 (-0.86) The waiting game continues. Despite a solid breakout over the $38 level two weeks ago, EOG bulls are having a hard time maintaining their conviction. With the price of Natural Gas once again calming down and the XNG index consolidating above its own breakout near the $190 level, it should come as no surprise that shares of EOG are settling in around the $39 level. We're still leaning bullish on this stock, but proper entries will be important to managing risk. Look to enter on a rebound from the $38.50-39.00 level, keeping a tight stop on the play at $38.50, just below the ascending 20-dma ($38.57). This is the top of the gap up on March 7th and if EOG falls into this gap, the bullish move will be in serious jeopardy. Barring that sort of negative development, use intraday bounces from support to initiate new positions ahead of a renewed run at the $41.50 resistance level. KLAC $65.13 +0.75 (-0.13) Those high-flying chip stocks got their tail-feathers singed over the past couple days, as the Semiconductor index (SOX.X) broke below the critical $580 support level. But dip-buyers came to the rescue, giving the SOX a morning bounce off the lows and then another bounce in the afternoon from the $580 level. That helped our KLAC to bounce from support, just as we were expecting. The chip equipment manufacturers should lead any true rebound in the Semiconductor industry, and KLAC has been performing well in recent months. Due to end-of-quarter window dressing, we could even see a nice ramp into the weekend if the SOX can get moving in a northbound direction. KLAC gave us a great entry this morning, as it rebounded from the long-term ascending trendline near $63.25, which also happens to be the site of near-term support from last week. Continue to target intraday dips to support for initiating new positions and keep stops set at $62.75. ************** NEW CALL PLAYS ************** THC - Tenet Healthcare $65.53 +0.33 (+0.94 this week) Tenet Healthcare Corporation (Tenet) is the second largest investor-owned healthcare services company in the United States. As of May 31, 2001, Tenet's subsidiaries and affiliates owned or operated 111 general hospitals with 27,277 licensed beds and related healthcare facilities serving urban and rural communities in 17 states, and held investments in other healthcare companies. The consistency and quality of earnings offered by health care providers continues attracting bullish attention. That much can be observed by the fact that the HMO Index (HMO.X) trades near its all-time high. One of the strongest stocks in the broader group, THC is poised to breakout to an all time high itself. The stock has been trending higher since early 2000 and that trend does not appear to be near an end. The stock pulled back, along with its group, in late February, which culminated with a trade down to and rebound from the 200-dma in early March. Since that time, THC has been trending higher and is threatening to breakout from its three month consolidation range. The consolidation began in early January when THC traded up above the $66 level. It retested that level in early February, followed by the pullback down to the 200-dma. The third test of that resistance may prove to be the charm that carries the stock well above resistance and into the low $70s over the short term. Momentum traders who favor trading breakouts above resistance in strong stocks can look for a volume-backed move above the $67 level in conjunction with strength in the HMO.X. The sector can move counter to the broader market due to its defensive nature, so give more credence to the sector itself. Those who prefer waiting for a pullback can look for a light volume retreat down into the $63 to $64 support zone, reinforced by the 10-dma at the $64 level. Our stop is initially in place at the $62 level. BUY CALL APR-60 THC-DL OI=1370 at $5.90 SL=3.75 BUY CALL APR-65*THC-DM OI=3866 at $1.85 SL=1.00 BUY CALL MAY-65 THC-EM OI=3776 at $2.85 SL=1.50 BUY CALL MAY-70 THC-EN OI=1479 at $0.90 SL=0.25 Average Daily Volume = 2.06 mln LH - Laboratory Corp. of America $93.61 +2.36 (+1.70 this week) Laboratory Corporation of America Holdings (LabCorp) is the #2 clinical laboratory service in the world, behind Quest Diagnostics. LH performs 2000 types of tests for more than 100,000 clients, including health care providers, pharmaceutical firms, physicians, government agencies and employers. With 25 major laboratories and some 1200 service sites nationwide, the company emphasizes specialty and niche testing such as allergy tests, HIV tests, blood analyses, and substance abuse screenings. Never mind the persistent weakness that the broad markets have been seeing in recent weeks, there are still some notably strong stocks that are breaking out to new highs. Add in the fact that this one is in the relatively stable Health Care industry, and things start sounding better. We've played LH on numerous occasions over the past 18 months and if there is one thing we've learned, it is that the stock loves to breakout. Well, true to form, shares of the #2 clinical laboratory service company broke through recent congestion on Tuesday to post a new all-time closing high of $93.61. This move really got moving a couple weeks ago, when LH pushed through the $89 level to create a triple-top buy signal on the PnF chart. The current vertical count points to the stock eventually rising to $118, but we won't hold our breath on that one. Near-term, the buying volume is on the rise and daily Stochastics are still vacillating near the overbought zone. A good old-fashioned momentum run. Use intraday pullbacks near the $90-91 level to initiate new positions or else wait for another breakout (this time over $94) on strong volume before playing. We are initially placing our stop at $89.50. BUY CALL APR-90 LH-DR OI=396 at $4.80 SL=3.00 BUY CALL APR-95*LH-DS OI=405 at $1.70 SL=0.75 BUY CALL MAY-90 LH-ER OI=180 at $6.00 SL=4.00 BUY CALL MAY-95 LH-ES OI=116 at $3.10 SL=1.50 Average Daily Volume = 593 K ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* PLAY UPDATES - PUTS ******************* MIL $44.51 +0.62 (-0.35) MIL broke from last week's consolidation in yesterday's trading with its decline below the $44 level. The trading following that breakdown has been volatile, taking MIL back up to the $45 level. We've seen some serious intraday volatility uncharacteristic of this stock, possibly revealing a battle between the bulls and bears at current levels. The intraday rollovers from the $45 level have proved to be solid entry points into new put plays, so traders can continue to look for such moves and target the rollover. Tight stops just above the $45 level can be used to manage risk. Its no surprise that we've seen the volatility in the last two days because of the significance of the $44 support level. That level is a quadruple bottom on the point and figure chart and will be broken with a decline below the $43 level. MIL was 0.29 away from the $43 level in yesterday's session. Momentum traders who favor entering on weakness can wait for a trade below the $43 level before entering new put plays. Look for volume to increase on any breakdown below $43 and confirm such a decline with a move below $42. GDW $62.52 +0.80 (+0.05) GDW has traced a classic 'b' long liquidation consolidation over the past six sessions. Interestingly, volume has increased over that time period as bulls try defending at current levels while the sellers rotate supply. The stock is likely to breakout of its consolidation within the next three trading session. The probabilities of the pattern are in favor of a breakdown due to the direction of recent trend. Whether that breakdown is realized will depend on the direction of the broader market as well as the KBW Bank Sector Index (BKX.X). The BKX.X has been trading strong in recent sessions and a continuation of that trend will most likely prevent a breakdown in GDW. The short term resistance that is forming between the $62.50 and $63 levels can be used as an entry point on intraday rollovers. That resistance zone is reinforced by the rolling over 50-dma at the $63.18 level. Look for weakness to return to the BKX.X and use entries near the resistance zone in order to manage risk easier. EMLX $29.80 +0.04 (-1.75) Despite valiant attempts by the bulls, shares of EMLX can't get out of their own way. After failing to move through the declining 20-dma ($31.89) for the past 3 days, the bulls seem to have lost their nerve again on Tuesday afternoon, allowing the stock to once again fall below the $30 level, closing below the 200-dma again. While we need to be aware of significant support in the vicinity of the $26-27 area, there's no doubt the stock is seeing some concerted selling pressure. We can continue to use failed rallies near the 20-dma to initiate new positions, and this should make risk easy to manage with a stop set at $33. The picture portrayed on the PnF chart tells us there is still some significant downside risk, with a bearish target of $17. Momentum traders will want to see the $28.50 support level give way before initiating new positions on a breakdown, keeping in mind that the true breakdown level will be near $26.50, in the vicinity of the lows from a week ago. FLIR $44.64 +3.39 (-0.05) Holy mirror images, Batman! What shares of FLIR gave us to the downside yesterday, it took back today. The really interesting thing is that the intraday candle patterns from the two days are virtual mirror images of one another. With both days' action coming on pretty heavy volume, we need to be on the lookout for more strength on Wednesday, as the daily chart shows us a Tweezer Bottom candle pattern, which is a fairly reliable bottom-reversal signal. So keep those stops in place at $46 and move to the sidelines if it is violated. But if the weakness that has been prevalent (both in the stock and the DFI index) continues, we can use today's rebound to give us an attractive entry into the play. A rollover in the vicinity of $45 would be good, but a pop and then decline from the $46 area would be even better. Keep an eye on the DFI index for signs of renewed weakness before adding new positions. ISSX $23.07 -2.13 (-2.82) Patient bears were rewarded again this morning, as ISSX broke down below the $25 level. We've been leaning on the stock over the past week due to its poor relative strength and a lack of positive catalysts in the Internet Security arena. The picture got a little uglier this morning before the opening bell, as Robertson Stephens says its channel checks indicate that the current quarter is tracking below plan and they fear the company may miss its numbers. That's all investors needed to know to knock the stock as low as $21.75 before firming a bit through the afternoon to end with 'only' a 8.45% loss on the day. Volume was understandably huge, coming in well above triple the ADV. There was a lot of technical damage done on Tuesday, but shares of ISSX are still technically hanging onto support near the $22 level. It is important to note that we got a fresh double-bottom breakdown on the PnF chart on Tuesday, and that means we have a new bearish price target: $11. But we don't want to give back too much of our gains after being in the right place, at the right time, so we are ratcheting our stop down to the $25.50 level (just above the top of today's gap). Use failed intraday rallies below that level to initiate new positions with an eye on the next level of support near $19-20. TMPW $33.78 +0.80 (+0.75) For all the wild movement in the broad markets so far this week, the action in shares of TMPW has been rather disappointing. Ending virtually unchanged on Monday and tacking on 80-cents on Tuesday is not the stuff winning directional plays are made of. But the stock is definitely showing its weakness, as it pulled back from the $35 resistance level to post another Doji day of indecision. Until the market decides which way to drive shares of TMPW, we can take action at the extremes of the recent range. Consider new entries either on another failed rally near the $35-36 area, or else wait for near-term support at $32.50 to give way. Our stop remains at $37. Note that volume was downright anemic on Tuesday, further evidence of the market's indecision on the stock. Wait for the conviction of volume to provide confirmation before playing. ************* NEW PUT PLAYS ************* IBM - IBM $102.90 -0.66 (-2.70 this week) International Business Machines Corporation (IBM) uses advanced information technology to provide customer solutions. The Company operates using several segments that create value by offering a variety of solutions, including, either singularly or in some combination, technologies, systems, products, services, software and financing. Electronic Data Systems has been the target of bearish analyst actions in recent days. Sanford Bernstein cut its investment rating on shares of the information technology company. Analysts raised concerns over EDS' ability to realize its sales goals for the current quarter, citing the continued weakness in corporate spending. If the analysts are correct about EDS' weakness, then that brings into question IBM's current quarter. The company relies heavily on its services division, which is a bigger version of EDS. Not to mention the fact that IBM continues to trade poorly relative to the broader market and the narrow-based technology segments of the market. The stock traded heavy all day during today's session and actually closed lower, one of the few Dow Jones Industrial Average components that finished in negative territory during today's session. The rebound in tech shares near the close of trading today couldn't even inspire a bounce in IBM, which finished just off of its intraday lows. Traders could be fearing a warning from IBM in the coming week as warnings season is underway for the first quarter. The stock certainly trades as if investors are fearful of further deterioration in IBM's core businesses. Traders looking to capitalize on that fear can look to take entries into further weakness below the $102 level. Below there, the $100 level can often act as psychological support, so the technical downside may be limited in the very short term barring a major rollover in tech stocks or an actual warning from IBM. Those who'd rather get bearish plays at higher prices can wait for an intraday rally on relatively lighter volume up to the $105 to $106 resistance level. The 10-dma, which is declining and converged with the 50-dma, may reinforce that resistance zone and prevent IBM from rallying much above that level. Our stop is in place at the upper-end of that zone at $106. BUY PUT APR-105*IBM-PA OI=20479 at $4.30 SL=2.00 BUY PUT APR-100 IBM-PT OI=36027 at $2.15 SL=1.00 Average Daily Volume = 7.84 mln GNSS - Genesis Microchip $25.00 -1.81 (-2.93 this week) Genesis Microchip designs, develops and markets integrated circuits that receive and process digital video and graphic images. Its integrated circuits are typically located inside a display device and process images for viewing on that display. The company also supplies reference boards and designs that incorporate its proprietary integrated circuits. GNSS is focused on developing and marketing image-processing solutions and targets the flat-panel computer monitor and other potential mass markets. How many times can you go to the same well before you are considered greedy? There are several plays that we have come back to time after time over the past several months because of the predictable trends they provide. Despite the fact that it fits into the volatile Semiconductor sector (SOX.X), shares of GNSS continue to languish in a very predictable manner under their 10-week descending trendline. The stock cratered more than 40% on February 28th after the company gave a disappointing post-merger (with Sage) financial outlook. Since striking a low of $22.50 on the day of the announcement, GNSS gradually recovered up hear the bottom of that big gap ($32.50) before beginning to slide downwards again. Late last week, the declining price trend ran smack into that descending trendline near $29 and the stock has been under increasing selling pressure since then. Tuesday's price weakness dropped the stock through last week's intraday lows near $25.75 and it really looks like the $22.50 support level is in jeopardy. The recent consolidation had been building a neutral triangle on the PnF chart and that pattern recently broke in favor of the bears. Use intraday rallies in the vicinity of the descending trendline (now at $27) or $28 intraday resistance to initiate new positions. Because of the stock's volatile nature, we're initiating the play with a wide stop, set at $29.25. BUY PUT APR-25*QFE-PE OI=8383 at $2.30 SL=1.25 BUY PUT APR-22 QFE-PX OI= 717 at $1.20 SL=0.50 Average Daily Volume = 4.51 mln ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Tuesday 03-26-2002 Copyright 2001, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. ********************** PLAY OF THE DAY - CALL ********************** CAH - Cardinal Health $69.27 +0.56 (-0.68 this week) Cardinal Health, Inc. is a provider of products and services to healthcare providers and manufacturers, helping them improve the efficiency and quality of their healthcare services and products. Cardinal Health has four reporting segments: Pharmaceutical Distribution and Provider Services, Medical-Surgical Products and Services, Pharmaceutical Technologies and Services, and Automation and Information Services. Most Recent Update CAH pulled back in yesterday's session along with the broader market. In the recent past, we've seen the health care stocks get a boost when the broader market sells off, but didn't see that develop in yesterday's session. After trading slightly lower early in today's session, CAH rebounded and held onto its gains despite the rollover in the broader market. That was more like it! We like to see relative strength in this stock during weakness in the broader market. However, yesterday's move placed CAH well below its 200-dma for the first time in six sessions. The stock's rebound today took it back above the 200-dma on an intraday basis, but CAH had some trouble advancing above the 200-dma near the late part of today's session. The 200-dma currently sits just above the $69 level and could serve as short-term resistance. That being said, the 200-dma could also be used as an action point for those traders looking for new entry points. An advance above today's intraday high at the $69.45 mark would confirm a break above the 200-dma. From there, we'll look for a move above the $71 mark. Otherwise, look for entries on intraday pullbacks above the $68 level. Comments CAH's pullback in yesterday's session removed some of the downside risk in this play. Today's rebound could be the early move in a breakout above short-term resistance. Look for the stock to follow-through in tomorrow's session by taking out today's high at $69.45. From there, a move back up to $70 is probable. That should set-up the eventual breakout above the $71 mark. BUY CALL APR-65 CAH-DM OI= 290 at $5.20 SL=3.50 BUY CALL APR-70*CAH-DN OI=1487 at $1.50 SL=1.00 BUY CALL MAY-70 CAH-EN OI= 85 at $2.50 SL=1.50 BUY CALL MAY-75 CAH-EO OI= 370 at $0.85 SL=0.25 Average Daily Volume = 3.03 mln ************************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.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** TRADERS CORNER ************** Trader's Corner Do You Have Trader Status? Buzz Lynn buzz@OptionInvestor.com That's almost an insulting question! Of course I have trader status. I'm a trader! Err, well, maybe I qualify. OK, I lost $100,000 last year and quit trading after March, so maybe not. But boy, how I wish I could claim the whole loss suffered in instead of using a measly $3,000 per year over the next 34 years for what seems like eternity. Anybody utter these words to themselves over the last two years? We get plenty of reader e-mail from those who have. Invariably, they go on to ask if we know what is/how to get trader status that would allow deductions for substantial losses exceeding the $3,000 annual limit. While we are not accountants (at least none of the folks I know at OIN are) and we don't even play them on TV, we know people who are. And following last week's Trader's Corner on Beating the Tax Man, there seems to be an unusual amount of interest in the subject - no surprise given that returns and taxes are due in just 21 days. So we figured, "what the hey". Not only would this make a great article of immense benefit to fellow readers, it would also give us an excuse to seek out and ask the questions of an expert in the field. Just as we would never entrust our hard-earned dollars to a brick maker for the purpose of buying fine jewelry, so too should we avoid trusting our accounting issues to Fundamentals Guy or any other analyst, market strategist, and trader on our staff. While we know tidbits, we are in no way qualified to talk specifics on the subject of trader status and tax liability. For those issues, we need an expert. And that expert is Jim Crimmons of www.tradersaccounting.com. Here's the reader e-mail that got the ball rolling on this: "Hi, Would you please direct this question to the most appropriate individual at option investor? I realize that you are not accountants but you all do the same thing with options. I have discussed for many years the tax strategies with my accountant and to date have always been an investor and not a trader and have not marked to market. I make over 400 option transactions per year, create a lot of margin debt and had huge losses over the past two years that would have been better offsetting earned income rather than the current 3000 per year until offset by future capital gains. Would some please devote an article to trader Vs investor? My accountant say that the rules are deliberately ambiguous so that most people will end up investors and not risk going into unchartered waters where they are subject to audits, penalties and interest for trying to write off home office expenses, and use mark to market today. He says that one has to get permission from the IRS to go back from market status to investor status after making their first election so that in years where there are huge capital gains one would regret that they no longer can have long-term capital gains. He says that having separate accounts at separate brokerage firms does not allow one to be a trader in one account and an investor in another account as there has been no ruling and that at an audit one would have to pay penalties and interest and then go to tax court to try to win your case without any ruling. Would someone at Option investor please comment on the tax options available to option investors/traders. Thank you" Dear Reader - Your day is here! Rather than try to answer our fellow reader's question with just a paragraph from one of us here, we posed the question to Jim Crimmons, founder of www.tradersaccounting.com. What we got back was detailed enough to answer almost anyone's questions on the entire subject. I'll let Jim do the talking from here. Me: What say you, Jim? Jim: Executive Summary: Tax planning is worthless unless it is put in place. Probably the biggest reason people do not follow through is that the idea is either too complex, or forces them to change their lifestyle in a dramatic fashion. While the following suggestions may sound intimidating and complex initially, their operation is fairly simple and is designed not to make any major changes in your current lifestyle. Remember the idea is to plan ahead to establish your Tax Efficient Trading Plan, which dove tails with your overall Trading Plan. Treat it as a business: Establish an LLC for your trading. Advantages. Since you can treat the LLC as a pass-through entity, you will not be subject to double taxation as you could with a C corporation, but you can run your business deductions through it. This account will be your active trading account and will provide you with liquidity and asset protection. When there is sufficient trading activity, you can adopt the Mark to Market method of accounting, which allows you to ignore both the Wash Sale Rule, as well as the $3,000 cap on Capital Loss Deduction. Because many of the expenses you are now paying out of your own pocket can be expensed out through your trading company, you will be lowering the amount of money you need to live on, and by this means lowering your personal income taxes. Learn to deduct expenses that you cannot fully do personally, like education, meetings, and trading expenses. For example, Healthcare costs - Your company can pay Medical Insurance premiums. Medical Savings Account - If you are funding your own medical insurance, a Medical Savings Account for your family generally saves our clients a lot of money, as well as add to their retirement income. If you are unfamiliar with MSA’s order our free special MSA report by e-mailing us at email@example.com, enter the words MSA in the subject box. [Shameless plug for Jim :-)] Work With Your Tax Advisor Quarterly: As the year progresses, because of the extremely volatile nature of trading, you need to evaluate your tax strategy needs. You cannot wait until this time next year and enact any strategies for this year. A pro-active tax advisor will work with you on a quarterly basis, to ascertain what you need to do to lower your taxes. Traders Education: Learning from others can often be the least costly. As a former dean of Harvard put it: “If you think education is expensive, try ignorance.” Investment seminars and publications present important learning opportunities that are essential to mastering your trading skills. Me: Sounds good so far, Jim, but why should we trade in a business entity? Jim: Some clients have traded as a business, and others have traded in their own name and are considered investors. When we talk with the last group we are always asked, “Why should I trade in a business entity?” It is important that you understand both the pros and cons of trading as a trader and as an investor. Trading as an “investor” limits you in several aspects, the first being taxes. Taxes: Because the IRS treats an investor as a hobbyist, educational expenses and the related expenses of attending seminars such as travel and meals are not deductible. If you are a trader like I am, you realize that from time to time you need to go to an educational workshop to hone your skills. This generally is an on-going process, many of us go to at least one trade show or workshop each year, and the expenses can be pretty substantial. The rub is we bump up against the 2% threshold the IRS imposes for expenses on our personal tax return. What this means is that if our Adjusted Gross Income for the year is $100,000 the first $2,000 of expenses we have cannot be deducted. Let’s look at two examples where our taxpayer has made money: John is an investor trading in his own name without benefit of a business. At the end of the year he finds he has made $40,000 trading. He and his spouse both work; together they have made an additional $100,000. Their trading expenses look like this: Telephone $ 480 Seminars 3,500* Fees 1,200 Travel & Entertainment 650* Cable 360 Home Office Expense 1,800* DSL 240 Office Equipment 10,000* Margin Interest 6,000 Sub-Total $15,950 Sub-Total $8,280 TOTAL $24,230 Of this amount, how much could be deducted by John? He can claim only $8,280 in expenses. He cannot claim the items above which are marked with an asterisk, since he is classified an investor, and the hobby rules indicate that he cannot deduct these items. He and his spouse have approx. $140,000 in income for the year, so the first 2% of his expenses are not deductible. This would mean that $2,800 in expenses could not be deducted, leaving John with $5,480 he could deduct, which at a 30% tax bracket would save him $1,644! (Obviously for illustration this example is flawed in its simplicity. Most taxpayers will have other deductions as well as adjustments to their gross earnings.) Susan on the other hand has set up a business entity to trade in. Within the business she has filed for the Mark to Market Accounting Method. Assuming she is in the same exact situation that John is with the same total income and expenses, Susan would be able to deduct the additional $15,950. According to section 162 of the IRS code, a business can deduct "all ordinary and necessary expenses." Susan, also in the 30% tax bracket, is able to deduct the entire $24,230. Susan saves $7,269 in taxes. Lets see: the difference between John and Susan is $5,625 more in Susan’s trading account at the end of the year—that’s quite a difference! Ok, we have seen that Susan wins out when they both have made $40,000 in trading income, but what happens when they have a losing year. Let’s remain consistent with our expenses, the same as before, but this year each has lost $40,000 with their trading. Now John really gets stiffed because he has the same limitations on his expenses that he had in example one, but since he did not make money trading he cannot deduct his margin expense. (You can only deduct margin interest to the extent that you have made money trading securities or options.) At this point he has $2,280 in deductible expenses. Since he lost money trading, his AGI has dropped to $100,000, which means that the first $2,000 of expenses is not deductible. He is now able to deduct only $280 in expenses this year, and $3,000 of his capital loss for a total of $3,280 of deductions. Assuming he remains at the 30% tax level he will save a whopping $984 in tax saving! Oh yes, in addition to this he has a $37,000 loss carryover, which he can use at $3,000 a year in subsequent years! However, Susan is still able to save the complete $7,269 in taxes, (all ordinary and necessary expenses for the business). Plus, since she is a trader who has taken Mark to Market, she can offset her regular income of $100,000 with her $40,000 loss, bringing her AGI to $60,000, so she saves another $12,000, for a total savings of $19,269 in taxes. The difference this year? $18,285 more for Susan’s Account. So, no matter whether you make or lose money in the market, it makes sense to be trading as a business! Lets summarize: Example John DIFFERENCE Susan 1. $40K Gain Tax Savings $1,644 $5,625 $7,269 2. $40K Loss Tax Savings $984 $18,285 $19,269 Me: Wow! That's quite a difference. It really does seem to pay off if we establish a separate trading entity and run it like a business. Jim: In addition to the huge difference in the tax savings, when you trade as a business there are other issues that we should bring to your attention. Wash Sales When your entity is set up properly and you are trading at a level to validate using Mark to Market Accounting, you no longer have to worry about the Wash Sale Rules, which has been a boon to those active traders who trade the same stock over and over throughout the year. [Note: Wash Sale rules can affect persons who trade the same stock repeatedly throughout the year. An example of one of the rules should suffice to illustrate. You buy Microsoft at $50, it goes to $45; you sell for a loss of $5. If you buy Microsoft again within 30 days, you cannot claim the $5 loss; rather you must increase your basis. In this situation if you buy Microsoft at $30, then your basis would be increased by the amount of the prior loss to $35. See "Beat the Tax Man" from March 19, 2002, Trader's Corner.] Fringe Benefits When you trade as a business, you have the ability to pay for health insurance, set up higher education plans, and provide for retirement plans, child care and other benefits for your employees. Most traders have immediate family members as their only employees, so this can be a huge benefit, lowering your taxes by increasing the legitimate expenses of your trading business. In my opinion there is absolutely no reason you would not want to trade as a business. Whether you use Mark to Market accounting needs to be investigated thoroughly. Don’t wait another day, as you gain nothing doing so, and will probably penalize yourself by losing money each day you wait. Me: Thanks, Jim for that information that could save us traders countless thousands of dollars! As we can see, Jim has a wealth of knowledge on the subject and has barely broken through the surface on the topic. Many of you are probably wondering about "trader status", which is a topic worthy of a full column in and of itself. So we don't have to wait a full week, I promise that subject will be first up in tomorrow's article. Until then, let us make a great day for ourselves! ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************ MARKET WATCH ************ Bulls back in health care. Bears leaning on brokers. To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/032602.asp ************** MARKET POSTURE ************** Monday's movement in the major averages shifted support and resistance levels in several of the indexes, but the volatility didn't induce any breakdowns or breakouts. 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