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Daily Newsletter, Monday, 04/29/2002

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The Option Investor Newsletter                   Monday 04-29-2002
Copyright 2001, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

Posted online for subscribers at http://www.OptionInvestor.com
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MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
      04-29-2002          High     Low     Volume Advance/Decline
DJIA     9819.87 - 90.85  9937.09  9811.57  1.26 bln   1402/1742
NASDAQ   1656.93 -  6.96  1678.56  1640.97  1.82 bln   1437/2104
S&P 100   526.84 -  5.53   534.08   525.78   Totals    2839/3846
S&P 500  1065.45 - 10.87  1078.95  1063.62             
RUS 2000  500.54 -  0.96   502.34   498.08
DJ TRANS 2694.70 - 27.79  2751.79  2719.47
VIX        26.11 +  1.47    26.36    24.59
VXN        45.12 +  2.88    45.12    41.77
TRIN        2.40
PUT/CALL    0.80
*******************************************************************
Dull Beginning to an Interesting Day
By Buzz Lynn
buzz@OptionInvestor.com

Traders must have slept through this morning's opening bell on the 
casino floor.  Las Vegas is a bit more advanced though in that 
casinos there don't have clocks to tell us what time it is.  They 
don't want us to know because they'd rather we lost track of time 
and spent money staying up past our bedtime.  Not so with the 
equity markets.

But that's beside the point.  The point is that the markets opened 
flat with single and low double-digit gains.  When investors 
finally returned to the floor, they saw there was no rational 
reason for equities to rise.  Levitation over - stocks relegated 
to a methodical kick down the stairs into the basement where they 
closed at nearly their lows for the day.

Why so gloomy for the bulls?  It's earnings silly!  There aren't 
any to speak of and the much-prattled slogan that stocks would 
rise in anticipation of a second half '01 recovery. . .no wait, 
Q1. . .alright first half 02. . .sheesh, second half 02. . .DOH!, 
'03 or later, has hit home with the latest round of earnings 
announcements, income restatements, and broker/analysts' self-
dealing.  Why would anybody want to put their highly prized, 
rightfully coveted nest eggs on the line in the equity markets?  
The simple answer is that investors don't.

Besides that, think of the absurdity of the logic that was driving 
earlier gains.  It is as Bill Fleckenstein, current dour Bear, 
once put it, the market action is like a cat chasing its tail.  
The ingrained belief that profits will recover by the end of the 
year drives the buying (as the theory goes) in anticipation of 
said event.  How do they know profits will rise?  Because the 
rising equity markets that were supposed to precede profits by 6-9 
mos. said so!

I'm still in the long-term bear camp myself.  But that doesn't 
mean I can't profit from an occasional short-covering rally or 
stochastic reversal that shows the cycles of human emotion that 
have driven markets (and most behavior) throughout history.  Far 
from it.  I've said before and will say again.  This is a bear 
market in general, but we can make money from movement in either 
direction, up or down.

But for those of you sick of my bearish bias, and who still insist 
on keeping the horns sharpened ready to buy any dips, take heart.  
While the charts are not currently in bullish favor, all the 
makings are there for a bounce - big enough to convince bulls that 
this will be the recovery we've all waited for, and big enough for 
bears to short the top again for another ride down.  Boy, I love 
this business!  Can you say trading range?  Sure, I knew you 
could.

Take a peek over my shoulder and see what I'm seeing on the 
charts.  Stochastics are bottoming in the daily time frame and 
have even entered oversold on the weekly time frame.  This could 
make for a sustainable bounce over the next few days or even 
weeks.

Still, volumes are low and the markets are entering the typically 
slow season where that is unlikely to change.  Without volume, the 
impetus to power to new levels (even in defiance of economic laws) 
is not there.  But the charts suggest against all odds that a bull 
rally could happen. . .at least temporarily.

See what I'm seeing. . .

Dow Industrials chart - INDU (weekly/daily/60)


 

Glaring red flag: oversold stochastics across all time frames.  If 
the Dow is going to continue falling, it would be against the odds 
of setting new lows.  Support looks to be coming in around 9750.  
Perhaps this downward move is nearing its end.  Still, though the 
stochastics are oversold, they have yet to reverse from oversold 
telling us that further downward action is a real possibility.  
Also telling is that the 200-dma acted as resistance today, from 
which INDU fell to close near the low of the day.  Bulls are not 
in control yet, but there is the possibility of bullish change 
soon.

NASDAQ chart  - COMPX (weekly/daily/60)


 

Ditto for COMPX - same oversold stochastics.  More interestingly, 
the daily has actually crossed fast over slow as has the 60-min, 
which is bullish (slightly) on both counts.  However, before 
jumping into calls, I'd be inclined to wait for the lines to break 
back over the 20% mark.  Even the weekly is not far behind.  One 
other thing for the COMPX: it is nearly 200 points under its 200-
dma and nearly 150 under its 50-dma.  This is a long stretch to 
the downside from the mean.  And having seen enough charts in my 
day, when that happens, a snap back in favor of the bulls is a 
common outcome.  Who cares if techs and biotechs are weak and 
overpriced with lousy prospects for a huge business recovery?  The 
charts, while not completely bullish yet, are holding their cards 
openly enough to suggest that a bullish move is right around the 
corner.  Exactly when is anyone's guess.  But in my opinion, this 
is precisely the time NOT to go short.  The bearish trend is 
nearer an end than a beginning.  But it is not time to be long 
either in my opinion.  Wait for a bullish trend to emerge or the 
bearish trend to resume.

S&P 500 chart - SPX (weekly/daily/60)


 

Let's see, Grand Daddy chart says. . .same story.  Way oversold 
from the 200 and 50 dmas (gray and magenta lines, respectively) 
and stochastics buried with pending signs of reversal.  While not 
bullish yet, bears are going to have a hard time finding new and 
improved excuses to keep these oversold for long even if the 
support levels of February were violated today.  Like the eons of 
history prove, human emotions vacillate and oscillators oscillate 
with them.

Another thing. . .how about that VIX?  Markets fall, VIX rises.  
Scientifically, it isn't supposed to happen that way.  VIX is 
supposed to reflect a montage of OEX implied volatility.  High VIX 
means investors assume high price volatility ahead, no matter what 
the market direction.  Low VIX means investors assume low 
volatility ahead.  But I have yet to see equity prices spike along 
with the VIX.  Empirically, that's nearly a mutually exclusive 
event.  From that, I'll step out on a limb and say that with the 
VIX over 26, complacency is waning, and option prices are gearing 
for uncertainty.  

However, people are more easily convinced that the markets will 
rise than that they will fall.  Accordingly, bulls dominant in the 
media bandwagon will quickly sooth nerves that the future is "up" 
and the VIX will soon reflect a sigh of relief as the more people 
become convinced (and again complacent) that prices will rise.  
The VIX would correspondingly fall.  Look for VIX resistance at 
the January levels reflected at the current reading of 26.11.

What of tomorrow?  Following 7 of 9 negative days on the Dow and 8 
or 9 negative days on the NASDAQ and the SPX, the trading bears' 
days are numbered, especially with stochastics now oversold in all 
time frames.  I would not be at all surprised to see a short-
covering rally ensue any day now, even if sparked by some flimsy 
piece of news that the market will interpret as "bullish".  What 
might that be?  No telling.  The only economic news coming out 
tomorrow will be the Chicago PMI and Consumer Confidence.  A small 
decline in both is anticipated after March's big surge.  Thus 
negative news won't really be that negative unless there is a 
downside surprise.  But with the Fed as adroit at numerical 
massage as any tech company manufacturing "pro-forma" numbers to 
hit earnings targets, that likely won't happen.  So any inkling of 
remaining the same might be construed as "great news for the 
economy", which the bulls could use to charge ahead.

This isn't a license to load up on calls, but merely an eye opener 
to be on the lookout for a possible reversal of the current 
downslide, and to throw in a healthy dose of caution on sinking 
our trading accounts heavily into puts at this time.

See you at the bell.


********************
INDEX TRADER SUMMARY
********************

ONE-WAY STREET  
by Leigh Stevens

TRADING ACTIVITY - 

Normally, there are two-sided trading swings in every trend.  
This phase of the bear market, as is typical of the later stages 
of a trend, is a one-way street however.  It reminds me of the 
upside action in the final stages of the last bull market.  You 
could buy every dip and make money.  Here, it’s the reverse - 
Sell Every Rally is the happy song of the bears, sung to the tune 
of "Climb Every Mountain".  

The selling is not so huge, there just is scant buying interest. 
At the end of the NYSE day session, decliners outweighed 
advancing stocks by only some 350 - on the Nasdaq, it was about 
650.  These figures are not hugely lopsided. 

But, downside volume today ran way ahead of upside -- on the 
NYSE, downside volume ran 3.25 times that of upside volume. The 
equivalent ratio on Nasdaq was about 2 to 1.  Because of the 
lopsided volume figures, the NYSE Arms Index ($TRIN), named for 
Richard Arms who came up with it, (as known as TRIN or TRading 
INdex), went above 2.00, closing at around 2.5 -- readings above 
1.5 indicated heavy selling pressure.  On Friday, the Arms Index 
also was above 2.00.  

A fellow Market Technicians Association (MTA) member, Ralph 
Bloch, pointed out today that 2-days of back to back readings in 
TRIN at 2 or above, have a good record for predicting counter 
trend rallies, within a few trading sessions.  "FEW", being the 
key word, as, is it going to be tomorrow or next week??? -- a 
MINOR point of concern to option traders, who live from day to 
day!!  

WorldCom (WCOM) continued to trade huge volume, with talk of 
bankruptcy in the air.  No talk of this kind of dire strait, but 
investors who failed to get out of Tyco (TYC), decided to bail 
today.  On the plus side, Nasdaq biggies Cisco (CSCO), Sun Micro 
(SUNW), Microsoft (MSFT) and Oracle (ORCL) traded in heavy volume 
but were on the plus side.  Fits with what I'm seeing 
technically, as Nasdaq is more oversold and downside momentum is 
slowing.   

Please look at last night's (4/28) commentary for the longer-term 
weekly chart picture.  I'll just repeat possible major downside 
targets in the indices: SPX: 1050 area. (The monthly chart has an 
up trendline intersecting at 1006 currently - drawn with 2 points 
only.) OEX: 500; DXJ: 96 on a weekly close basis, 9525 intraday; 
Nasdaq Composite (COMP): 1600 area; Nasdaq 100 (NDX): 1200; QQQ: 
27.  

TRADING OUTLOOK AND STRATEGY -
I'm going out on a limb and suggest nailing down some profits on 
puts tomorrow, if my anticipated 1-2 day rally develops Tues., at 
the end of which should be a shorting opportunity. What's the tip 
off to such a trade? That SPX, OEX, NDX and the Q's hold at or 
above today's lows or don't dip too much further, and the 
stochastics confirm upside momentum on the hourly and daily 
stochastics -- set length to 10 or above; e.g., 13, up to 21.

What's the rationale?  As below, the S&P indexes and Nasdaq, got 
to the low end of their downtrend channels.  Usually, there has 
been a tradable bounce when prices have gotten to the low end of 
the channel and the market has gotten this oversold. Stay tuned.

If the weakness continues unabated, then we should get more than 
a 1-2 rebound at the end of it. In which case, another better 
opportunity sets up. On a longer-term basis, we're likely headed 
lower still and the volatility index, VIX is on the move, but is 
not yet in bullish territory, as you can see at the end of this 
column.

WOULD NOT ASSUME A SHORT-TERM BOUNCE BASED SOLEY BASED ON NEAR-
TERM PRICE TARGETS HAVING BEEN MET AND AN OVERSOLD CONDITION, 
WITHOUT SEEING DEFINITE SIGNS OF A TURNAROUND. You can also just 
stay short if you are already positioned in puts, etc., betting 
on still lower lows ahead and before the Mid-May index option 
expiration.  
 
S&P 500 (SPX) Daily/Hourly Charts: 


 

In terms of price, the 1060-1063 is the low end of the downtrend 
channel and a possible place to take some put profits if 
stability comes into the market tomorrow.  However, will also 
note that, at today's low, SPX has reached already the low end of 
its downtrend channel and lows have finally also dipped under the 
lower trading band on the daily charts. The odds of a big further 
downside move, without a intervening rally, appears less than 
before today.      
 
S&P 100 (OEX) Daily/Hourly Charts: 


 

If the OEX is going to stabilize, it looks like it will be in the 
525 to 527 area, although today's low is already at the low end 
of the long-standing downtrend channel.  The dip under the lower 
trading band on the daily chart, at an expanded 5%, is suggesting 
that today's low is bucking the tendency usually seen for some 
snap back toward the 21-day average.  It may creep lower, but I 
don't expect a further acceleration or gallop lower.    

Dow Industrials ($INDU & $DJX.X) Daily/Hourly Charts: 


  

Same story -- as DJX fell to the low end of its downtrend price 
channel, dipped under the lower trading band, and is oversold on 
all timeframes except weekly.  A good prescription for a rally to 
set up by tomorrow.  Time will tell, but in the area at and
 under 98, risk to reward is not hugely favorable if you were to 
go into puts for a new trade.  If its not favorable for a new 
play, its not favorable for existing puts IF you trade actively. 
If you see a rally start, believe it.  Longer-term buy and holds 
in DJX puts are probably not in real danger that any rally that 
develops would signal any major turnaround.  


Nasdaq 100 ($NDX.X) Daily/Hourly Charts: 


 

NDX, the Nasdaq 100 Index, began enough of a rebound from its 
lows, to already generate an upside crossover type buy "signal" 
in the faster moving 5-hour stochastic model. 

The fact that the lower channel line was reached, as well as the 
lower daily envelope line, plus the higher closes today for some 
key Nasdaq stocks, suggests that a short-covering rebound could 
already be underway.  

If so, such a rebound has probably got enough upside potential to 
play on the long side for nimble traders.  I don't trust the 
sustaining power yet for any advance beyond 1-2 days.     

Nasdaq 100 Trust Stock (QQQ) Daily/Hourly Charts: 


 

Hey, every dog has its day and if a rally gets going tomorrow, it 
probably started today, as the Q's lifted a bit from its lows and 
the low end of the downtrend channel.  Play it if you can watch 
it.  We are so used to rallies falling apart, that I am very 
cautious here, but we also can also play the  probabilities when 
they line up.  That another bearish play will follow any rally 
has been the most reliable part of the trading strategy that has 
been working well for weeks.   

Index Trade Recommendations -

SHORT-TERM COUNTERTREND TRADE ON LONG SIDE WITH CALLS, INDEX 
FUTURES, LOOKS INTERESTING HERE, PUT PULL THE TRIGGER ON ANY SUCH 
TRADES BY WATCHING MARKET INTRADAY, SO NO "OFFICIAL" 
RECOMMENDATIONS AHEAD OF TOMORROW.

Long/Call Positions:

Date: 
Bought XXX Calls at 
Stop: 
Trade Objective: 
Comments: 

Short/Put Positions: 

Date: 
Bought XXX Puts at   
Stop or risk parameters: 
Trade Objective: 
Comments:


MAJOR MARKET INDICATORS - 

VIX -
The CBOE Market Volatility Index (VIX.X) is starting to show 
signs of increased "fear". This attitude becomes especially 
apparent when VIX gets up toward 30 -- we closed the week at 24.6 
which was an increase of 1.5. Today saw another advance and there 
is a definite acceleration in this indicator to the upside. A low 
VIX indicator has been the "missing ingredient" in the 
possibility that a bottom could be even close at hand before now.  



 


Leigh Stevens
Chief Market Strategist 
lstevens@OptionInvestor.com 


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***********************
INDEX TRADER GAME PLANS
***********************

THE SECTOR BEAT - 4/29
by Leigh Stevens


SECTOR TRADING STRATEGY:
In general, any attempt to buy pullbacks in sectors without 
upside momentum, looking for technical rebounds, such as in the 
Internet, Telecom, Semiconductor, and Airlines has not worked 
out. Cyclicals, which had been in an uptrend lost its upside 
momentum.  Best trading strategy continues to be to sectors with 
strong MOmentum, either up or down.  Will be looking to play the 
side of sectors with strong MO only going forward.   

SECTOR ACTIVITY/OUTLOOKS:

One sector that lead last week was the leader today on a 
percentage basis today - the Healthcare Index ($HMO.X). Will it 
ever correct so we can buy some of these stocks?  

It will probably correct when the market has a decent rally, as 
there is bound to be some profit taking ahead.    

The other top performing sectors were:


 

Someone asked me to look at the Biotechnology Index, after it 
moved to a new 52-week low recently -- the question was, did I 
see any signs of stability with this sector.  Well, the momentum 
is still down, which is the bad news bear side of the story.  The 
good news hopeful bull side, is that lows have been made in the 
same area over the past couple of years and BTK is approaching 
that area.  Too soon to tell of course as to whether the 
biotechs, in terms of the BTK Index, will again find support in 
this same area.  Stat tuned on this one.   



 

Healthcare Payors Index ($HMO.X) -- I will be looking at some 
picks in the healthcare, from the component stocks, as listed in 
the 4/28 column.  

Health Provider Index ($RXH.X) - I will have the list of these 
stocks tomorrow from the Amex and have a pick or two on 
individual issues that are part of the RXH index. 

Gold and Silver Index ($XAU.X)- corrected some today.  As part of 
the recently "hot sectors", I may also have a call, and maybe a 
put play suggestion on 1-2 stocks in this group in tomorrow's 
Sector Trader summary.

Oil Services Index ($OSX.X) -- also correcting today a bit.  
Individual potential call plays tomorrow. Stay tuned. 



SECTOR WATCH - contu.

>> DRG, the Pharmaceutical sector index ($DRG.X), (4/22 comment). 
Rebounding from low end of a probable trading range and oversold.  
Moreover, investor attention may focus on DRB due to strength in 
other healthcare areas.
  
DRG sector may be playable by the purchase of the May 60 Merck 
(MRK EL) calls, a prominent stock in this sector, especially on a 
pullback in the stock.

UPDATE: AM HOLDING OFF ANY SPECIFIC RECOMMENDATION ON BUYING 
CALLS IN THIS SECTOR, GIVEN THE WEAKNESS IN THE OVERALL MARKET. 



LONG/CALL TRADES, PREVIOUSLY RECOMMENDED:

>> Internet Sector index ($INX.X) - 4/17 Sector Trader 
suggestion: OPTION play: JNPR (Juniper Networks) May 15 Calls 
(JUX EC).JNPR objective is to $18, based on the stock having 
potential to retrace half of the Dec - Feb. downswing.

The May 12.5's (JUX EV) Calls were later recommended. 

UPDATE: Juniper fell under its March low at the close on Friday 
and had follow through weakness today.  NO FURTHER CALL 
PURCHASES. WILL BE LOOKING FOR ANY RALLY TO EXIT EXISING CALLS. 


>> Telecom ($XTC.X) index - 4/15 suggestion:
OPTION play: Sector stock, Level 3 Communications (LVLT)-
1)June 5 Call (HGY FA) suggested at .60 and under
2)LVLT outright purchase, with stock under $5, also suggested. 
Objective on LVLT stock is to 5.5/6 based on upside potential 
based on the stock continuing to advance within its current 
uptrend channel.

UPDATE: LVLT is nearing its support up trendline at 4.2.  Any 
close under this area would cause me to exit the long side here. 


>> Semiconductor Index ($SOX.X) - 

WATCH: Continue to watch any further rebound this week as a point 
to suggest put plays in SOX-member stocks like Micron (MU), KLA 
Tencor (KLAC), Teradyne (TER), Applied Materials (AMAT) or Intel 
(INTC). 


>> Cyclical sector ($CYC.X) - 4/15 suggestion:
1.) iShares Cyclical Trust (IYC)  - 4/16 open: 56.95
Objective: new high above 63.00
2.) OPTION play: CYC Sector stock, - Alcoa (AA) 
May 40 calls (AA EH) - 4/16 open: .60  

UPDATE: CYC broke technical support today.  AA today fell to the 
low end of its multimonth trading range at $33.30, but rebounded 
a bit.  Technical action has been bearish, but damage seems done, 
so will wait and watch for any technical rebound.   


>> Airline sector ($XAL.X) - 4/15 Sector Trader suggestion:
OPTION PLAY: XAL sector stock Southwest Airlines (LUV) 
Sept. 20 (LUV ID) call suggested at 1.25 or less.  
OBJECTIVE: $22 based on a rebound back toward the high end of the 
current uptrend channel.

LUV has been holding technical support, but just. Retreat in the 
stock to BELOW 17.25, on a closing basis, would cause me to exit. 


>> Utilities Index - Holders trust shares (AMEX: UTH) 
Long at 95.25 
Stop: 91.00



OPEN SHORTS/PUT PLAYS:

>> RTH (AMEX: Retail sector trust stock)
SHORT at 99.00 
LOWER stop to 100 


LIQUIDATAIONS:

May 650 SOX calls bought at 2.35 on the 4/23 close.

UPDATE: SUGGESTED EXITING ANY SOX CALLS BASED ON NEGATIVE 
TECHNICAL CLOSE OF LAST WEEK 

Break below the early-April lows at 548-548, suggests new down 
leg. 

NOTE: RISK to REWARD guidelines -  
Determining an objective is important, even if it is a moving 
target, as this is the reward potential.   Determining reward 
potential is critical to establishing whether a stop that makes 
“sense” (e.g., a sell stop that was placed under a key support 
level) would, if triggered, result in a dollar loss that is in 
proportion to profit potential; e.g., 1/3 of it.  (On occasion, 
when the purchase price of call or put is equal to 1/3 or less of 
the estimated reward potential, there may not be a specific exit 
suggestion, as the cost of the option is equal to the amount that 
is being risked.)   


Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com


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The Option Investor Newsletter                   Monday 04-29-2002
Copyright 2001, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


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*****************
STOP-LOSS UPDATES
*****************

ADI - put
Adjust from $40.50 down to $38.50

CVC - put
Adjust from $26.50 down to $25.25

EBAY - put
Adjust from $52.75 down to $52

PLCM - put
Adjust from $21.50 down to $21


*************
DROPPED CALLS
*************

AZO $74.75 -3.75 (-3.75) Fading strength is the name of the game
for shares of AZO, as the stock finally succumbed to profit
taking on Monday.  What started out as mild weakness turned into
a bit of a bloodbath though, as the stock collapsed through our
stop and then the $75 level.  By the closing bell, AZO came to
rest nearly $4 lower than Friday's close, confirming that it is
time to let this play go.  With broken support, the selling could
very well intensify as the week continues.  While all positions
should have been stopped out today, those still holding open
positions will want to use any strength in the morning to exit at
a more favorable level.

TKTX $38.04 -3.03 (-3.03) The relative strength that TKTX has
been experiencing lately finally cracked on Monday under the
continuing strain of severe Biotech weakness.  With the BTK index
falling to major support near $415, TKTX finally broke down with
a nearly 7.5% decline on Monday, puncturing our $39 stop shortly
after the open this morning.  Despite a valiant attempt at a
late-day rally, the stock remains below our stop tonight, so we
are dropping coverage.  Use any sort of rebound in the morning
to gain a more favorable exit price for any open plays.


************
DROPPED PUTS
************

MXIM $48.06 -0.13 (-0.13) MXIM pulled a fast one and announced
earnings this morning before the opening bell, but that didn't
help to stem the flood of sellers.  MXIM fell as low as $46.50
before finding any buying support on Monday.  While there could
be more weakness in store, with the SOX nearing major support at
the $500 level and MXIM bouncing from an area of solid support, we
think the best course of action is to harvest those gains and move
on to new plays with greater potential.  MXIM has been very good
to us with more than a $10 drop since we picked it, so we're going
to retire it tonight rather than take a chance on giving those
gains back on a short-covering rally in the Chip sector.

NVDA $35.43 +5.06 (+5.06) Restating earnings isn't normally a sign
for bullish action, but it was in the case of NVDA on Monday.  In
their pre-earnings conference, the company announced that they
would restate earnings for 2000 and 2001, with the net effect
being an INCREASE in revenue.  Additionally, the company said it
expects non-Xbox growth to be over 65% for the year and investors
cheered the stock higher by more than 16% on more than triple the
average daily volume.  Clearly, we are dropping coverage of NVDA
tonight with our stop at $34.25 decisively broken.


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**********************
PLAY OF THE DAY - CALL
**********************

THC– Tenet Healthcare Corp. $71.70 -2.78 (-2.78 this week)

THC is the second largest investor-owned healthcare services
company in the United States.  As of the end of May, 2001, the
company's subsidiaries and affiliates owned or operated 111
general hospitals with more than 27,000 licensed beds and
related healthcare facilities serving urban and rural
communities in 17 states.  The related healthcare facilities
included a small number of rehabilitation hospitals, specialty
hospitals, long-term care facilities, and numerous medical
office buildings located nearby its general hospitals and
physician practices.

Most Recent Write-Up

Never have the words "The Trend Is Your Friend" been more
valuable than in the current market.  While economically
sensitive stocks are crumbling all around us, the Health Care
index (HMO.X) is rocketing to new highs, seemingly on a daily
basis.  Witness Thursday's blast through the $600 resistance
level, which paved the way for Friday's mild consolidation.
Shares of THC have been working their way higher in a very
predictable trend since the beginning of March.  Each time the
bulls pause to harvest some gains, it provides an opportunity
to get onboard for the next leg higher.  So long as the
ascending trendline (currently $72.75) remains unbroken, we can
take advantage of the dips to enter the play for the next move
up the chart.  So a pullback to this area looks good for new
entries, although given THC's pattern of rallying for 7-10 days
before pulling back, it appears the next high-odds entry will
come from a breakout over the $74.75 level.  Trade the breakout
if it comes, or else wait for the pullback to support to enter
the play, its as simple as that.  We want to give THC a little
leeway, so we are keeping our stop set at $71, right at the
last reaction low.

Comments

The sharp selloff in shares of THC on Monday definitely raises
a caution flag for this bullish Health Care play, as the
ascending 8-week trendline has now been decisively broken.  But
it was interesting to note that the stock once again bounced from
the $71 level, which also happens to be the level of our stop.
Note that the sharp selloff last week bounced from near this
level to march to a fresh all-time high, and we're looking for a
repeat performance.  With the HMO index continuing to advance to
new highs, sector strength is still on our side, and today's dip
could be just the latest in a long line of attractive entry
points.  We need to see the $71 level hold as support to keep the
play alive, but as long as it remains intact, bounces from that
level can still be used to initiate new positions.  A close below
$71 though will have us dropping coverage of the play in short
order.

BUY CALL MAY-70*THC-EN OI=4879 at $2.85 SL=1.50
BUY CALL MAY-75 THC-EO OI=1204 at $0.45 SL=0.00
BUY CALL JUN-70 THC-FN OI=  83 at $3.90 SL=2.50
BUY CALL JUN-75 THC-FO OI= 474 at $1.40 SL=0.75

Average Daily Volume = 2.04 mln



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Candlestick Charting 101 - Part III
by Mark Phillips
mphillips@OptionInvestor.com

Welcome back to another installment of my ramblings on the
various Candle patterns and how to interpret them.  We left off
a couple weeks ago after looking at the Doji candle pattern,
complete with chart examples and now I think it is time to delve
into some of the more colorful pattern names.  For those of you
that missed the first two installments, here are the links for
your convenience.

Candlestick Charting 101
Candlestick Charting 101- Part II

Given the fact that the current market trend has been down for
awhile, I thought I would focus on a couple of candle patterns
that can be used to identify possible bullish reversals at the
end of a downtrend.  Granted, from my prior commentary, you
would be correct in reminding me that I expect more weakness
out of this market.  But that is a topic for another day and
we're working on education here, right?  With the markets
getting into oversold territory, we ought to be able to find
some charts with bullish candle patterns, right?

But first, we need to define the patterns that we want to find.
First up is the Hammer pattern.  I don't know if it was the
reason for the name, but the Hammer candle pattern is referred
to as "hammering out a bottom" in the market or security in
question.  The Hammer pattern consists of a small Real Body
(whether white or black), with a long lower shadow and little or
little or no upper shadow.  The Hammer pattern occurs in a
downtrend and can presage a bullish reversal.  From a price
dynamic standpoint, this pattern is formed when sellers drive
price lower for the candle in question, only to have the stock
driven higher by the close.  This is indicative of the bears
starting to lose their grip in a declining market.  Here's what
it looks like in example form.



 

See how the bears seem to be losing their grip on AGN?  After
driving the price fractionally lower, the stock rose to close
very near the high of the day, also near the opening price.
Making the setup even better is the fact that today's Hammer
pattern followed a doji pattern on Friday.  Recall that a Doji
reflects indecision in a market.  With today's Hammer and the
bottomed Stochastics, I would look for AGN to rise in the days
ahead.

By the way, if you see one of these candle patterns in an
uptrend, it isn't called a Hammer.  In an uptrend, the same
candle pattern is called a Hanging Man and its interpretation
is just the opposite of the Hammer.  It points to a bearish
reversal from the current uptrend.  I don't want to go into
that pattern today, as we're looking at bullish reversal
patterns.  But for those of you that feel like scanning through
some charts, they would be most likely to show up in the charts
of stocks that have been performing rather well lately.  See if
you can find one or two within those sectors that have been
strong lately such as Health Care, Home Construction, Oil Service
and even Gold Stocks.

There is another way in which the Hammer pattern can present
itself, that of the Inverted Hammer, and as the name implies, it
is simply a Hammer that is upside down.  It is interpreted as a
possible bottom reversal signal, with confirmation coming from
the price action of the following day.  You can see this pattern
in the AGN chart above on April 9th.  That pattern preceded a
sharp advance in the stock, which led it higher by more than $10.

Shares of MSFT have seen a fair amount of selling pressure since
their earnings report just over a week ago, and today the stock
posted a solid Inverted Hammer.  Take a look and you can see it
there plain as day.  Some traders also refer to this as a "golf
club" pattern, and I think you can see where that analogy comes
from.  That's right, too much watching of golf on CNBC on the
weekends! (BIG GRIN)



 

Another Software stock that has been under pressure lately is
PSFT, driven lower by the combined factors of weakness in the
Software sector and disappointing earnings from the company.
After posting a possible double bottom over the past 2 days, we
have a provocative little Inverted Hammer in the daily chart
there too.  While I wouldn't be wild about a long play on PSFT
due to its relative weakness in the sector, the current candle
pattern would certainly have me snugging up my stops if I had
been playing the stock to the downside.  At a minimum, it should
be interesting to observe the price action over the next few
days to see whether the current candle pattern is indeed
predicting a near-term rebound in price.



 

Remember that by itself, this pattern is not tradable.  We need
to see follow through tomorrow.  But it can be an early warning
of a trend reversal.

Please don't use our discussion here today as motivation to go
out and buy calls on any of these stocks tomorrow.  My focus is
education, and I can tell you unequivocally that I won't be
initiating bullish plays on any of these stocks tomorrow.
Instead, I'll be watching to see how the chart patterns play
out, as what I'm really looking for is some confirmation that it
is time to exit some of my recent bearish plays.  My intent in
sharing these examples is simply so that you can get a feel for
what these various Hammer candle patterns look like.  Watch
these stocks over the next few days so that you too can get a
feel for how they play out.

By referring to the examples that I listed above, scan through
your favorite symbols to see if you can find some Hammers or
Inverted Hammers in addition to those that I've listed.  If the
broad markets are indeed trying to put in a near-term bottom,
then there should be a fair number of stocks that display these
patterns over the next few days.  Watch them develop and then
learn from the process.  That's how we all become better
traders -- applying new knowledge to improve our research.

Next week we'll dissect a couple more Candle patterns in our
process of mutual education.  If there are specific patterns that
you'd like me to discuss, be sure to drop me an email and I'll be
sure to incorporate it in our discussion in the weeks ahead.

In the meantime, happy exploring!

Mark


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