The Option Investor Newsletter Tuesday 05-14-2002 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) ************************************************************ 05-14-2002 High Low Volume Advance/Decline DJIA 10298.14 +188.48 10304.44 10119.34 1.41 bln 2207/ 984 NASDAQ 1719.05 + 66.51 1722.26 1691.42 2.60 bln 2432/1119 S&P 100 545.42 + 11.84 545.89 534.66 Totals 4639/2103 S&P 500 1097.28 + 22.72 1097.71 1074.56 RUS 2000 511.40 + 12.00 511.99 499.72 DJ TRANS 2767.70 + 64.73 2770.04 2702.12 VIX 21.89 - 1.62 22.90 20.81 VXN 44.34 - 1.78 46.61 44.01 TRIN 0.57 PUT/CALL 0.57 ************************************************************ Chips, No Dip! Starting the day off in style Robertson Stevens upgraded INTC to a buy from market perform and the race was on. Yesterday as you remember AMAT was upgraded before the open and the markets reacted strongly as shorts covered early to avoid the rush. Today those remaining short wished they had covered on Monday as the news sent the Nasdaq to a almost a three week high at 1718. The SOX gained +6% today on top of a strong gain on Monday. The RS upgrade of Intel stressed the fact that this could be the first quarter in over five years that Intel has failed to cut prices on its leading computer chip. Either demand has increased or AMD is no longer a viable competitor. This news prompted traders to cover short positions on anything PC related. Dell for instance gained +1.54, MSFT +2.30 and even IBM added +3.29 on the day before its bi-annual analyst conference. What is a bear to do? The tech news was helped by good news from the retail sector where Wal-Mart announced record earnings, which increased nearly +20% on a +15% increase in sales. The $.37 cent profit beat the street by a penny with sales approaching $55 billion for the quarter. The guidance was less than stellar but decent. The company said the rate of improvement in the economic recovery was slowing but they should have an inline quarter. This cautious guidance did not keep WMT from adding +2.35 to its stock price. Helping the Retail bullishness was the Retail Sales numbers which jumped +1.2% in April, the largest monthly gain since October. The retail sales numbers impressed upon traders that a) the recovery may actually be in progress and b) the consumer is spending their tax refunds at a record pace. Nearly 4.5 million more people have received their tax refunds than at this time last year. This money is being poured back into the economy at the retail level. The Retail rally had plenty of chips to celebrate with and it was quite a party for everyone but WorldCom. WCOM was removed from the S&P-500 at the close and the volume nearly doubled the previous record for any single issue day on the Nasdaq. At 670 million shares it passed the 308 million record held by Intel, 281 million held by Cisco and 266 million held by SUNW. The next two places were already held by WCOM at 256 and 254 million respectively. Enron holds the NYSE record at 346 million shares. The 670 million shares represented nearly 25% of the 2.9 billion shares outstanding. WCOM accounted for 25% of the 2.6 billion shares traded on the Nasdaq today. Brocade previewed its Wednesday earnings on a webcast today by mistake. Their complete earnings were not released but question and answer notes that related to guidance. The company indicated they expected to beat estimates and for 3Q revenue to rise to nearly $150 million from $116 million last year. This guidance along with the AMAT news continues to paint a positive tech picture. Analysts were only looking for $141.8 million. They also announced that their SilkWorm switch would be offered through an OEM agreement with IBM. After the close AMAT followed through with optimistic expectations and beat the street by a penny but blew away estimates for new orders. The company was expected to announce $1.35 billion in new orders but they announced $1.69 billion instead. They said renewed demand for consumer electronics helped push orders up +51% and beating expectations. The company also predicted up to a +15% increase in orders for the 3Q. The company said they were seeing a moderate recovery, driven by "strong" consumer-related demand and a strengthening "wireless" market in Europe and Asia. WOW! Strong consumer and wireless? What next, fiber optics? (grin) HWP (HPQ) in case anyone is interested also announced earnings after the close and met estimates on profits but missed revenue by a mile. This is the last time they will report earnings without including CPQ in their results. HPQ lost -$1.00 in after hours. HPQ warned that IT spending will remain weak with no real recovery until next year. They stressed that consumer spending was weak and corporate spending was showing no signs of improving. Ouch! Carly said, "a muted recovery for 2002 was still possible but don't count on any meaningful improvement until 2003." Is it just HWQ or is it everyone? Dell will offer their translation on Thursday. The next two giants to rule our fate this week are IBM and Dell. IBM will hold its biannual analyst meeting on Wednesday and after two strong days of gains almost anything good they may say is already priced into the stock. This sets up a lose/lose situation. Good news is priced in, stock drops. Bad news is not priced in, stock drops. Of course IBM investors could be so disillusioned that any excuse for a rally will be met with open arms, but remember they are rumored to be planning another -10% cut of their workforce. It does not look like a positive outlook in their future. Dell will announce earnings after the close on Thursday and they are expected to show sequential drops in sales and earnings. This will probably be overlooked with Michael Dell expected to be very happy about the HWP/CPQ merger and his chances for gaining market share while those two porcupines attempt to mate. I suspect IBM will be the bigger problem of the week. It was interesting that the transports gained ground today even as oil hit new highs at $29.54 a barrel. Could it be that the Dow theory is alive and well despite the prospects of even lower earnings by airlines due to rising fuel costs? That idea may be tested again tomorrow because oil data released after the close showed an unexpected drop of over seven million barrels in current oil supplies. Looks like $30 could be in our future. All dressed up and nowhere to go? The markets have put together two days of strong gains that remind traders of the tech bubble days. The Dow came to a dead stop just under strong resistance at 10300 with the next level of 10400 liable to limit any gains for the rest of the week. Are investors ready to buy stocks on principle and hold them despite the short term volatility? I doubt it. Visions of increasing earnings are there to see but even with the better than expected AMAT results there was still caution in the guidance. The Nasdaq also stopped right under resistance at 1725 but if that is broken the next strong resistance is not until 1825. These are numbers that were unthinkable just a week ago when it was threatening the low 1500 range. Old habits die hard and just like dip buyers persisted for a year after the crash began the rally sellers may continue to pressure us for some time. The S&P stopped right under resistance at 1100, (getting the picture I hope), with next strong resistance at 1130. Every major index is right below resistance. This is great if we have the power to break it tomorrow but the futures are actually down as I write this. If we can't break through at the open then the all the gains from the past two days will be called into question. We all know that the buying from the last two days was mainly short covering of tech stocks prior to the AMAT earnings. Those earnings are now record and as we have seen in the past they could end up roadkill for the "buy the rumor, sell the news" crowd. Everyone would like to wake up in the morning to another triple digit open but you can only have so many of those days in a row before the house of cards collapses. The VIX has died and has sunk to a low of 20.81 on Tuesday. The TRIN is at a miserable .57 as well as the put/call ratio. Any market technician will tell you that is a recipe for a drop. That drop could be just a severe profit taking dip intraday or several days of retreat like we had last week. Remember that +300 point gain that evaporated before the week was out? I am not advocating that everyone buy puts at the open. We don't need to try and correct the put/call ratio by ourselves. I just want everyone to be aware that what goes up quickly sometimes comes down just as fast. I do believe the evidence of the economic recovery is becoming too strong to ignore by even the staunchest bears. For every hundred points the Dow and Nasdaq add there are several thousand more investors who have been on the sidelines that decide to venture back into the market. This is building some upward pressure as you can see by the strength of these short covering rallies. The sellers are not as strong and the buyers are nibbling. While it may be a little early to start calling for the beginning of the next bull market (sorry Jeff/Leigh) we are getting close to that magic day. However, nobody will be able to point to it until long after it has passed and we still have the summer doldrums ahead of us. I do think it is time to start rounding that extra cash and start sending it to your broker. Spring is here and garage sales are in the air. Sell the rest on EBAY and get ready to turn that idle money into some real dough. The 3Q earnings estimates appear to be improving and that is the real key. The bulls will have their day again and the bears will be forced back into hibernation. Until then, keep those stops tight on your longs and let's see just how the rest of the week goes. Before we can breakout to new highs there is a lot of resistance to be broken and that can be a painful experience as we all know. There are still economic hurdles to be overcome this week as well. The CPI and Industrial Production on Wednesday, Housing Starts on Thursday and the ever-present Consumer Sentiment on Friday. They can either be potholes on our path or kindling for the next advance but they should not be ignored. Enter Very Passively, Exit Aggressively! Jim Brown Editor ******************** INDEX TRADER SUMMARY ******************** GAP AND GO by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - We saw a similar pattern to last week, with sizable upside gaps on the indexes. As with last week, these gap areas are now worth watching, as it is common for the indices to decline back into these gap areas on a subsequent correction. We saw what happened when the gaps were filled in partially or entirely on Friday. At this point buyers came in again and took the market higher. An upside gap is simply where the High of one period (hour, daily, weekly) is below the Low of the next. The gap is the difference between the High and the Low. It is an empty space - seemingly no big deal. However, this price area had no buying as no offers were present. When prices come back to these gap areas and trading in the chart gap space "fills" it in, there tends to be strong buying interest again as stock prices are back at levels where the gap event occurred. Gaps commonly do get filled in within a few days of the gap. They don't always get filled in, but the ones that don't, due to buying interest being high at the top end of the gap area, are more common to individual stocks. So, the gap areas highlighted on the charts below, are of interest to traders who might want to buy puts in resistance areas - possible downside objectives then becomes the gap areas. Conversely, for frustrated bulls feeling like they may be watching the train pull out of the station without them, the gap areas represent a possible area where you can get long calls. Of course on such a retreat in prices, you need to not lose your bullish conviction. There has been a lot from the talking heads on CNBC, etc., constantly saying that P/E ratios are still high relative to expected earnings - therefore, stock prices must come down. However, stocks are an asset class that must be viewed in terms of the main competing asset class for our investment dollars. The main competing asset is fixed-income. With interest rates so low, bond holders have gone shopping for something with more upside potential - that would be equities. It is instructive to take a look at one of the longer-term yield charts on the most popular Treasury issues, the 5-year Note. Yields have been rising since October, as bond investors demanded higher yields to own bonds, as they looked ahead to possible Fed rate tightening. However, yields are now into some longer-term resistance as suggested by the analysis of the weekly chart below: When yields stop going up, and I think they will moderate over the coming weeks, there is less interest in bonds and more interest in equities, especially now that a major bottom may be forming in stocks. So, it is not just analysis of P/E ratios that should be taken into account in judging the prospects for stocks, but what other alternative investments are out there. Real estate is another possibility, but in a low inflation era, we don't have hoards of people buying second houses to rent out or to flip. There is gold, but its appreciation potential has always been limited unless there was a major inflation trend eroding the value of financial assets. S&P 500 (SPX) Daily/Hourly charts: I suggested yesterday that a close over 1088, at the 21-day moving average, was needed to create a clear cut bullish breakout. We got that today and then some. We now have the possibility of SPX reaching the upper trading band, which suggests a target to as high as the 1130 area. There may be of course, pullbacks along the way. For example, corrections from the upper trendline of the emerging uptrend channel on the hourly chart. Potential resistance comes in around 1105-1108 currently. Near support is at 1088-1090. A possible eventual downside objective is to 1080. The gap area on the hourly charts is in the 1075 area. This should be a strong area of support, if reached. I favor the buy side on balance, but buying "safely" may take waiting to avoid the first sharp shakeout. The risk is that we don't get the pullback until much higher levels - momentum is strongly higher and the close at the intraday high suggests that more buying will come in Wed. morning. S&P 100 (OEX) Hourly/Daily charts: The close above 540.7, at the 21-day moving average, now suggests potential to as high as 560-565. However, as I noted with the 500, a close over this particular resistance should mean that it then becomes support on pullbacks. If not, look for a pullback. Near support is in the 540 area. I would like to buy calls again, but on a setback, particularly back down to the gap area around 535. Patience will be required to wait for corrective action and a hoped for "safer" spot to buy into this market if you are not long or are holding index puts. Dow Industrials 1/100 Index ($DJX.X) Daily/Hourly charts: The second day of trading above the 21-day moving average suggested that DJX may reach the top trading band in the 105 area. How we get there is another story. The odds of a correction early is limited, given the close at the high. The bulls are not letting the bears off the hook easily! Looks like the top of the emerging hourly uptrend channel might signal resistance developing in the 103.8-104 area. Nimble traders might take a stab at shorting there, with a stop at 104.5. Support is at 101 - 101.5. I most favor buying calls in this area. A move to 101.11 would "fill in" the upside hourly chart gap and offer strong support in my estimation. Nasdaq Composite ($COMPX) Weekly/Daily charts: I anticipate a pullback into the gap area. The question is WHEN? With the Nasdaq, I am more inclined to suggest selling into resistance around 1740, looking for a pullback to at least the 1693. I favor buying Nasdaq calls if and when the Composite gets back into the 1693 to 1653 zone. 1660 may the area to focus on as a realistic downside possibility. The question again is how we get there. Do we first go up toward the upper trading band in the 1795 area and then correct? This may be the case, but tomorrow should tell the story. If the Composite cannot maintain a second day close over the 21-day average at 1693, it suggests a correction sooner rather than later. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: As I said yesterday, the close over 31.9 at the 21-day moving average created a bullish looking chart picture. One close over this level is not enough however, as tomorrow should be watched to see if the rally holds up. The close at the high suggests early strength. Assuming the up trend continues unabated, I don't see a major shorting opportunity coming before the upper band area is reached on the daily charts -- 34.4-35 looks like a possible objective. Today, on the Market Monitor I suggested selling in the 33.00 area, risking to 33.50, with an objective to 31.25-31.00. This is the most "optimistic" on the downside potential. However, near support is in the 32-31.80 area. I most favor buying calls again, wherever support develops. INDEX TRADE RECOMMENDATIONS: LIQUIDATIONS: Recommendation: 5/12 - Buy SPX on 5/13 at 1048 or on advance above 1060, whichever came first. Objective: 1075 CALL EXAMPLE: 5/13: June 1190 Call level at SPX 1160 = 15.00 5/14: Open greater than 1075 trade objective 5/14: Sale of June 1190 Call at Open = exit at 25.70, for a 10.70 profit MAJOR MARKET INDICATORS - On 5/8, the day of the large 1-day advance last week, my Index Trader column had all my general market indicator charts; e.g., sentiment, advance-decline, volume and TRIN. All were pointing to a major trend turnaround and a significant rally. If you are interested in reviewing those indicators, you can scroll back on the Option Investor Home page to my 5/8 column: "Holy Cow!" Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ------------------------------------------------------------ WINNER of Forbes Best of the Web Award • optionsXpress voted Favorite Options Site by Forbes • Easy screens for spreads, collars, or covered calls • Free streaming quotes • Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ **************** MARKET SENTIMENT **************** Full Steam Ahead? By Eric Utley As it turned out, we were a few days early on the tepidly bullish market call last Thursday. But our trusted indicator didn't let us down. It was, after all, right again! The Nasdaq-100 Bullish Percent ($BPNDX) reversal into bull alert mode, below the 30 percent level we might add, last Thursday foreshadowed what we've seen in the technology sector so far this week. So where do we go from here? To me, there appears to be more upside in this rally from Tuesday's close. But that's not based upon Applied Materials' (NASDAQ:AMAT) perceived bullish earnings report after the bell today. Rather, I see room to the upside in key technology measures. Certainly enough room to trade. If you're still bearish on technology, I think you're better off waiting for a better entry point at higher prices until the bulls run their course. I've seen a significant shift in several of my indicators that suggests the upside is where the risk lies. But looking out past this recent upside, I do see some troubling signs as they relate to the intermediate term. Namely the lack of stick in the CBOE Market Volatility Index (VIX.X). For whatever reason, investors continue to believe in every rally that even hints towards carrying stocks higher over the short term. What we need to see in order for a rally to last over the intermediate to long terms is a wall of worry to form. That way to monitor for that wall is through the volatility measures. I just don't see it yet. An interesting study of a wall of worry can be found in the Gold and Silver Index (XAU.X). Readers can examine the trading of puts versus calls on the XAU.X, and the relationship with price in the index, to observe what a wall of worry looks like, and how an asset's price climbs that wall. Nevertheless, over the short term, it appears that the easier direction to trade is the bullish direction. Until we see a significant shift in the indicators, most accurately the $BPNDX, the bears will likely remain on the run, while the bulls will press ahead. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 10298 Moving Averages: (Simple) 10-dma: 10323 50-dma: 10261 200-dma: 9907 S&P 500 ($SPX) 52-week High: 1316 52-week Low : 945 Current : 1097 Moving Averages: (Simple) 10-dma: 1074 50-dma: 1120 200-dma: 1122 Nasdaq-100 ($NDX) 52-week High: 2071 52-week Low : 1089 Current : 1306 Moving Averages: (Simple) 10-dma: 1226 50-dma: 1378 200-dma: 1468 Software ($GSO) The GSO.X was the best performing sector in today's technology led rally. The sector edged past other tech sectors such as the SOX, BTK, and INX to earn the top spot. The GSO.X gained 6.40 percent for the day. Top movers included Novell (NASDAQ:NOVL), Veritas (NASDAQ:VRTS), Agile Software (NASDAQ:AGIL), Ariba (NASDAQ:ARBA), and BEA Systems (NASDAQ:BEAS). 52-week High: 246 52-week Low : 112 Current : 133 Moving Averages: (Simple) 10-dma: 124 50-dma: 148 200-dma: 162 Gold ($XAU) The tech led rally Tuesday caused a shift out of defensive sectors of the market. And gold is as defensive as it gets. The XAU.X earned the day's worst performing sector spot with its 5.49 percent drop. Movers to the downside included Meridian Gold (NYSE:MDG), Agnico Eagle Mines (NYSE:AEM), Newmont Mining (NYSE:NEM), and Harmony Gold (NASDAQ:HGMCY). 52-week High: 81 52-week Low : 49 Current : 76 Moving Averages: (Simple) 10-dma: 78 50-dma: 71 200-dma: 60 ----------------------------------------------------------------- Market Volatility The VIX imploded Tuesday following Monday's move lower. The fear gauge isn't revealing much of that emotion with the return of the bulls. There's no wall of worry here. After kissing its 200-dma for the second time last Friday, the VXN headed lower on the strength of tech shares during Monday's session. Tuesday, the VXN lost another 3.85 percent. CBOE Market Volatility Index (VIX) - 21.89 -1.62 Nasdaq-100 Volatility Index (VXN) - 44.34 -1.78 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.57 896,455 508,222 Equity Only 0.49 748,853 364,059 OEX 0.76 44,887 34,322 QQQ 0.66 69,759 45,755 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 62 + 0 Bull Confirmed NASDAQ-100 28 + 1 Bull Alert DOW 53 + 0 Bear Confirmed S&P 500 57 - 1 Bear Alert S&P 100 53 - 1 Bear Alert 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 1.15 10-Day Arms Index 1.31 21-Day Arms Index 1.32 55-Day Arms Index 1.25 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 2228 986 NASDAQ 2433 1117 New Highs New Lows NYSE 139 28 NASDAQ 170 55 Volume (in millions) NYSE 1,419 NASDAQ 2,598 ----------------------------------------------------------------- Commitments Of Traders Report: 05/07/02 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 eased further from their extreme bearish positioning. The group added more longs than shorts for a reduction to their net bearish position. Small traders backed off from their most bullish reading by adding more shorts than longs. Commercials Long Short Net % Of OI 04/16/02 322,578 411,245 (88,667) (12.1%) 04/30/02 340,936 421,673 (80,737) (10.6%) 05/07/02 348,019 422,801 (74,782) (9.7%) 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 04/16/02 150,529 50,424 100,105 49.8% 04/30/02 153,158 56,372 96,786 46.2% 05/07/02 154,664 59,583 95,081 44.4% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 107,702 - 3/26/02 NASDAQ-100 Nasdaq commercials stayed on the fence during the most recent reporting period. The group's net position is short 814 contracts; not much conviction there. Same thing with small traders; they're long a full 68 contracts. Commercials Long Short Net % of OI 04/16/02 32,024 35,723 (3,699) (5.5%) 04/30/02 34,591 35,933 (1,342) (9.7%) 05/07/02 38,338 39,152 (814) (1.1%) 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 04/16/02 12,458 10,572 1,878 8.2% 04/30/02 12,271 12,703 (432) 1.7% 05/07/02 13,229 13,161 68 0.3% 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 Commercial traders remained flat during the most recent reporting period. The group added a few longs and shorts. Small traders grew more aggressive on the bearish side by bringing their net position to short 4,700 contracts. Commercials Long Short Net % of OI 04/16/02 19,080 14,267 4,813 14.4% 04/30/02 17,275 13,341 3,934 12.8% 05/07/02 19,967 14,045 5,922 17.4% 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 04/16/02 5,644 9,448 (3,804) (25.2%) 04/30/02 5,813 8,869 (3,056) (20.8%) 05/07/02 5,124 9,831 (4,707) (31.5%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's • optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's • 8 different online tools for options pricing, strategy, and charting • Access to options specialists via email, phone or live chat online • Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ *********************** INDEX TRADER GAME PLANS *********************** THE SECTOR BEAT - 5/14 by Leigh Stevens The same tech sectors were the top gainers again today, with the Semiconductors ($SOX.X) in the forefront. SOX today gained another 6 percent and I indicated yesterday that I would focus on the SOX if there was a second day of strong gains. SECTOR TRENDS AND TRADING IDEAS - The jury is still out on whether the SOX is reversing its trend. The sector index needs to advance to above 580 on a weekly closing basis to suggest that SOX had reversed its downtrend. An initial bullish positive this week would be a close above the 40-week moving average. Stay tuned, as SOX needs to close over 540. One stock in this sector that IS acting already like it has made a bottom, is Intel Corp (INTC). INTC has completed a 62% retracement at the recent low. The gap up today was bullish, but I think that the stock can drop back into this gap area and retreat back to the 28.50 area. If so, out of the money (OTM) calls like the one shown are a possible play. Healthcare Payors Index ($HMO.X): Healthcare ($HMO.X) continues its corrective action. As said before, after a correction, these stocks are likely to have still more upside, so view this pullback as a buying opportunity. PacifiCare Health Systems (PHSY) dropped a second time into my suggested buying zone at 23.5-24.7, with a low at 24.1, but with a close at 26.98. The August 30 calls were one possible play; close: 2.30. Oxford Health Plans (OHP) - Buy suggested in $43 area. Down to 44 today, back up to 45.84 at the close. United Health Care (UNH) - Suggested buy at 82-83. Not close yet, but still correcting. Sept. 95 calls are a possible option play. Wellpoint Health Networks (WLP) - suggestion was to buy at 72.00 area, a doable purchase today with dip to nearly 70. I suggested further purchases around $70 - today we saw a low at 67.77, but a close back above 70, at 70.35. The July 80 calls are getting fairly cheap - today's close: .80, down from the 2.60 area at the beginning of the month. AETNA (AET) - My revised entry suggestion is in the $44 area. Today AET held its up trendline, in its close at 46.66. Not there yet. HUMANA (HUM) - purchase suggestion is first, at 15.60, at its support (up) trendline; then if further weakness develops, in the 15.00-15.15 area. Today, HUM reached a low of 14.75, rebounding to close at 15.33. The August 17.5 calls are getting cheaper - close today: .70 MID ATLANTIC MEDICAL (MME) - buy point suggested in the 32.80- 33.00 area. Low today was 34. TENET HEALTHCARE (THC) - buy in the 66 area. Today saw a dip to just under the 70 area, with a close at 71.53. LIQUIDATION OF TRADES PREVIOUSLY RECOMMENDED: >> Cyclical sector ($CYC.X) - 4/15 suggestion: 1.) iShares Cyclical Trust (IYC) - Bought at 56.95 5/14 close: 56.15 2.) OPTION play: CYC Sector stock, - Alcoa (AA) May 40 calls (AA EH) - Bought at .60 3/14 close: .05 5/14: Exited on the rally to and above $36 today. The stock still looks vulnerable to another downswing, which may develop from resistance in the 37 area. 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 ------------------------------------------------------------ We got trailing stops! • Trade online with trailing stops at optionsXpress, at no extra cost • Trailing stops based on the option price or the stock price • Also place Contingent, Stop Loss, and "One Cancels Other" orders • $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. 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The Option Investor Newsletter Tuesday 05-14-2002 Copyright 2001, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. ********************** PLAY OF THE DAY - CALL ********************** SGR - Shaw Group $34.29 +0.94 (+1.04 this week) The Shaw Group Inc. (Shaw) is a vertically integrated provider of complete piping systems and comprehensive engineering, procurement and construction services to the power generation industry. Shaw has supplied fabricated piping systems in over 375 power plants with an aggregate generation capacity in excess of 200,000 megawatts of piping systems in the United States and worldwide. Most Recent Update SGR kicked off the week with a favorable analyst coverage. Frost Securities initiated coverage on the stock with a strong buy rating Monday morning. But despite the bullish analyst actions, the stock didn't respond. Instead, SGR spent the day meandering in a tight trading range on very light volume. In other words, Monday's session for like a consolidation day for SGR. That was even more evident at session's end when the stock completed an inside day session. But it did manage a breakout from that inside day during today's session, which saw the stock trace a new relative high in its most recent leg higher. The stock now appears fully broken out of its ascending wedge pattern, which looks to carry SGR higher over the short term. For new entry points, we favor pullbacks on light intraday trading volume to between the $33 to $33.50 support zone. We also like the upward curling action of the 10-dma, which sits just above the $32 level now. During any extended pullback in the market or the stock alone, the 10-dma may come into play as support and provide a favorable entry point upon a rebound from near that level. Comments SGR is displaying very impressive technicals. The stock is coming off of an inside day breakout, plus a short term ascending wedge pattern. The shorts should be nervous in this stock's failure to give up ground to the downside, and the buyers are gaining confidence by the day. Look for a move above today's high at the $34.53 level. Confirm with an increase in volume. BUY CALL JUN-30 SGR-FF OI=138 at $5.10 SL=3.25 BUY CALL JUN-35*SGR-FG OI=552 at $1.75 SL=0.75 BUY CALL JUL-35 SGR-GG OI=661 at $2.40 SL=1.25 BUY CALL JUL-40 SGR-GH OI=142 at $0.90 SL=0.25 Average Daily Volume = 620 K ------------------------------------------------------------ We got trailing stops! • Trade online with trailing stops at optionsXpress, at no extra cost • Trailing stops based on the option price or the stock price • Also place Contingent, Stop Loss, and "One Cancels Other" orders • $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************ MARKET WATCH ************ Wow! Plays are triggering action points, mostly to the upside. Here are two more bullish stocks to monitor this week. To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/051402.asp ************** MARKET POSTURE ************** Technology sectors were on the move in the last two days. Financials too. Will the rally continue? To Read The Rest of The OptionInvestor.com Market Posture Click Here http://www.OptionInvestor.com/marketposture/051402_1.asp ********** 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
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