The Option Investor Newsletter Tuesday 05-21-2002 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) ************************************************************ 05-21-2002 High Low Volume Advance/Decline DJIA 10105.71 -123.80 10292.95 10086.55 1.17 bln 1135/2012 NASDAQ 1664.18 - 37.40 1717.93 1660.22 1.44 bln 1273/2254 S&P 100 538.28 - 7.00 549.56 537.81 Totals 2408/4266 S&P 500 1079.88 - 12.00 1099.55 1079.08 RUS 2000 495.46 - 7.71 504.89 494.27 DJ TRANS 2702.78 - 58.60 2773.05 2699.66 VIX 22.56 + 1.00 23.23 20.62 VXN 44.65 + 1.77 44.96 42.63 TRIN 1.19 PUT/CALL 0.90 ************************************************************ Gains Gone Again? Don't you just hate those words? For most of the indexes the gains from the last week are history. Gone. Kaput! The Dow closed at 10102 and below the close from last Monday of 10107. For the last five trading days the Dow is negative. The S&P is only six points away from giving back all of its gains and the OEX only five. The Nasdaq is only 12 points away. This is very frustrating for the bulls although it is positive technically. The day started well with Merrill Lynch announcing a settlement with the NY attorney general for $100 million. Not pocket change but significantly lower than previous estimates. The AG took a shot at the other brokers and said "check your records and pay us a visit. Don't make us come to you." While this was a temporary positive for the markets the glee turned to gloom as the news continued to be analyzed. Some analysts think customer lawsuits could turn into a $3 to $4 billion problem for Merrill. Others are not so grim but do agree the future is not bright. Once the thousands of suits start winding their way through the courts there is likely to be a flood of documents coming public that could point to other problems as well. Merrill may be out of the frying pan and into the fire. Did I mention that the SEC said this was not the end of the line for Merrill? They plan on continuing their investigation to see if any investors were harmed. Now that should not be very hard. If that was not enough to sour the positive sentiment there was another terrorist warning supposedly from Al Queda interrogations currently under way. The targets were the Statue of Liberty and the Brooklyn Bridge with Memorial Day as the time frame. I wonder how hard they had to look to find someone willing to die while blowing up a statue? Still the constant replay of the "nuclear, chemical, biological warning from yesterday in addition to today's specific threat was just more weight for an already heavy market. Not enough negatives yet? Solomon Smith Barney downgraded a host of software companies including SEBL, PSFT, ARBA, EPNY. They cut estimates all the way out to 2003 on lack of a rebound in business investment. PSFT had already said they saw "no discernable pickup in customer spending." Add to this the negative SEC news on PSFT and CA from Monday and you can kiss that sector goodbye. Microsoft lost -1.82 on news that they would invest $2 billion in the online Xbox project, not the $1 billion as previously thought. The industry game box price war is also weighing on Microsoft. After the price cut last week they could be losing as much as $100 per game console sold. While this will be made up as more software becomes available it could impact earnings in the short term. Need more? India and Pakistan are reportedly on the verge of war with over one million soldiers on high alert. This border conflict has been brewing for sometime and lest we forget these are nuclear powers. Pakistan claimed more than a dozen people killed as India shelled the village of Chakothi. Dow component Home Depot got hammered for a -3.60 loss after earnings rose a sharper than expected +35%. The reason for the decline was a lack of raised guidance like their competitor Lowes. Lowes' same store sales rose +23% compared with only +17% at Home Depot. Home Depot only forecast a +2% to +3% rise in sales compared to a +4% to +6% outlook for Lowes. Home Depot also booked a $350 million gain in sales due to a calendar shift. Without the shift their sales would have only gained +14%. As they say, the headlines don't always tell the tale. The HD drop accounted for about -25 Dow points. Not everything was negative today. QCOM affirmed estimates for the 3Q and the year on expected strong acceptance of their newest mobile phones that allow users to surf the Web, swap pictures and download music. They said they saw revenue rising from +4% to +8% or $.90 to $.95 cents compared to analyst's estimates of $.87 to $.92 cents. QCOM gained +.73 cents on the day but until it breaks $34.50 it is still in a downtrend. Alan Blinder, former Fed Vice Chairman and principal in the G7 Group, said their proprietary indicators are showing a rise in business spending for the first quarter. This would be the first real signal that businesses might be loosing the purse strings. It runs contrary to many companies, like PSFT and HPQ, that have said in the last week that they see no recovery in business spending. Perfect Storm Revisited The challenge for the markets going forward is the markets themselves. The earnings news is about over for the quarter and the summer doldrums are ahead. This is not normally the time when stocks rally. The major rally from last week was met with dire predictions of death and nuclear destruction as well as leading economic indicators that came in twice as bad as expected. The follow through that would have convinced the shorts to bite the bullet was non-existent and it became a race to get out before the next terrorist attack. It is hard to predict major news events in advance and it is clear that the shorts were not afraid on Monday morning with Rumsfeld on their side. The bullish scenario ran into a bear with a sentiment killing story to tell. That story carried into Tuesday and the new threats to New York just added to those bearish feelings. For tomorrow there are some things that may work in our favor. The Nasdaq has retraced 50% of its jump from the May-7th low of 1560 to the May-15th high of 1760. That number is exactly 1660 and that is EXACTLY where the Nasdaq stopped its drop today. Coincidence? The Dow stopped within five points of the exact retracement of the last five days gains at 10102. Another coincidence? I believe nothing it a coincidence when it concerns the market. Still it does not guarantee market direction the following day. Market technicians hunt for critical points on which to base "their" bias. I am no different and probably you are not also. I get a handful of emails a day predicting a market crash and giving a dozen reasons why. Some are pretty good and some are really out there. I also get a lot of mail predicting the next rebound. Some of those are so technically literate you would think somebody with a PHD in technical analysis penned them. Others are in the "my brother in law knows a broker who says it will go up tomorrow." Believe it or not they all have the same success rate. 50/50. I bore you with this because everybody has an opinion and the market proves them wrong on a daily basis. You want a lesson in humility? Try publicly predicting market direction on a daily basis. I will be happy to give you a forum. The only thing anybody knows for sure is that the bell will ring at 9:30 tomorrow morning and stocks will trade. In this current environment we can't even guarantee that! With the Dow/Nasdaq at support levels (give or take a few points) and the OEX/SPX only six points away, the ODDS of another large drop are smaller than chances for a bounce. The put/call ratio closed at .90 which is bullish and indicates a higher than normal level of put buying. This normally occurs just before a bounce. The VIX however at 22.56 is on the bearish side of neutral while the TRIN is on the bullish side of neutral at 1.2. What all this means is that we are "slightly" oversold and conditions favoring a bounce are building. That bounce could be intraday or multi-day and nobody knows. This market is not for the timid and not for traders that cannot move into and out of positions on a daily basis. The oversold/overbought oscillators are fluctuating on almost a daily basis. This shows that there is no conviction and nobody is "holding" stocks. Until that changes we have not seen the bottom and volatility will continue to rule the day. There is a lingering thought process by long time traders that we have not seen the retest of the September lows and we have not had a capitulation event. Without that capitulation event, where stocks are sold off in volume at any price, institutional traders will still be holding money in reserve. That type of event will cause them to buy the dip and that will be the bottom everyone can claim. Will that happen tomorrow? I strongly doubt it and that means we are doomed to continue bungee trading until it does. Enter Very Passively, Exit Aggressively! Jim Brown Editor ******************** INDEX TRADER SUMMARY ******************** BROKER BLUES by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - Gee, the announcement that Merrill was going to get off the hook with the New York Attorney General for only $100 million, was initially seen as bullish. Not for long. That 100 mil, plus all the other bucks that burned investors will dig out of Mother Merrill, is a lot of "full" commissions. Of course, one of the justifications for a full-service firm and the correspondingly high price tag to execute orders, is the advice that you get from all that research. When I was a Merrill Lynch stockbroker, I hardly ever knew an Analyst that would put a sell on a stock. Yet, we had to get special dispensation to recommend stocks to clients that were not covered by our high-priced analysts. This state of affairs led me further down the road of technical analysis. I begin to notice that the high priests of finance couldn't tell the beginning from the END of a trend. At least I had a chance with the charts. The market behaved pretty much as I expected. As I have been saying, the probabilities were high that the market would find a "reason" to fall back to the index chart gap areas that I've been talking about. I didn't recommend playing puts, as I wasn't sure that there would not be one more shot up. I prefer to buy a pullback. I can better identify some areas that should develop as support and that I could actually size up in an end of day commentary rather than by the seat of my pants intraday. I actually suspect that not everyone who reads Index Trader is watching the market all day long. There are these little things that interfere with this, like WORK and jobs. Not that trading the indexes is not a lot of work! Jim Brown is putting in his share of it and sweat to come up with shorter-term swing trades that shape up intraday. I prefer to pick my spots and my work is trying to analyze the areas where the high potential buying and shorting areas will fall. I find that index options are tough that way, for the need to anticipate what the market is going to do. I was never so shocked as when I bought index calls or puts on a breakout, was RIGHT on the further move in that direction, only to find out that the premium I paid was so high that I was losing money at the end of the day. Also, as I anticipated, I redrew my hourly chart channel lines today. Constructing channel lines are a bit of an art, as trendlines are. You need 2-3 points to construct an uptrend or downtrend line. Then, only one point is needed, initially, to draw a parallel trendline through the highest high or lowest low on the opposite side of the emerging trendline. Over time, 2-3 points and more develop to define both the upper and lower boundaries of the channel. I still am assuming that there are emerging uptrend channels developing here. However, the other real possibility, as we saw at the March low, is that we get a second low in the area of the first, making a double bottom. The daily (14-day) stochastic will not reach an oversold reading anytime soon. Either the market starts to trade sideways and builds a base, and gets oversold that way, or it's going to drop further than is just to fill in the gap areas. Transitional markets are tough. Just as bullish sentiment takes a long to time to dissipate after a major bull market has ended, bear markets keep investors nervous and either disinterested in stocks or quick to retreat when rallies don't last for long periods. S&P 500 (SPX) Daily/Hourly charts: Well, the hourly oscillators are at oversold levels, but the daily is just on a sell signal. It will take a few days to get oversold or at a more neutral midpoint again, on a daily basis. Near resistance is now at the breakdown point at 1090. Support is anticipated in the 1075 area, both where the S&P chart gap is filled in and at the low end of my redrawn uptrend channel. I have some, not unlimited, confidence that this area will be develop as a bottom. The doubt in my mind is to whether SPX will retest the prior downswing low (1054) about 20 points under where I've been anticipating buying calls. Note the close under the 21-day moving average. Typically the index will dip a little way under this line or drop well under it. Middle of the road case is SPX rallies a bit, drops back again, while the daily oscillators work their way lower. In this market, having an oversold or overbought condition going for us, is the "wind at our backs". Am waiting to see how this shapes up this week. While SPX may be in a bottoming process, a possible 20-point leeway for entry on long calls is too wide. S&P 100 (OEX) Daily/Hourly charts: 535 is where I've wanted to buy OEX calls, but am not quite ready to step up to the plate with the daily stochastics showing downward momentum. Likely there will be a rally, but how short- term is the question. Maybe back only up to near resistance at prior line of support at 540-541. Would love to buy a double bottom, if one developed by a retreat again to the 522 area, as I would go into index calls in a more heavy way. There are times you want to take a heavier position. I don't have that confidence yet in what I'm seeing here. There are two things I would like to line up - decent support develops on decent volume and the market is neutral to oversold on the momentum models. Usually good bottoms are made from oversold levels. Dow Industrials 1/100 Index ($DJX.X) Daily/Hourly charts: The rectangle pattern on the hourly chart turned out to be a top, which is a less common outcome. The key is the breakout direction. Near support is anticipated at 100.8-101, near resistance at 102.2. The 99-100 area has been major support and should prove to be again. If there was one index I would step up and buy this is the one, but suspect there will be a sideways move for a while, so we can let the market prove itself. No break yet of the 21-day moving average. Nasdaq Composite Index ($COMPX) Daily/Hourly charts: 1653 is where the chart gap is filled in. 1660 may shape up as near support. However, if these areas give way, we're looking at a 100 points lower if COMP is going to test the prior low. We have a close under the 21-day moving average, so am taking a bit more time to see how this next low shapes up. The most bullish case would be support and buying interest developing in the 1660-1680 area over a few trading sessions and the daily stochastic works to the bottom. Near resistance can be assumed to be 1692-1694 and I don't think COMP is going to turn around and go back above this area. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: I have been anticipating a buying opportunity developing in the 30.5-31 area. Now, with the close under the 21-day average, rather than bouncing off it, I suggest taking a wait & see attitude on the buy side. Especially given the possibility of re- testing the lows in the 29 area. Near resistance can be assumed to lie at 32.9-32, the breakdown point of today -- once through this area, QQQ fell like a stone. Expect this area to keep a "lid" on the Q's in the near term. 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 **************** Crazy Commodities, Indifferent Investors By Eric Utley Is one segment of the market smarter than another? Some suggest, and I believe, that the bond market is smarter than the stock market. But what about the commodity markets? The Commodities Research Board (CRB) Index ($CRB.X) closed slightly lower Tuesday, but is still looking pretty bullish over the intermediate-term. I can foresee a big unwinding to the upside in this index over the next two or three months. More precisely, though, let's take a look at two of the more telling commodities markets: gold and oil. June crude was off by $1 per barrel today following the American Petroleum Institute's report of a build-up in inventories. While Tuesday's drop was a big move, bigger picture analysis shows us that oil is trading north of $27 per barrel, and well above last year's highs. Meanwhile, gold -- as measured by both the metal and equities -- hit yet another multi-year high during today's trading. June gold hit $316.60 an ounce, while the Gold and Silver Index ($XAU.X) graced the best performing sector spot with its advance above the 85 level. What I found perplexing about Tuesday's polarity in oil and gold is that the latter's move was rationalized by the talk of further terrorist attacks. So why didn't oil respond? Maybe that's a moot point when considering only a one day move, but something worth further observation nonetheless. Bigger picture, however, oil is a whole heck of a lot closer to yearly highs than lows; gold is at yearly highs. But fear, as measured by the CBOE Market Volatility Index (VIX.X), is trading closer to yearly lows. We observed nine month trend of the market's sentiment yet again last week when the VIX imploded on the first sign of strength in the OEX. The VIX's move higher today was also rationalized by the terrorism threat, but also on the weakness in stocks. What I can't figure out is why the VIX isn't higher with all the gloomy talk about, specifically the threat of an attack on the Statue of Liberty or the Brooklyn Bridge. Heck, that scares me. But it's not frightening the market by the magnitude I would expect. Either one or more of the markets I track every day has got it wrong. There's no conclusion to tonight's sentiment, because this story is still being written, and where it ends from here even I can't guess. But I think the relationship between oil, gold, and fear will lead us down the road. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 10106 Moving Averages: (Simple) 10-dma: 10175 50-dma: 10231 200-dma: 9904 S&P 500 ($SPX) 52-week High: 1316 52-week Low : 945 Current : 1080 Moving Averages: (Simple) 10-dma: 1086 50-dma: 1113 200-dma: 1120 Nasdaq-100 ($NDX) 52-week High: 2071 52-week Low : 1089 Current : 1256 Moving Averages: (Simple) 10-dma: 1276 50-dma: 1355 200-dma: 1459 Gold and Silver ($XAU) There's a lot of emotion at play in the $XAU, and it's primarily fear. Further terrorist warnings fueled today's rally, which saw the $XAU hit another multi year high. The index earned the day's best performing sector spot with its 2.15 percent rally. Gold equities on the move higher included Gold Fields (NYSE:GFI) - the stock recently moved to the NYSE, previously trading on the Nasdaq under the ticker GOLD - Agnico Eagle Mines (NYSE:AEM), Harmony Gold (NASDAQ:HGMCY), and Anglogold (NYSE:AU). 52-week High: 85 52-week Low : 49 Current : 85 Moving Averages: (Simple) 10-dma: 79 50-dma: 72 200-dma: 61 Internet ($INX) The $INX earned the day's worst performing sector spot with its nearly 4 percent slide. There wasn't a lot of news from the group, and there was an interesting pattern among the index's poorest performing components for the day. There's a theme here, see if you can spot it. The worst performing components included CMGI (NASDAQ:CMGI), Inktomi (NASDAQ:INKT), Earthlink (NASDAQ:ELNK), and InfoSpace (NASDAQ:INSP). Other movers included Overture Services (NASDAQ:OVER) and Check Point (NASDAQ:CHKP). 52-week High: 243 52-week Low : 76 Current : 97 Moving Averages: (Simple) 10-dma: 96 50-dma: 105 200-dma: 117 ----------------------------------------------------------------- Market Volatility Fear returned to the OEX, evidenced by the rise in the VIX Tuesday. But it's not trading where you might expect given the frequency of talk about further terrorist attacks. I can't rationalize it, this remains a complacent market. The VXN, which didn't breakdown with the gusto of the VIX last week, rebounded today to the tune of about 4 percent. The daily chart of the VXN shows a nice pattern of relatively lower highs, which in a way confirms the weakness in the NDX. CBOE Market Volatility Index (VIX) - 22.56 +1.00 Nasdaq-100 Volatility Index (VXN) - 44.58 +1.70 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.90 482,992 434,205 Equity Only 0.71 403,203 288,899 OEX 1.14 17,797 20,344 QQQ 0.77 46,002 35,202 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 63 + 0 Bull Confirmed NASDAQ-100 46 - 4 Bull Confirmed DOW 67 + 0 Bear Correction S&P 500 65 + 0 Bull Confirmed S&P 100 66 + 1 Bear Correction 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 1.06 10-Day Arms Index 1.11 21-Day Arms Index 1.26 55-Day Arms Index 1.26 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 1138 2030 NASDAQ 1270 2253 New Highs New Lows NYSE 80 33 NASDAQ 92 96 Volume (in millions) NYSE 1,183 NASDAQ 1,659 ----------------------------------------------------------------- Commitments Of Traders Report: 05/14/02 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 reverted to their bearish commitments by reducing their longs and adding to shorts. Small traders grew more bullish by adding a large amount of longs; small traders are 3,000 contracts away from their most bullish reading of the year. Commercials Long Short Net % Of OI 04/30/02 340,936 421,673 (80,737) (10.6%) 05/07/02 348,019 422,801 (74,782) (9.7%) 05/14/02 343,941 424,893 (80,952) (12.1%) 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 04/30/02 153,158 56,372 96,786 46.2% 05/07/02 154,664 59,583 95,081 44.4% 05/14/02 163,035 58,587 104,448 49.8% 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 shifted to a decidedly bullish position last week by adding longs and dropping shorts. Commercials are net long more than 5,000 contracts. Small traders meanwhile went in the opposite direction by establishing a position that was net short more than 5,000 contracts. Commercials Long Short Net % of OI 04/30/02 34,591 35,933 (1,342) (9.7%) 05/07/02 38,338 39,152 (814) (1.1%) 05/14/02 40,858 35,761 5,097 (5.5%) 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 04/30/02 12,271 12,703 (432) 1.7% 05/07/02 13,229 13,161 68 0.3% 05/14/02 11,920 17,479 (5,559) 8.2% 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 added a few more longs than shorts for an increase in the group's net bullish position. Small traders went in the opposite direction by reducing their longs and adding to their shorts. Commercials Long Short Net % of OI 04/30/02 17,275 13,341 3,934 12.8% 05/07/02 19,967 14,045 5,922 17.4% 05/14/02 21,080 14,725 6,355 14.4% 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 04/30/02 5,813 8,869 (3,056) (20.8%) 05/07/02 5,124 9,831 (4,707) (31.5%) 05/14/02 4,930 10,899 (5,969) (25.2%) 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 - 5/21 by Leigh Stevens HIGHER ON THE DAY ON Tuesday - DOWN ON THE DAY on Tuesday - SECTOR HIGHLIGHT OF THE DAY - Healthcare Payors Index ($HMO.X): There has not been a good way to play the Healthcare Payors index in iShares of HOLDR's as, for example, the one that seems to come close, the iShares US Healthcare Index (IYH) is not a "pure" HMO play and in fact the charts look very different. To participate in the strong performance of the HMO group, its been necessary to buy a basket of the stocks or a basket of their calls. 3 HMO stocks already suggested, with updates - PacifiCare Health Systems (PHSY) dropped twice into my suggested buying 23.5-24.7 zone at. Stock could drop back to the 25.7 level and still not break its uptrend line. Wellpoint Health Networks (WLP) - Two price entry points were suggested; at 72.00, then again at 70 or less. WLP broke further today on a gap, with close at 67.8. UNCHANGED analysis: Stock needs to hold 65.30, at his 62% retracement, to keep within a bullish overall trend. Will stay with what I own, call wise and may price average (down), if the stock stabilizes at or above 65. HUMANA (HUM) - Purchase suggestion at 15.60, and again in the 15.00-15.15 area. UNCHANGED: Correction in Humana may have run its course, but consolidation needed. 50-day moving avg. at 14.73 is a key level to watch and stock needs to climb above it to suggest recovery potential. I favor buying dips under 14, with a stop at 13.5 on the stock and an equivalent risk point on calls. Other HMO stocks - Oxford Health Plans (OHP) - Stock had been one of the stronger ones in the group, but is correcting now along with the sector. OHP gapped down today and broke under its up trendline. I favor buying the stock on a pullback to 42 (5/21 close: 42) Unitedhealth Group Inc. (UNH) - UNH is building a minor top it appears and I anticipate a further pullback. Favor buying the stock and/or UNH calls in the 80.00 area, which represents a 50% retracement. Stock may hold its up trendline at 82.6, which is also a 38% retracement, but many stocks in the group have pierced their support trendlines. (5/21 close: 87.2) Aetna (AET) - Aetna has broken its up trendline and gapped lower today. At a minimum, I anticipate a pullback to 44.3 to the bottom of its upside chart gap. However, most favor buying in the 40.5- 43 zone, somewhere between a 38 and 50% retracement. (5/21 close: 45.7) NEW SECTOR TRADER FORMAT - I will be starting a daily chart/technical review of all the major popular sectors. Each will not be updated every day if there is no change in the LAST update. If there is a chart, with technical patterns and/or indicators that may be of particular interest, I will include the chart. Also, over this week, the stocks in each sector will be listed by at least the symbol. In addition, if there is a complimentary iShares or HOLDR that represents the sector, its symbol and name will be noted also. The advantage of a HOLDR/iShares is that you have immediate diversification as the shares represent ownership in a basket of stocks in that industry. If you enter a trade in only one stock or its option, within the sector, that particular stock may not perform in line with the Index in question; e.g., there is a broker downgrade on the stock, but not others in the sector. Options do, of course, offer the benefit and attraction of offering a leveraged and limited risk (long options) means to participate in a sector's trend. However, the ideal means to play individual stocks is to select at least 3 of the group for the sector play, using representative stocks in that group. You'll also note that there are two Indexes, that are not sectors per se - the Amex Composite Index and the Russell 2000. One of the popular investment "themes" this year, is buying the small and mid cap stocks. These two indexes are composed of many of these companies. As such, they are of interest to many traders and investors. I have set up all the charts and will begin updates tomorrow (Wed.) SECTOR REVIEW - ** ALL TO BE UPDATED THIS WEEK ** Airline Index ($XAL.X) Amex Composite Index ($XAX.X) Bank Index ($BKX.X) Banks Index; S&P - CBOE; ($BIX.X) Biotechnology Index ($BTK.X) Computer Technology Index ($XCI.X) Cyclical Index; Morgan Stanley; ($CYC.X) Disk Drive Index ($DDX.X) Dow Transportation Average ($TRAN) Fiber Optics Index ($FOP.X) Financial Index; NYSE ($NF.X) Forest & Paper Products Sector Index ($FPP.X) Gold & Silver Sector Index ($XAU.X) Health Providers Index; Morgan Stanley ($RXH.X) Healthcare Index; Morgan Stanley ($HMO.X) High Tech Index; Morgan Stanley ($MSH.X) Internet Index; CBOE ($INX.X) Natural Gas Index ($XNG) Networking Index ($NWX.X) Oil Index; CBOE ($OIX.X) Oil Service Sector Index ($OSX.X) Pharmaceutical Index ($DRG.X) Retail Index; S&P - CBOE ($RLX.X) Russell 2000 Index ($RUT.X) Securities Broker Dealer Index ($XBD.X) Semiconductor Sector Index ($SOX.X) Software Index; Goldman Sachs ($GSO.X) Telecoms Index; No. American ($XTC.X) Utility Sector Index ($UTY.X) Wireless Telecom Sector Index ($YLS.X) 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 05-21-2002 Copyright 2001, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. ********************** PLAY OF THE DAY - CALL ********************** AOL - AOL Time Warner $18.58 -0.80 (-1.40 this week) AOL Time Warner Inc. is a fully integrated, Internet-powered media and communications company. The Company was formed in connection with the merger of America Online, Inc. (America Online) and Time Warner Inc. (Time Warner), which was consummated on January 11, 2001. America Online and Time Warner are wholly owned subsidiaries of AOL Time Warner. Most Recent Update AOL has fallen back to trading with the broader market. The stock has tripped lower in the last two sessions on broad selling in stocks. The news of additional layoffs may have played into the stock's weakness during the last two days, but the layoffs were minor. The company said that it would eliminate 120 jobs in the ad sales group division. Volume has been coming down during the slide in the stock, which is a good sign that the weakness may just be a normal pullback on profit taking. With that said, now is the time to start looking for favorable entries near intraday support levels. One level to watch closely is the $18.50 mark where the stock gapped higher from last week. The buyers have been trying to support the stock at that level, and may continue to do so in the coming days. Make sure to monitor the broader market direction and strength, and look for those intraday dips to hold near $18.50 support. Confirm a bounce before entering new plays. Comments AOL spent the last two days pulling back, reaching its 10-dma near today's intraday low. The stock bounced from that level, indicating that the buyers were still interested in taking it higher. Watch for a turn in the broader market tomorrow, then look for the buyers to return to AOL. Intraday bounces from the 10-dma are possible entry points with tight stops below today's intraday low, or wait for a breakout above the $19.75 level followed by confirmation back above $20. BUY CALL JUN-17*AOL-FW OI=15268 at $1.75 SL=0.75 BUY CALL JUN-20 AOL-FD OI=49874 at $0.50 SL=0.25 BUY CALL JUL-17 AOL-GW OI= 4693 at $2.15 SL=1.00 BUY CALL JUL-20 AOL-GD OI=12500 at $0.85 SL=0.50 Average Daily Volume = 24.1 mln ------------------------------------------------------------ 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 ------------------------------------------------------------ ************ MARKET WATCH ************ We’re balancing out the list tonight with a few bearish plays. Watch for snapback rallies in the bullish candidates. To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/052102.asp ************** MARKET POSTURE ************** We’re on hold after last week’s big move off of the lows. But averages and sectors are pinned near very key support levels. To Read The Rest of The OptionInvestor.com Market Posture Click Here http://www.OptionInvestor.com/marketposture/052102_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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