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Daily Newsletter, Tuesday, 05/21/2002

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The Option Investor Newsletter                 Tuesday 05-21-2002
Copyright 2001, All rights reserved.                       1 of 3
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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 


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****************
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

-----------------------------------------------------------------


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***********************
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


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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



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MARKET WATCH
************

We’re balancing out the list tonight with a few bearish plays.  
Watch for snapback rallies in the bullish candidates.


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**************
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
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