The Option Investor Newsletter Thursday 05-30-2002 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) ************************************************************ 05-30-2002 High Low Volume Advance/Decline DJIA 9910.70 – 11.30 9943.50 9802.20 1236 mln 1493/1681 NASDAQ 1631.92 + 7.53 1637.65 1607.30 1360 mln 1664/1767 S&P 100 528.88 – 1.16 531.56 523.31 totals 3157/3448 S&P 500 1064.66 - 3.00 1069.50 1054.26 RUS 2000 487.83 + 0.23 489.57 482.60 DJ TRANS 2717.96 - 6.96 2725.51 2697.96 VIX 23.14 - 0.54 24.51 22.77 VIXN 46.57 - 1.00 47.66 45.04 Put/Call Ratio 0.80 ************************************************************ Sidelined traders by Leigh Stevens Given the lack of any strong countervailing bullish news that might impact the Market directly, the unsettling tensions coming from the Indian subcontinent helped keep potential buyers on the sidelines this morning. Given this situation, there was more impetus to get out then get in, so the orders that were coming in for the first half of the day were predominately on the sell side. The second half of the session saw some bullish influences affecting Software and the PC sector that brought in some tech buying along with the same in healthcare, biotech and healthcare sectors, along with technical buying as indices held prior lows. The afternoon lift brought the Nasdaq Composite, Nasdaq 100 and the Russell 2000 indexes into slightly plus territory. The Dow Industrials (INDU) S&P 500 (SPX), and S&P 100 (OEX) indices got back to nearly unchanged, closing just fractionally lower. Tomorrow is another story as far as potential for market-moving news - we'll see important releases on Productivity, Factory Orders, and Consumer Sentiment as noted on our Event Calendar. THE POLITICAL FRONT - The market woke up today with news that Pakistan forces continued to be shifted to Pakistan's eastern border with India. Besides the dire prospect of conventional war that has the risk of going nuclear, it's bad news for the U.S. in that some of those troops were helping American forces search for al-Qaida and Taliban forces near and along the Afgan border. Pakistan and India have now over a million troops in the Muslim dominated Kashmiri region, mostly under Indian control, but hotly disputed for decades. Muslim extremists seem to want to get the two big guys fighting, so they can advance more of their agenda: uniting the Muslim world and their "oppressed" breathen, weakening the moderate secular government of President Musharef, and taking the pressure off the same al-Qaida and Taliban forces that the U.S. has had on the run and on the defensive. The Pentagon was said to be preparing plans for mass evacuations of U.S. government personnel as well as U.S. nationals in general - numbers of 60+ thousand people were being discussed. Secretary of Defense, Donald Rumsfield is planning now to go the area next week. Bush says that the ball is Pakistan's court to stop the infiltration of terrorists across into Indian controlled territory. ECONOMIC NEWS - The Department of Labor reported that jobless claims fell in the week ended last week. Seasonally adjusted new unemployment claims fell to 410,000, a decrease of 12,000 from the previous week's revised 422,000. The 4-week average fell to 418,500 from the prior week's 421,500. The dollar fell against the Euro, Pound and the Yen. The Euro went to a 15-month high to 93.78 (+0.3%) and the dollar fell to a new 6-month low against the yen which closed at 123.3 yen to the dollar, with the buck off 0.8% against the Japanese currency. Keeping some of this in perspective, the yen was at one time going for 100 to the dollar and the Euro began its life trading at $1.15 - it has some ways to go to get back to "par"; i.e., 1 dollar equaling 1 euro, which is where I think it can and should wind up. The weaker dollar helps many of the American multinationals, as U.S. goods and services become cheaper relative to our other major trading partners. A strong dollar is always a mixed blessing. Good if you want to tour Europe, not so great if you live there and want to buy American. Many economists, being practitioners of the "dismal science", feel that a weak dollar could hamper the U.S. economic recovery. Their thinking is that a steep drop in the dollar risks a sustained, non-inflationary economic recovery, as Americans start paying more for foreign imports, pushing up prices and U.S. inflation. In this view, the dollar is already overvalued. However, this viewpoint is debatable. It's like PE ratios - what level is over or undervalued? It's often a pretty subjective thing. Also, a cheaper dollar makes U.S. equities cheaper and foreign investing has been a significant influence in the past. It still is true that the U.S. is having a significantly stronger economic rebound than anywhere in the world. Bottom line, I would not necessarily take the recent months weakening trend in the dollar as another bearish Market influence without question. Gold eased a bit, with the nearby futures at 326.20, -.15 the ounce. Bonds rose as there was a flight to the relative safety of U.S. Treasuries. COMPANY/SECTOR NEWS - As noted, there was little bullish news other than the improving jobless claims numbers. Consequently, traders focused such things as the sale of Miller brewing and more talk of the SEC's long- standing probe relating to whether Microsoft manipulated its earning's picture by inappropriate accounting measures. Dow stock Philip Morris was up over a percent after the company announced the sale of its Miller brewing unit to South African Breweries PLC, a $5.6 billion deal creating the world's second largest beer maker. Microsoft (MSFT) was up 1.6 percent as investors reacted positively to a Wall Street Journal story that MSFT and the SEC are in negotiations to resolve allegations about fuzzy accounting that would give the impression of steady profit and earnings growth. The Journal indicated that any violations were minor. The SEC has launched several investigations in recent days against energy firms for inflating their earnings through accounting tricks such as sham "round-trip" trades. The oil index ($OIX.X) fell 1.6%. Salomon Smith Barney downgraded several energy companies, noting continued scrutiny by the debt ratings agencies, mounting legal and regulatory risks and concerns over heightened challenges for their business models. El Paso Energy (EP) fell another 8 percent as investors sold EP following its restructuring announcement Wednesday. Soundiew Technology, in an influential analyst report, said that there will be a "clear uptick" in the enterprise application software sector, Q2 forecasts are "realistic" and a repeat of the disappointing Q1 quarter was unlikely. Their report went to say positive things above PeopleSoft (PSFT - +9%), and Oracle (ORCL - unchanged). Besides these companies in the Software Index ($GSO.X +2.5%), the day also saw good gains in Veritas Software (VRTS - +10%) and Siebel Systems (SEBL - +6%). TRADING STRATEGY - Not to discount the dangers on the political front, but the focus should probably remain "on the economy, stupid". (Let's assume that Pakistan and India will find an overriding interest in self-preservation and avoiding another costly war.) However, there are obviously still a couple of major things bothering current or potential U.S. equities investors: One, is the still lackluster pace of business spending. Businesses spent so much on the last technology buying spree, that they are taking a very cautious stance on opening up the corporate pocketbooks again, until they see their earnings coming on stronger than they are; sort of don't fire until you see the "whites of their eyes!" Two, there is still this basic view by professional and individual investors that stocks are still fully if not over -valued. I've stuck my neck out and said that the market is probably bottoming and that we're in a price area where further downside risk may be limited. However, that said it still takes BUYING to get em back up. I haven't seen that investors are finding any compelling reasons for sustained buying. And for index options players this factor, by necessity, keeps the trading focus short-term. The weak sector, as we've seen over and over, is tech. Bottom line, buy the S&P and Dow indices and representative stocks around these recent lows, sell the Nasdaq indexes around recent highs. The strategy is that called for the likely continuation of a trading range. Any expectations, my own included, for a breakout of this range, are starting to look like they will not be realized this summer. The S&P 500 (SPX) would need a weekly close above 1140 and the Nasdaq Composite above 1700, to suggest otherwise. Support continues to look like it will come in the 1050 area in S&P and 1600 in Nasdaq. Like to trade? - there are opportunities within this range. CHARTS OF INTEREST - S&P 500 (SPX) Daily/Hourly charts: The sideways to lower move is moving the daily stochastic indicator down toward an oversold reading, but its not there yet. Price wise, SPX rebounded today from the low end of its recent trading range, as can be best seen on the hourly chart. The pattern of a double bottom, in this case at 1054, was the same as seen back in February, although then the double bottom formed at a higher level, at 1075. The 1075 level, once support, will likely offer some resistance on a rebound back to it. Above 1075, focus would be at the prior 1097 (up) swing high. Use of the 21-day moving average acts as a "pivot" point, with trade under this level suggesting a bearish near term trend and trade above it indicating upside potential as long as prices can hold above it. The percentage trading envelope lines reflect a tendency for extremes in the indexes trading range to be contained within these percentage envelopes (relative to the 21- day average). So, for example, if 1054 (also, 1048.9) was pierced, 1031 comes in as a possible "worst case" downside objective. The Dow 1/100 index ($DJX.X) - Daily/Hourly charts: As with the S&P, a double bottom low may have formed in the Dow at 98 in DJX or Dow 9800. Moreover, today's low formed in the area of the 3% lower envelope line that typically contains the Dow's trading range. The prior low at 110.6, then the prior high at 102.2, are potential resistance areas. I favor the long side in the Dow sector, as the low end of a likely 98-103 trading range has been seen once again. However, if 98 gives way, 97 is a next possible downside objective, suggesting an exit/stop point at 96.8 for calls. The Nasdaq Composite ($COMPX) - Daily/Hourly charts: Today's low in the Composite at 1607, occurred a bit above the prior 1600 low. This makes an approximate double bottom low nevertheless. Time will tell. Key near-resistance looks like Near resistance is 1600, then 1560. Notice that there is not yet an oversold reading on the 14-day stochastic - not so on the 10-day setting, which is another popular length and measures a 2-week time frame. The ever popular QQQ tracking stock of the Nasdaq 100 has made a similar double bottom just under 30 (29.9 versus the 5/10 low at 29.5). The Q's continue to look like a buy on dips to and under 30 and a sell in 32-33 zone. That chart is in my Index Trader wrap up tonight. Leigh Stevens LStevens@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** TERROR BLUES by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - Worrying the market these days is something not seen so clearly since the Cuban missile crisis -- of course then they were tons of nukes pointed at our cities and neighborhoods and monster ones at that. But the current saber rattling in the Indian subcontinent nevertheless fits the terror/terrorist worries prevalent since 9/11. The India/Pakistan terror blues might be the alternative title, even though in strictly economic terms, Argentina is more important to us as a trading partner. In a geo-political sense, unleashing the nuclear genie is pretty worrisome and gruesome. This is really letting the genie out of the bottle, if Pakistan uses nuclear weapons to create equality of arms - India and her army vastly outnumbering the Pakistani's. As I said in the Option Investor wrap tonight, the market really still has these same two worries - how soon will business spending improve and the related question of how soon will earnings get into a decent upward trend - stocks being seen as OVER priced relative to current earnings. Back from a short 2-day market break, barely looking at the market except to go on line at the end of the day. A true break, but not the one I was looking for as the market broke again in another drift lower on LOW volume. I suggested at the beginning of the week that accumulation of index calls was warranted at least in the SPX & OEX, as the pivotal 21-day moving average looked like it was holding. Suggested a stop under SPX 1070 and/or to price average again on a retest of recent lows at 1054. 1054 was good, not sure about carrying calls under SPX 1070! We need a good rally to make that work out. Oversold readings were still not registering in the daily stochastics, so my original caution to not buy before that happens was on the mark given a worsening of the situation in Kashmir. One thing if I was long QQQ stock - I can hold the stock, with some confidence of an eventual sustained rally. But where I have time premiums to worry about - well, this recent action has made me less confident of a summer rally. There may not be much more downside risk, but the market can go more sideways than up for some time to come unless peace breaks out all over and we see continued strong economic reports. Time will tell. Just one example - June 1190 SPX calls went from a 17.50 opening on Monday to 9.20 today. Even buying more at 7 today around SPX 1054, means 3 more points to break even on the two. A losing proposition unless there is a substantial rebound in the next couple of weeks. S&P 500 (SPX) Daily/Hourly charts: See my Option Investor wrap up. S&P 100 (OEX) Daily/Hourly charts: Buy zone for accumulation of OEX calls was suggested in 536-441 area, risking to 529.50. A second buy point was the 522 area in a re-test of those prior lows. WRONG! on the first, right (sort of) on the second point for today. We'll see what tomorrow brings, but next time I want to position trade this market, I'll lay down until the feeling passes. 536 now looks like it will be the opposite of the earlier expected support and act as near resistance on a further rally. If 522 gives way, we may be looking at the 517-518 lows of early in the month as next possible support. Below there, if we retreat to my lower envelope band again, we're looking at maybe 510. Dow Industrials 1/100 Index ($DJX.X) Daily/Hourly charts: Nasdaq Composite Index ($COMPX) Daily/Hourly charts: See my Option Investor wrap up on both - I would note that Nasdaq/tech continues to look like the indexes that I prefer trading from the put side on rallies. Buy calls on OEX, sell rallies on Nasdaq seems to be the only way to play this split market. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: Suggested stop on long QQQ positions at 30.5, made Sunday and not adjusted would have resulted in what looks like an unnecessary exit today as the bottom was hit at 29.9. Accumulating calls if 29.5 was re-tested, was the right general idea, but of course TOO "ideal" in a way as there were way too many buyers willing to take a long/call trade at this exact level with far to few sellers willing to put them at that price. Looks like we've seen a short-term low so would trade it that direction the next 1-2 sessions. Sell in the 32-33 zone both to take any long profits and to play the short/put side. You'll note that there is no more upside hourly price channel outlined on my charts, as there was continued bottoming action and a trading range, but the emerging trading range WITHIN an uptrend was not something that was maintained. 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 **************** One Day Chance By Eric Utley Well, so much for the post Memorial Day rally. Or maybe Thursday's little late day ramp job was the beginning of the rally. It seems a little late, though. The Nasdaq-100 (NDX.X) has about 2 percent, or about 25 points to go for a positive finish for this week, which is certainly possible with month's end. Those wily fund managers like to play games at the end of the month in an attempt to try to boost short term performance, and in turn appeasing investors who've taken it on the chin once again this year. With the light holiday volume it would be pretty easy to push around tech stocks tomorrow, so that's something to keep in mind going into the session. Elsewhere, there was a trend in the sector scorecard that I'd like to touch upon. There was a concentrated amount of selling in some of the more economically senstive sectors today, which didn't show up in the closing figures for the broader market averages. What I saw was weakness in the Airlines, Cyclicals, and Paper stocks that was disconcerting for those who are believers in the second-half recovery thesis. Without the participation from the aformentioned groups, Thursday's late day rally seems to me nothing more than another short covering rally with a bit of month-end buying thrown in. That's not to say it won't continue into tomorrow's session, because I think it will. But looking out into next week, things don't look so well for the bulls. And at the risk of sounding like a broken record, I didn't like the action in the CBOE Market Volatility Index (VIX.X) Thursday. The S&P 100 (OEX.X) finished off of its lows, but still fractionally lower. Yet the VIX couldn't manage to trade higher, revealing ever more complacency in the market. The mere sight of the rebound in the OEX was enough for the VIX to roll over from its earlier rally attempt. Tying this observation in with our sector observations, I think that there's a lot of risk to the OEX names minus tech components. The one potentially bullish metric in tonight's sentiment is the short term ARMS Index reading. The 5-day moving average is creeping back into extreme oversold readings, perhaps signaling a short term relief rally around the corner. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 9912 Moving Averages: (Simple) 10-dma: 10127 50-dma: 10167 200-dma: 9890 S&P 500 ($SPX) 52-week High: 1316 52-week Low : 945 Current : 1065 Moving Averages: (Simple) 10-dma: 1085 50-dma: 1103 200-dma: 1116 Nasdaq-100 ($NDX) 52-week High: 2071 52-week Low : 1089 Current : 1128 Moving Averages: (Simple) 10-dma: 1269 50-dma: 1325 200-dma: 1445 Software ($GSO) Here's an unfamiliar sector to the best peforming spot. But the GSO earned it Thursday with its 2.50 percent rally on bullish comments from Wall Street. Leaders to the upside included Veritas (NASDAQ:VRTS), Rational Software (NASDAQ:RATL), PeopleSoft (NASDAQ:PSFTA), and Siebel Systems (NASDAQ:SEBL). 52-week High: 241 52-week Low : 112 Current : 123 Moving Averages: (Simple) 10-dma: 126 50-dma: 139 200-dma: 159 Gold and Silver ($XAU) The profit takers did just that in the XAU, which earned the day's worst performing sector spot with its 2.44 percent give back. Leading to the downside included Gold Fields (NYSE:GFI), Harmony Gold (NASDAQ:HGMCY), Anglogold (NYSE:AU), and Barrick (NYSE:ABX). 52-week High: 89 52-week Low : 49 Current : 84 Moving Averages: (Simple) 10-dma: 84 50-dma: 75 200-dma: 62 ----------------------------------------------------------------- Market Volatility I though we might finally witness the VIX trade higher in conjunction with stocks Thursday, but it didn't happen. The fear gauge imploded on the late day rebound. The VXN did have some stick to it, closing higher on the rebound in the NDX. From this little observation, I'd be more inclined to be bullish on tech stocks for a trade than the NYSE names. CBOE Market Volatility Index (VIX) - 22.96 -0.07 Nasdaq-100 Volatility Index (VXN) - 46.62 +0.91 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.82 300,464 245,610 Equity Only 0.59 257,679 152,740 OEX 1.00 12,617 12,627 QQQ 0.27 17,345 4,689 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 63 + 0 Bull Confirmed NASDAQ-100 40 - 1 Bull Correction DOW 67 + 0 Bear Correction S&P 500 64 + 0 Bull Confirmed S&P 100 66 + 0 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 1.47 10-Day Arms Index 1.22 21-Day Arms Index 1.27 55-Day Arms Index 1.31 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 1494 1697 NASDAQ 1676 1757 New Highs New Lows NYSE 77 60 NASDAQ 95 133 Volume (in millions) NYSE 1,237 NASDAQ 1,574 ----------------------------------------------------------------- Commitments Of Traders Report: 05/21/02 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 added more longs than shorts last week, resulting in an decrease in the group's net bearish position. Small traders did just the opposite for a net increase in their bullish positions. Small traders are less than 2,000 contracts away from their most bullish reading of the year. Commercials Long Short Net % Of OI 05/07/02 348,019 422,801 (74,782) (9.7%) 05/14/02 343,941 424,893 (80,952) (12.1%) 05/21/02 354,039 429,803 (75,764) (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 05/07/02 154,664 59,583 95,081 44.4% 05/14/02 163,035 58,587 104,448 49.8% 05/21/02 164,964 58,950 106,014 47.3% 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 grew slightly more bullish last week with a gain of 1,000 contracts to their net bullish position. Small traders on the other hand grew more bearish by adding to their existing chunk of shorts. Commercials Long Short Net % of OI 05/07/02 38,338 39,152 (814) (1.1%) 05/14/02 40,858 35,761 5,097 (5.5%) 05/21/02 51,448 45,375 6,073 (6.3%) 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 05/07/02 13,229 13,161 68 0.3% 05/14/02 11,920 17,479 (5,559) 8.2% 05/21/02 12,567 19,899 (7,332) 22.6% Most bearish reading of the year: (9,877) - 12/21/01 Most bullish reading of the year: 8,460 - 3/13/01 DOW JONES INDUSTRIAL Dow commercials grew less bullish last week by reducing their long position and adding to their short position. Small traders remained flat in their actions. Commercials Long Short Net % of OI 05/07/02 19,967 14,045 5,922 17.4% 05/14/02 21,080 14,725 6,355 14.4% 05/21/02 20,173 15,317 4,856 13.7% 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 05/07/02 5,124 9,831 (4,707) (31.5%) 05/14/02 4,930 10,899 (5,969) (25.2%) 05/21/02 3,661 9,585 (5,924) (44.7%) 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 - 5/30 by Leigh Stevens We continue to see oversold rebounds in various tech sectors from time to time (e.g., today's Software index rally; $GSO.X), without it being particularly noteworthy. However, worth noting is the Semiconductor index's ($SOX.X) strong rebound from an area near its prior low. The SOX is of course a strong bellwether for tech stocks and the Nasdaq. Also, Healthcare ($HMO.X) has rebounded this week strongly right from where I suggested that it needed to, at its up trendline. HIGHER ON THE DAY ON Thursday - DOWN ON THE DAY on Thursday - SECTOR HIGHLIGHT OF THE DAY - Semiconductor Sector Index ($SOX.X) STOCKS: AMAT; AMD; CMOS; CREE; IDTI; INTC; KLAC; LLTC; LSCC; LSI; MOT; MU; NSM; NVDA; NVLS; PMCS; RMBS; TER; TXN; XLNX The Semiconductor sector, after making a double bottom in the same approximate area, rebounded strongly today. This was accompanied by an RSI reading that was well above its prior low, which is a related sign that SOX may made a significant bottom here. One option play on this sector is to buy SOX index calls, although they have a tendency to get pricey as soon a rally develops so limit orders and picking an area to buy them on a pullback is important, Individual stocks that look favorable, like they will likely trade in line or as well as the SOX on a rebound, include MU, NSM, and TXN. SECTOR REVIEW - * COMPLETION OF THESE REVIEWS OVER COMING DAYS * Airline Index ($XAL.X) STOCKS: ALK; AMR; AWA; CAL; DAL; FRNT; KLM; LUV; NWAC; U; UAL Still in a downtrend, well under its 50 and 200-day moving averages. Sector would not break out above its major down trendline before 89. Support has developed in the last month in the 77.00 - 79.00 area. Sector looks like it may be bottoming, but is not yet in a position to rally much - little buying interest in the group has shown up as evidenced by the pattern of lower relative lows after the early-May rebound. LAST UPDATE: 5/30 Amex Composite Index ($XAX.X) The small cap stocks so predominating in the Amex, as a group, appear to be correcting from their strong up trend, perhaps in a sideways consolidation. Recent rally attempts have not carried to above the 962 area, at a "line" of resistance that is putting a cap on rallies. A close under 955 would cause a break of the up trendline dating from Feb. and suggest that the strong trend was reversing. LAST UPDATE: 5/30 Bank Index ($BKX.X) STOCKS: BAC; BBT; BK; C; CMA; FBF; FITB; GDW; JPM; KEY; KRB; MEL; NCC; NTRS; ONE; PNC; SOTR; STI; STT; USB; WB; WFC; WM; ZION The bank index has made at least a temporary double top in the 916 area - closing penetration of this prior top, and subsequent support developing in this area, would suggest a new up leg. BKK fell under its up trendline this week and its 50-day moving average. It would need to close back above 889 to reverse this bearish near-term picture. Significant support lies in low 860 area - no major trend change is signaled without a move to under this area. LAST UPDATE: 5/30 Biotechnology Index ($BTK.X) STOCKS: ABGX; ADRX; AFFX; AMGN; BGEN; CELG; CEPH; CHIR; CRA; DNA; ENZN; GENZ; GILD; HGSI; ICOS; IDPH; IMCL; IMNX; INCY; MEDI; MLNM; MYGN; PDLI; TARO; TEVA; VRTX; XOMA Biotech has been in pronounced downtrend, which appears to have reversed at the early-May lows in the 380 area. Continued rally from this point suggests that index can work higher as long as we continue to see a pattern of higher (up) swing highs and higher (down) swing lows. Next key technical resistance area is 449-450, area of several prior lows and the intersection of daily down trendline. Close above 449-450 would indicate that the trend has reversed higher. Further resistance then comes in at the top of its downtrend channel at 475. Suggested buy of Biotech Holdr's (BBH) at 101.50 on 5/24 open; recommended initial stop/exit point at 92.5; initial objective: 113; longer-term objective: 127, back to area of mid-March highs. LAST UPDATE: 5/24 Computer Technology Index ($XCI.X) STOCKS: to be listed Remains in a downtrend; May rally recently reversed at 50-day moving average and from an overbought reading on the daily oscillators; e.g., 4-day RSI. Key resistance is at 672, then 682. Close over these levels would turn the trend up. Early-May lows in the 580 area now looks like major support as current levels are well above this area. LAST UPDATE: 5/23 Computer Boxmaker Index ($BMX.X) STOCKS: AAPL; CPQ; DELL; GTW; HWP; IBM; SNE; SUNW; UIS; VRTS Boxmakers sector, an unglamorous term for PC manufacturers, had a mid-May rally right to its down trendline at it's 50-day moving average, where BMX reversed - this was also area of its 50-day moving average. Current downtrend reverses with a close above 96. Break of near support at 91, on a closing basis, suggests a possible further retreat to major support in the 83-85 area. LAST UPDATE: 5/23 Cyclical Index; Morgan Stanley; ($CYC.X) STOCKS: AA; C; CAT; CSX; DCN; DD; DE; DOW; ETN; F; FDX; GP; GT; HON; HWP; IP; IR; JCI; KRI; MAS; MMM; MOT; PBI; PD; PPG; PTV; R; S; UTX; WHR; X The cyclical index has been locked in a 595-552 trading range since early- March, with current levels close to the high end of this range. Interestingly, the recent advance did not hit an overbought extreme on the daily oscillators, so the sideways trade could be setting up for an eventual breakout when/if the economy really gets going. A breakout above 395 on a closing basis, with subsequent ability to hold this level on pullbacks, would suggest that another up leg was developing in CYC. A close below 564, at its up trendline, would reverse the trend down. LAST UPDATE: 5/23 Defense Index; Amex ($DFI.X) STOCKS: ATK; BA; COL; DRS; EASI; EDO; ERJ; ESL; FLIR; GD; INVN; ITT; LLL; LMT; NOC; OSIS; RTN; SSSS; TDY; TTN; UIC The Defense sector, a very strong performer in the January to May timeframe, formed a May top after repeated failures to get through resistance in the 680 area - retreat from the top area was accompanied by the a downside break of the Jan-May up trendline. The last rally to this area occurred on less relative strength, forming a classic price/RSI divergence. Resistance at the previously broken up trendline is at 673 currently, not far under the major 680 resistance. Am watching to see if the 50-day moving average acts as support beyond today. Downside possibilities for a pullback in DFI may lie either in the 615 or 595 areas, representing the 38% and 50% retracements, respectively. LAST UPDATE: 5/23 Disk Drive Index ($DDX.X) STOCKS: ADIC; ADPT; DSS; FLSH; HTCH; IOM; MXO; RDRT; SNDK; STK The disk drive index remains in a downtrend. However, after a drop to the 82 area in early-May, which completed a 62% retracement of the September '01 - February '02 advance, DDX rebounded some. If the index can hold above its prior low at 82, the index could be a position to rally. The last rally reversed at its 200-day moving average. A close above 88, current resistance implied by its down trendline, would suggest some further rally potential at least back up to re-test its 200 and 50-day moving averages. LAST UPDATE: 5/26 Fiber Optics Index ($FOP.X) STOCKS: ADCT; ALA; AMCC; AVNX; CIEN; CORV; CSCO; FNSR; GLW; JDSU; JNPR; LU; MRVC; NEWP; NT; NUFO; ONIS; PMCS; Q; SCMR; TLAB; VTSS; WCG The Fiber Optic group has been in a downtrend since peaking in the 139 area in early-December. FOP's recent low was made at 65 in early-May and the index is again near that area. A break of this level would suggest another downswing, but I don't have enough price history to focus on what might be a possible further downside objective. On the upside, a close over 71.00 would put FOP above its down trendline, basis the daily chart. Sector is again approaching an oversold reading on the daily oscillators. LAST UPDATE: 5/26 Financial Index; NYSE ($NF.X) STOCKS: This index is composed of all the financial stocks on the NYSE; e.g., banks, insurance, etc. Forest & Paper Products Sector Index ($FPP.X) Gold & Silver Sector Index ($XAU.X) STOCKS: ABX; AEM; AU; FCX; GOLD; HGMCY; MDG; NEM; PD; PDG; SIL XAU continues to accelerate to the upside, but may find near resistance at the top end of its steep uptrend channel at around 90. My longer-term objective is 100 however. Near support looks like 80, with major support at 70. If you want to buy into this sector it is high risk, although gold bullion has a possible per ounce target to $340-345, maybe 350. The question is how much of the potential further price rise in gold is priced into the XAU stocks already. LAST UPDATE: 5/23 Health Providers Index; Morgan Stanley ($RXH.X) Healthcare Index; Morgan Stanley ($HMO.X) STOCKS: AET; AHG; ATH; CAH; CI; FHCC; HUM; MME; OHP; OPTN; PHSY; TGH; THC; UNH; WLP Healthcare ($HMO.X) has rebounded strongly right from where I suggested that it needed to, at its up trendline. LAST UPDATE: 5/30 ** Previously suggested basket of 3 HMO stocks/calls - PacifiCare Health Systems (PHSY) at 23.5-24.7. Stop/exit: 23.3 Wellpoint Health Networks (WLP) - Entry at 72.00, then at 70. Stop/exit point: 65 Additional buy suggested at 66. Humana (HUM) - Entry suggested at 15.60 & 15.00-15.15. Stop/exit point: 13.2 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 ($SOX.X) STOCKS: AMAT; AMD; CMOS; CREE; IDTI; INTC; KLAC; LLTC; LSCC; LSI; MOT; MU; NSM; NVDA; NVLS; PMCS; RMBS; TER; TXN; XLNX ** SEE DAILY SECTOR HIGHLIGHT ** Software Index; Goldman Sachs ($GSO.X) Telecoms Index; No. American ($XTC.X) Transportation Average; Dow Jones ($TRAN) 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 Thursday 05-30-2002 Copyright 2001, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** RYL $107.50 -3.00 (-6.60) Despite the positive housing data earlier this week, the shares of the home building stocks haven't been able to gain any traction. After failing to push through the $115 level earlier in the week, shares of RYL have been heading south again and sold off with a vengeance on Thursday, ending well below our stop. Even the late day rebound wasn't enough to get the stock back above the $108 level and with the $DJUSHB trading sharply lower as well, it should come as no surprise that we're dropping coverage of RYL tonight. Since our stop was violated today, all positions should now be closed. If you are holding open positions, use any strength tomorrow to exit at a more favorable level. CYMI $42.61 -0.51 (-1.99) CYMI took a turn for the worse in the last two days on continued weakness in the broader technology sector, and specifically in the semiconductor sector. The stock broke below its relative low and our stop in today's session before staging a big late day recovery rally. But with the stop broken and the chart looking weak, we're dropping the play this evening. Look for a follow-through of today's rally to exit plays. PUTS: ***** None *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Tue Wed Thu TEVA 67.10 -0.50 0.15 0.65 Still very strong, breakout? ERTS 64.30 -0.89 -0.46 1.84 Ready to break above $66!!! NOVN 26.01 0.38 0.58 0.69 Retesting relative highs RYL 107.50 -1.90 -1.70 -3.00 Dropped, housing rolls over SNPS 50.99 -1.23 -0.87 0.39 Bouncing above the 200-dma ADBE 36.53 -1.00 -0.82 0.68 Finding support above $36 CI 105.93 0.19 0.05 0.88 Advanced past the $106 mark CYMI 42.61 1.33 -0.81 -0.51 Dropped, broke below lows GILD 36.81 0.90 -2.60 1.46 Volatile trading, entry pt. PDLI 12.06 0.30 -0.49 0.20 Coiling tighter and tighter THC 74.20 1.45 0.95 1.22 Strong stock, strong sector DGX 87.00 0.44 0.33 1.28 New, rebound from pullback INTU 44.48 -0.74 1.44 1.56 New, relative tech strength PUTS HB 60.50 -0.54 -0.48 1.10 Rally to resistance, entry GS 75.08 -1.29 -0.75 -1.07 Ready to breakdown at $74 PLAB 22.72 -0.25 -0.75 -0.24 Another relative low COHU 23.75 0.30 -0.65 0.10 Relief rally sets up entry WHR 71.10 -1.26 -0.80 -0.75 Blue chip stocks breaking VRTS 22.99 -1.48 -1.14 2.06 Oversold bounce to entry WMB 14.00 -0.31 -1.64 -1.47 New, headed to single digits DUK 31.78 -0.11 -1.08 -1.73 New, wrong sector for bulls ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity • No hidden fees for limit orders or balances • $1.50 /contract (10+ contracts) or $14.95 minimum. • Zero minimum deposit required to open an account • Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************** PLAY UPDATES - CALLS ******************** ADBE $36.53 +0.68 (-1.14) Soundview lit a fire under the Software sector on Thursday with their call this morning, stating that they believe earnings visibility is improving and that estimates for the group appear to be achievable. That was enough to life ADBE from its recent malaise, where the stock has been hugging the $36 support level. Recall that this level has been providing support for the past several months, so it was encouraging to see the bulls continuing to support it. While the gain was rather small at only 1.9%, it was good to see buying volume solidly above the ADV. Once again, it looks like the $36 level provided a solid entry point into the stock, but we need to see the confirmation of continued buying interest in the Software sector (GSO.X) before we can be sure. The problem we see is the fact that ADBE fell back at the close, showing that there is significant overhead resistance still in place. So while intraday dips near $36 are indeed buyable, more conservative traders will want to see ADBE push through near-term resistance at $38.25 before taking a position. Keep stops set at $35. ERTS $64.30 +1.84 (+0.49) Eager bulls can almost taste the pending breakout in shares of ERTS, as the stock is once again pressing against the $65 resistance level. After falling back to the $62 level earlier this week due to the persistent weakness in the Software sector (GSO.X), shares of the video game software company shook off their malaise and staged a strong rebound on Thursday. Traders that took advantage of the rebound from support are in good shape tonight, but those waiting for the breakout are wondering whether there is enough momentum to get through resistance. Price action will unfold as it sees fit and it is our job to act accordingly. Use a repeated rebound from the $62 level to initiate new positions or else wait for a solid breakout over $65 resistance. Keep stops set at $61. PDLI $12.06 +0.20 (+0.01) As the Technology market continues to try to find bottom, the Biotechs (BTK.X) are still looking positive due to their ability to maintain their fledgling uptrend from the early May lows. Whether the BTK can lead the rest of the NASDAQ out of its slump remains to be seen, but for now we are clearly seeing some relative strength. Shares of PDLI got hit by a bit of selling yesterday (likely due to sector weakness), but once again stabilized on Thursday. Despite holding up fairly well this week, the stock hasn't been able to advance and will need to see stronger bullish action in the BTK if the bulls have any hope of a strong move higher. Intraday dips near the $11.50 level still provide attractive entry points, with the first confirmation of bullish action coming with a push through the $13.75 resistance level. Use the action of the BTK to gauge the strength in PDLI. If the BTK can't clear the $435 resistance level, then PDLI will likely have a hard time clearing its own resistance. SNPS $50.99 +0.39 (-1.71) The past two days have been rough on investors in the Semiconductor sector (SOX.X) as the index has flirted with a major breakdown under the $475 level. But traders that focus on the strong stocks in the sector are finding solid entry points. SNPS has held up very well in the past month and both of the last two days bounced strongly from the $49.50 level, which is the site of our stop. Aggressive traders could have taken those bounces as entries into the play, but what we really want to see is whether the stock has the ability to move through near-term resistance at $51.50. That would be a positive sign, but the real test will come at $52. This is the site of the stock's 5-month descending trendline and if the bulls can clear it on a closing basis, it could set the stage for more follow through to the $54 resistance level. Clearly we'll need to see the SOX stage a significant rebound for SNPS to challenge this heavy resistance. Continue to target new entries on successful bounces from support, keeping stops set at $49.50. More conservative traders will want to see a rally through $54 before entering the play. THC $74.20 +1.22 (+3.62) Are Health Care stocks staging a rebound? It certainly looks that way and it was quite encouraging to see the Health Care Payor's index (HMO.X) briefly trade above $625 on Thursday. Not only did that represent a push through near-term resistance ($620), but it also created a fresh triple-top breakout on the PnF chart, putting the sector back in its bullish trend. Shares of THC had been consolidating in sideways fashion for most of the past month and then finally got moving upwards on Wednesday, closing right at the $73 resistance level. With Thursday's solid move in the sector, THC faulted higher, moving to within a dollar of its all-time highs before settling back a bit at the close. Relative strength appears to be back with the HMO index and THC is going along for the ride. We can use intraday dips back to the $72-73 area for initiating new positions or else wait for a breakout over the $75.50 level. Given the strength of recent support, we are raising our stop to $70.50 tonight. TEVA $67.10 +0.65 (+0.30) TEVA rebounded in today's session on the late day recovery in the broader market. Our feeling is that this stock will lead any rally to the upside from here, but getting that rally is going to be the difficult part. TEVA has built up some impressive relative strength in the last month or so, and that strength will carry to the stock up to new relative highs if the broader market and its sector, the AMEX Biotechnology Sector Index (BTK.X), get moving to the upside. In terms of new entry points, we favor taking advantage of intraday dips as entry points on short term weakness. That way, we can set tighter stops just below short term support and protect against any failure by the broader market of moving higher. To the upside, we'd like to see the stock trade above the $69 level on the next leg higher, which would confirm that the stock's bullish trend is still alive by tracing another relative high. NOVN $26.01 +0.69 (+1.64) Just as we discussed late last week when NOVN traded up above the $26 level, the stock came within a few ticks of that relative high today on the retest. Today's rally marked the eighth straight session that NOVN finished higher for the day, which is a remarkable accomplishment in this market environment. But just because the stock is very strong and very bullish doesn't mean we should lose our heads. It's growing more overbought by the day over the short term, which is why traders who've been riding the trend higher over the last two weeks need to raise up protective stops to hedge off any extended pullback over the short term. Or, those who were targeting the retest of the relative high might start looking to take profits on further upside in tomorrow's session. In terms of new entry points, we'd like to see a pullback in this stock back down to the $24 level, supported by the rising 10-dma where we can better manage risk. CI $105.93 +0.88 (+1.12) CI traded within a few pennies of the breakout level that we've been targeting at the $106 level during yesterday's session. The stock's rally attempt Wednesday was a peek into Thursday's session when the stock finally broke out above that key resistance level. We should see some more upside from here as the sector is moving in the right direction for this play to be a success. The pullback following the breakout created another entry point on weakness, which traders can start looking for bounces from the $104 to $105 level ahead of further upside. The rising 10-dma just above the $104 level should help to provide support during any further pullbacks from here. To the upside, with the $106 level broken, look for a retest of relative highs in the coming sessions up around the $110 level. Monitor the HMO Index (HMO.X) for sector confirmation, and confirm further upside in the stock with a breakout above today's high at the $106.95 level. GILD $36.81 +1.46 (-0.24) It's been a wild two days for GILD. Talk surfaced late yesterday afternoon that its AIDS drug was causing kidney failure in some of the patients using the drug. The stock responded by trading as low as $33.50 before rebounding. Then Wall Street came to the stock's defense today saying that the fears over the drug were unfounded. Merrill Lynch came to the stock's defense by reiterating its buy rating on shares, which helped to inspire a solid rebound today, and of course the broader market strength helped. The result of today's trading was a wide inside day being completed. From here, where the stock trades is up to the direction of the biotech sector, and the broader market. We'll look for a break from the inside day as an entry point in the coming session on further strength in the NASDAQ and BTK. If the stock continues pulling back, look for a low risk entry near today's low just above the $35 level. ************** NEW CALL PLAYS ************** INTU - Intuit $44.48 +1.56 (+2.26 this week) Intuit, Inc. is a provider of small business, tax preparation and personal finance software products and Web-based services that simplify complex financial tasks for consumers, small businesses and accounting professionals. The Company's principal products and services include Quicken, QuickBooks, Quicken TurboTax, ProSeries, Lacerte and Quicken Loans. Intuit offers products and services in five principal business divisions, which include Small Business, Tax, Personal Finance, Quicken Loans and Global Business. Relative strength is an amazing tool that helps investors spot winners, and keeps them out of trouble. We've found of all things a technology stock displaying very impressive relative strength that looks primed for a major breakout. We're talking about INTU, which staged a massive rally today with help from positive comments from analysts on the broader software sector. The shift of sentiment in the group was all INTU needed to trade up to its relative highs, threatening to breakout as early as tomorrow. The four month base that was traced from January through April should provide the necessary lifting power for the stock once it decides to breakout from its consolidation. Looking out over the longer term using the weekly chart, we see that the stock has formed a cup like base, which reinforces the short term consolidation that is in play. If the stock can clear its short term resistance at the $45 level, there's only the $46 level that stands in the way of clear blue sky upward trend towards the $50 level. A breakout above the $45 level could be used as an entry into strength above current levels, but only if the broader technology sector is supporting such a strategy. Look for strength in the Nasdaq to confirm a breakout in INTU before entering above $45. If the stock decides to pullback before breaking, then look for a retreat followed by a bounce from the $42.50 area. Our stop is initially in place at the $41 mark. BUY CALL JUN-40 IQU-FH OI=1668 at $5.00 SL=3.75 BUY CALL JUN-45*IQU-FI OI=1691 at $1.60 SL=0.75 BUY CALL JUL-40 IQU-GH OI=3797 at $5.80 SL=4.00 BUY CALL JUL-45 IQU-GI OI=1880 at $2.70 SL=1.75 Average Daily Volume = 2.41 mln DGX – Quest Diagnostics $87.00 +1.28 (+2.05 this week) Quest Diagnostics was the result of a 1996 Corning spinoff, and currently holds the title of the world's #1 clinical laboratory. DGX performs more than 100 million routine tests annually, including cholesterol, HIV, pregnancy, alcohol, and pap smear tests. Operating laboratories throughout the US and in Brazil, Mexico, and the UK, DGX also performs esoteric testing (complex, low-volume tests) and clinical trials. The company serves doctors, hospitals, HMOs, and other labs as well as corporations, government agencies, and prisons. With Health Care-related stocks finding renewed buying interest, even in the face of broad market weakness, it is time to revisit this familiar area for a fresh bullish play. The HMO index managed to break out over near-term resistance at $620 on Thursday, and that tells us the bulls are getting interested in this relatively strong sector again. While not a part of the HMO index, shares of DGX are no stranger to the call play list. The stock has been marching steadily upward since last September and had a strong bullish run into the last earnings report. We knew that the stock needed to consolidate those gains before we featured it again, and after falling back to firm support at $85 it looks like it is ready to go. While not quite down to the level of the ascending trendline ($83.50), this was a strong level of support in April and it was good to see it hold up again earlier this week. Moody's gave the bulls a shot in the arm yesterday, upgrading the company's debt rating, showing their confidence that the company whould be able to sustain its positive operating trends. Sure enough, the bulls came back in, right on cue, bidding DGX higher by 1.5% on Thursday on volume that was well above the daily average. Dips near the $85 level appear to be very buyable over the near term, and given that strong support, we can set a fairly tight stop at $84. On the upside, DGX has some resistance near $89 to get through and momentum traders will want to wait for that level to be cleared on continued strong volume before venturing into new positions. BUY CALL JUN-85*DGX-FQ OI=2544 at $4.00 SL=2.50 BUY CALL JUN-90 DGX-FR OI= 544 at $1.40 SL=0.75 BUY CALL JUL-85 DGX-GQ OI= 33 at $5.50 SL=3.50 BUY CALL JUL-90 DGX-GR OI= 127 at $2.85 SL=1.50 BUY CALL JUL-95 DGX-GS OI= 29 at $1.25 SL=0.50 Average Daily Volume = 851 K ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's • $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees • Easy screens for spreads, collars, or covered calls! • Contingent, Stop Loss, Trailing stop, or OCO • 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************* PLAY UPDATES - PUTS ******************* GS $75.08 -1.07 (-3.11) As the broad markets continued to plunge lower over the past few days, the Broker/Dealer index (XBD.X) certainly hasn't been a pillar of strength. Hope of support holding near the $465 level has now been dashed and if the bulls can't hold the line near Thursday's lows in the $448 area, a test of the early May lows near $432 seems assured. GS has been our vehicle of choice for playing this downward trend and the stock hasn't been disappointing in the least. After a brief pause near the $76 support level (also the site of the 62% retracement of the fall rally), the stock has headed southwards again, trading as low as $74.25 before recovering in the afternoon on Thursday. This level will be critical to the stock, as a break of $74 will open the door to a drop to at least $72 and quite possibly the September lows in the vicinity of $65-67. Overhead resistance is getting stronger in the $76-77 area and a failed rebound near that level would make for a choice bearish entry point. Failing that, a breakdown below the $74 level can also be used for initiating new positions, especially if the XBD index breaks below its own support. Lower stops to $78. VRTS $22.99 +2.06 (-0.56) After falling 30% in just over a week, VRTS was primed for an oversold bounce, and with the broad markets attempting to rebound from important support levels, that bounce occurred on Thursday. Even the laggard Software index (GSO.X) managed to stage a 2.5% rebound, helping shares of VRTS to post a nearly 10% advance from Wednesday's close below the $21 level. So is this a temporary end to the recent bearish trend or the setup for a fresh bearish entry? Only time will tell, but we're leaning to the 'fresh entry' side of the argument due to the heavy overhead resistance near $24. This was a persistent level of support prior to the sharp move lower last Friday. Today's rebound had the appearance of short-covering and if that's all there is to it, then we can look to initiate fresh positions on a rollover near the $24 level. Watch for weakness to resume in the GSO index to confirm fresh bearish entries and keep stops in place at $24.25. HB $60.50 +1.10 (+0.08) HB delivered the relief rally on relatively lighter volume that we have been waiting for. The stock climbed higher by about $1 in today's session on the recovery in the broader market. But the stock's trading volume for the day only totaled 126,000 shares, not the type of volume that reversals of trends are built upon. Instead, we suspect that today's short covering rally will prove to be yet another good entry point into this stock's one month declining trend. In addition to the weak trading activity, we like the pause and failure to rally at the 10-dma, which closed today at $60.46. The stock's close right on that level suggests that the buyers didn't have enough conviction to take it any higher, and that once the broader market rolls over again, so will HB. Start looking for entries near current levels early in tomorrow's session, or slightly higher around the $60.75 level. Tight stops can be set to protect against any further upside short covering rally, while the downside could be a quick trip down to the $58 level that we've been targeting. PLAB $22.72 -0.24 (-1.24) PLAB continued along its path of relatively lower lows during yesterday's session when it took out the previous day's low at $23.25. It went on to take out the $23 short term support level that we saw established during Tuesday's session. From there, it continued lower today keeping the trend alive and well. The continued weakness in the Semiconductor Sector Index (SOX.X) is certainly helping our play along, as the SOX continues to lose relative strength versus the broader technology sector. The rebound near the end of today's trading in the sector and the stock might continue into tomorrow's session as we near the end of the month. Such a relief rally in PLAB would set up another favorable entry point near the upper end of its aggressive downward channel. Look for a trade up to and a rollover from the short term overhead congestion area between the $23.50 and $24 levels. The declining 10-dma at the $25 level can be used as an upside protective stop. COHU $23.75 +0.10 (-0.25) COHU traded lower in yesterday’s session on the continued weakness in the broader technology sector, along the way taking out its short term support just above the $24 level that was formed earlier in the week. The stock's breakdown below that support should reveal that the sellers are still overwhelming any buying pressure, despite today's reversal from yet another new relative low in the downward trend that has been in place in the last two weeks. Today's relief rally on relatively lighter volume was most likely a short covering blip because of the rebound in the broader technology sector. We might see that buying continue into tomorrow's session which would set up another solid entry point into put plays upon a failed rally attempt above short term resistance. Watch for the sellers to return as early as the $24 level. If the stock advances through that congestion, watch for a rollover from the $24.50 level with pressure coming in from the declining 10-dma just above $25. WHR $71.10 -0.75 (-2.71) The economically and consumer sensitive stocks in the market are showing disconcerting signs of weakness as witnessed in WHR so far this week. The stock, along with other blue chip issues, broke down earlier in the week and continued lower in yesterday and today's session. With the gap above to the $72.65 level created by the move lower Wednesday morning, the bulls might try to fill that void in the coming sessions if the broader market tries to put together a rally. Bears might take a look at a rollover upon a filling of that gap for entry point. On the other hand, if the stock fails to fill its short term gap and continues lower, the bears might look for an entry into further weakness below current levels. A breakdown below the $70 level on relatively heavier volume and in a weak broad market environment would offer a good entry point into weakness, with confirmation coming on a decline below the 200-dma which now sits below at the $68.85 level. ************* NEW PUT PLAYS ************* WMB – Williams Companies $14.00 -1.47 (-3.42 this week) Williams is engaged in the transportation and sale of natural gas and petroleum products and other energy related activities. Through its subsidiaries, the company is engaged in price risk management services; the purchase, sale and transportation and transmission of energy and energy-related commodities; transportation and storage of natural gas; exploration, production and marketing of oil and gas. Along with being involved in seemingly every aspect of the energy production and marketing business, WMB also is engaged in energy commodity trading and marketing, and even participates in the communications business. Once the darlings of the energy markets, Utilities that moved into the arena of energy trading (pioneered by Enron) have fallen on hard times. With the price of Natural Gas falling back to earth and the power crisis averted, the speculative frenzy that drove these stocks into the stratosphere has disappeared. Now many of these stocks are suffering under the same burden that is plaguing many of the Telecom stocks, that of debt load. Debt-ratings agencies like Moody's and Standard & Poor's have taken notice and seem to be issuing a downgrade a day lately. WMB was already in a prolonged downtrend before the latest round of selling took place, with a series of lower highs and lower lows beginning in early 2001. The sharp selloff in late January drove the stock down to the $14 level, it's lowest level since late 1995, before there was a revival of bullish interest that took the stock right up to its descending trendline near $24. Showing the power of that trend, the stock headed lower again falling back to the $15 level last week on renewed fears by investors of debt-load issues and the growing spectre of SEC probes into any company involved in energy trading and possible "round-trip trades". Last Monday's pronouncement from the company that the company did not engage in round-trip trading gave the stock a pop up to the $18 level, but bearish news from other players like DYN and a downgrade from Prudential knocked the legs out from under the bulls. Completing the reversal, was Tuesday's news that the company may issue more stock or sell additional assets. Then after the close on Tuesday, the company's credit rating was cut by S&P. The final straw came from fellow energy trader El Paso, which cratered yesterday on news that it cut its outlook, followed by a downgrade at Merrill Lynch. You can see the theme here -- the outlook for these energy traders is bleak and getting worse. On Thursday WMB broke down below the $14 level on heavy volume, generating a fresh spread triple-bottom sell signal on the PnF chart. The current vertical count points to a price target of $11.50, but firm support is not seen until the $10 level. We want to take advantage of this strong bearish trend, preferably by selling into the next failed rally near the $15 level. A further breakdown below the $13.75 level is also tradable, but we need to keep a sharp eye out for an oversold bounce given the sharp 20% drop already this week. Following Thursday's breakdown, we feel comfortable setting a fairly tight stop at $16.50. BUY PUT JUN-15*WMB-RC OI=3996 at $1.70 SL=0.75 BUY PUT JUN-12 WMB-RV OI=6363 at $0.60 SL=0.25 Average Daily Volume = 3.52 mln DUK - Duke Energy $31.78 -1.73 (-2.92 this week) Duke Energy Corporation offers physical delivery and management of both electricity and natural gas throughout the United States and abroad. Duke Energy provides these and other services through seven business segments: Franchised Electric, Natural Gas Transmission, Field Services, North American Wholesale Energy (NAWE), International Energy, Other Energy Services and Duke Ventures. The broader energy sector has become littered with disasters. The most recent of which include Dynergy, El Paso, and Williams. The negative sentiment is spreading to others in the group such as DUK. The company reported that it was hit with more investor lawsuits today that claimed that the company misled shareholders by issuing false and misleading statements about its financial position and business conditions. We're not sure if this play is going to lead to another blow up like we witnessed in El Paso, but the odds are good that the stock is going to work lower over the short term. The descending wedge on the weekly chart is ready to be broken with a breakdown below the $31 level. Bears can look for a decline below that level as early as tomorrow morning as an entry point if the sentiment of negativity in the energy sector continues. Watch for intraday volume to increase on a move below that level. If the stock does rebound before first breaking down, we'll look for rollovers starting at the $33 level. If it continues above there, then we'll watch for a failed rally just below the $34 level. Our stop is initially in place at the $34.50 level. BUY PUT JUN-32*DUK-RZ OI=2591 at $1.75 SL=0.75 BUY PUT JUL-30 DUK-RF OI=6849 at $0.80 SL=0.25 Average Daily Volume = 4.16 mln ------------------------------------------------------------ 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. 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The Option Investor Newsletter Thursday 05-30-2002 Copyright 2001, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. ********************** PLAY OF THE DAY - CALL ********************** TEVA - Teva Pharmaceuticals $67.10 +0.65 (+0.30 this week) Teva Pharmaceutical Industries Ltd. is a fully integrated global pharmaceutical company producing drugs in all major therapeutic categories. In the area of proprietary drugs, Teva has focused on products for central nervous system disorders, primarily the development of Teva's first globally marketed branded drug, Copaxone, a treatment for relapsing-remitting multiple sclerosis. Teva also possesses significant manufacturing operations for active pharmaceutical ingredients (API). Teva Pharmaceuticals USA, Inc., Teva's principal United States subsidiary, is a generic drug company in the United States. Most Recent Update TEVA rebounded in today's session on the late day recovery in the broader market. Our feeling is that this stock will lead any rally to the upside from here, but getting that rally is going to be the difficult part. TEVA has built up some impressive relative strength in the last month or so, and that strength will carry to the stock up to new relative highs if the broader market and its sector, the AMEX Biotechnology Sector Index (BTK.X), get moving to the upside. In terms of new entry points, we favor taking advantage of intraday dips as entry points on short term weakness. That way, we can set tighter stops just below short term support and protect against any failure by the broader market of moving higher. To the upside, we'd like to see the stock trade above the $69 level on the next leg higher, which would confirm that the stock's bullish trend is still alive by tracing another relative high. Comments With the end of the month approaching, some of May's best performing stocks could be in for a little bit of upside. Fund managers like to play games at month's end. So we're turning to one potential game piece in TEVA. The stock has had a very strong month, and could be in for more end of month buying tomorrow. Watch for an advance above today's high at the $67.85 level, then look for a confirmation move up beyond the $69 level. BUY CALL JUN-65*TVQ-FM OI=1418 at $3.30 SL=1.75 BUY CALL JUN-70 TVQ-FN OI=1037 at $0.65 SL=0.25 BUY CALL JUL-65 TVQ-GM OI= 119 at $4.40 SL=2.00 BUY CALL JUL-70 TVQ-GN OI= 580 at $1.70 SL=0.75 Average Daily Volume = 910 K ------------------------------------------------------------ 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 ------------------------------------------------------------ ************** TRADERS CORNER ************** Carpe' Dementia! Buzz Lynn buzz@OptionInvestor.com Seize the debt! Time for Fundamentals Guy to dust off his cape. The truth of the matter is that I should have written this months ago, but didn't because I did not completely grasp the big picture of huge corporate debt loads, or at least never felt compelled to write about it until now fearing faithful readers would consider me just another sourpuss bear. There has much in favor the bears over the past 24 months, which has had little airtime until recently. Think back over the past few months to the top stories of big bearish days in the market. Think of Enron, WorldCom, Dynegy, El Paso Energy, and Williams Companies as the most recent examples. Common element? Debt, and lots of it, cloaked under the umbrella of "accounting issue". That is not to say that all companies with debt are in trouble with investors. We need only look at the likes of Philip Morris, Kraft, Pepsi, and scads of others to see that some companies operate very profitably using debt. So what is the difference? Aside form the obvious answer that some businesses are more profitable than others - for instance that oil companies generally make money and Internet companies don't - debt management and prudent borrowing is worth observing when picking the market's winners and losers. One such measurement that I watch is the debt to equity ratio, which is the total liabilities divided by shareholder equity. A ratio of 0.0 would mean zero debt (MSFT) while a ratio of 2.5 would mean 2.5 times as much debt as equity. It indicates the proportion of debt and equity that a company is using to finance its assets. Here's the catch. Sometimes only long-term, interest-bearing debt instead of total debt is used in the calculation. That leaves plenty of accounting wiggle room to use revolving, short-term lines of credit, interest rate swaps, and zero-coupon debt instruments to be omitted from the ratio. The ratio can be artificially low in the hands of an unethical CFO bent on hiding true debt loads. The number can often be understated, which conceals a company's inability to repay its debts. So what does that mean for a company that borrows heavily or carries a lot of debt. Furthermore, as traders or even investors, why should we care? For investors, that answer is obvious. Who wants to own a company that won't be able to produce profits after servicing its debt? Nobody I know - at least none that would intentionally buy a stock knowing it cannot earn money. But for the trader, that can often be a big clue as to the stocks long-term trend. Carrying lots of debt could mean that a company would founder under its own weight in an economic downturn (No, get out!). Knowing that and corroborating that with technical charts would likely keep us out of call LEAPS, selling naked puts, or writing covered calls. No thanks. We don't want to trade calls if the earnings prospects are bleak. Hmmm. . .puts anyone? The fact is that a high debt to equity ratio means that a company has been aggressive in using debt to finance its growth, which can lead to volatile earnings (if any at all) from the resulting interest expense. And therein lies the problem with debt. Companies that had a reliable and once growing stream of income no longer do. Debt loads that used to be serviceable are no longer so as revenues have remained flat or fallen back from previously anticipated levels. The problem isn't the debt itself, but rather that many business are being called into question on their ability to generate sufficient revenue to service the debt let alone earn a profit. Surprise! Profit margins matter again! Long gone are the days of losing on every sale with the attempt to make it up on volume. Isn't that what many were implicitly touting as they put "market share" above profitability? Without profit margin, there is no ability to repay debt! Market share should be the least of a company's worries if there isn't sufficient margin after expense to service debt. Ahh, now we see how the companies with high margins consistently make money (MSFT, ORCL). Profit margin. It's not a tough concept. It would also explain why those two have a cash hoard exceeding $44 bln between the two of them with MSFT making up nearly $39 bln of that. But furthermore, we can see that huge margins on a staple business like Philip Morris (love 'em or hate 'em) allows MO to carry a hefty but manageable debt/equity ratio of 1.18 (for them) and still pay a 4% (and increasing) dividend. That's do-able with a consistent 18% profit margin. Also, despite lingering, negative, accounting concerns and a debt/equity ratio of 1.84, even TYC has a decent operating margin of 13% and pays a small but consistent dividend, though who knows how long that will last if pricing pressures crop up in TYC's playing field. The same can't be said for EK whose photographic film business is being gobbled by Agfa and Fuji, whose digital strategy hasn't paid off, and who suffers under a 1.13 debt/equity ratio with a 1.6% operating margin, and still pays a dividend that exceeds its income. Think twice before buying EK for the dividend, which can't be sustained. But what about the revenue streams of DYN, WMB, WCOM, and others? With falling revenue streams, but debt service remaining at the same levels, profits get squeezed or eliminated. What then happens to stock prices? Since prices are a reflection of expected earnings, and earnings are falling, it makes sense that stock prices would too. How low could they go? Look at Globalstar, Global Crossing, Metromedia Fiber Network, 360Networks, and Exodus for the answer - zero, or pennies at best. All that begs the next question of, "If Greenspan is keeping borrowing rates so cheap, why don't companies just refinance to a lower interest rate to improve their earnings?" The short answer is that they can't. Why not? Companies get loans from all sorts of lender - banks, finance companies like GE Capital, insurance companies, or bonds to name a few. All of them want some sort of collateral in case the borrowing company cannot repay the loan. The company must remain solvent if the lender is to get a return on and a return of capital. Otherwise the lender will collect and dispose of collateral. Most of the time, the lender requires that and accelerates the loan if certain conditions cease to be met - conditions like a minimum average stock price over a 30-day period, or certain debt/equity ratios. That is why we often see a company CEO or CFO trying to prop up the stock price. He/She isn't necessarily concerned with his/her incentive stock option package. He/she is concerned with keeping the borrowing covenants intact so as not to have the company's credit downgraded or its loan called, the latter of which usually results in default. Lenders hate that and will not lend money if they perceive any real chance that could happen. The chances are much greater in this economic environment. So rates are cheaper now, but can companies get those cheaper rates? There's an old definition of a lender as someone that gives you an umbrella when the sun shines and takes it away when it starts to rain. How true, but not without good reason. So back to debt - rates may be cheaper, but shaky companies can't meet the requirements now to get the cheaper rates. With a falling debt/equity ratio, a company ends up on credit watch, and thus no ability to get cheaper loans or refinance even if the cheaper rates are around. That's the issue with WCOM along with the potential of that fear to materialize for other debt-laden companies too, including those named in the second paragraph above. Sad for investors but true. As Steve Forbes, publisher of Forbes Magazine points out, "It's like reducing the price of gas to $0.35 per gallon, but having none for sale at that price." The takeaway? Steer clear of the companies with heavy debt and flagging sales. No matter how low the interest rates, they will be the next victims in this bear market, along with their shareholders who are "investing for the long term". ------------------------------------------------------------ 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 ************ Two more bearish ideas make their way on to the list tonight. Look for breakdowns ahead. To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/053002.asp ************** MARKET POSTURE ************** More movement in the last two days following the quiet trading earlier in the week. Unfortunately it was below support. To Read The Rest of The OptionInvestor.com Market Posture Click Here http://www.OptionInvestor.com/marketposture/053002_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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