The Option Investor Newsletter Tuesday 06-04-2002 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) ************************************************************ 06-04-2002 High Low Volume Advance/Decline DJIA 9687.84 - 22.00 9739.41 9592.79 1.48 bln 1407/1768 NASDAQ 1578.12 + 15.60 1587.79 1548.31 1.61 bln 1575/1877 S&P 100 516.03 + 1.29 518.94 510.65 Totals 2982/3545 S&P 500 1040.69 + 0.01 1046.06 1030.52 RUS 2000 473.76 - 0.63 475.11 467.11 DJ TRANS 2663.50 - 26.30 2691.43 2638.42 VIX 26.94 + 1.24 27.93 25.94 VXN 49.66 + 2.01 50.12 47.91 TRIN 1.32 PUT/CALL .87 ************************************************************* A Pause to Refresh War worries, tax evasion, front running, layoffs, profit warnings and even an attack by Greenspan could not make a big dent in the indexes today. Does this mean the worst is over? Has the retail investor suddenly had enough and decided that the bad news is already priced into the market? While that may be too bullish an assessment there were many positive points to be derived from today's market action. We started the day with an overhang from the FLEX warning after the company said they would miss estimates for at least two quarters. They said they would miss estimates by as much as -50%. Since Flextronics makes equipment for companies like Cisco the warning had a deeper meaning than just one company's problem. If the manufacturers, FLEX, PLXS, SANM, JBL and SLR are suffering from lack of orders then the companies that use them are suffering also. The networking sector (NWX.X) hit a new low on the news. Still the Nasdaq held up very well under the pressure. HPQ held its first analyst meeting and Fiorina reiterated the plan to cut 15,000 employees and targeted a $3 billion savings through 2004. Fiorina said she would cut costs as well by consolidating contracts for outsourcing their manufacturing. Yet, another hit for FLEX and the sector mentioned above. She said they would save as much as $800 million in the move. While the HPQ CEO said there was no signs of a recovery in IT spending this quarter she was confident that a backlog of pent-up demand was building. Once managers could see profits improving they would not hesitate to place those orders, she said. Bristol Meyers got the call they wish they could have ignored today. Twenty-nine states sued BMY over delaying generic competitors for its Taxol cancer drug. BMY had reserved $125 million for the upcoming litigation expense but some analysts estimate the problem could run into billions. The revenue on Taxol was $1.5 billion and depending on tactics employed to delay they could be found liable for treble damages. This is even more troubling for them since they are under suit for the same thing on BusPar. This pattern of tactics will be especially damming if proven. Layoffs are continuing in corporate America. IBM cut another -1500 jobs and announced a sale of its disk drive business to Hitachi for $2 billion. IBM will take a charge of up to $2.5 billion for the sale and the restructuring of the workforce. IBM said after the bell that the workforce reduction effort was complete. IBM gained +1.20 on a down day and was up slightly after the close. Corning said it began cutting jobs as announced in April. They will eliminate -1500 jobs this week and -4000 jobs before the plan is complete. They said this would enable them to return to profitability by 2003. They said they will provide further details in July. Knight Trading got hammered for the second day in a row but for a different reason. Yesterday's trading glitch loss was almost completely eliminated by Monday's close but the stock opened back down at $4.00 today after the SEC announced they were under investigation for front running. The accusation said employees processing orders would place orders for their own account before entering large customer orders that would likely move the stock price. Once the price jumped the employees would close the trade pocketing the difference. With NITE handling 11% of the market volume this could have amounted to significant gains. Oops! The Tyco CEO was formerly arraigned today on a dozen felony counts of evading sales taxes on $13 million of purchased art. $100 million a year in compensation and you can't afford the sales tax? While many people can relate to bending the rules on a personal basis they do not want those rules bent corporately. This called into question not only the accounting practices but the business practices of Tyco under Kozlowski. Ironically, had he only shipped the art to his New Hampshire home for a few months as he stated on the exemption forms and then transferred it back to his $18 million New York residence he might have avoided the tax legally. That was an expensive decision by a high income CEO. India and Pakistan are still facing an imminent war. Contrary to rumors during the day about various statements and peace agreements they are still facing each other with guns drawn. The Pakistan leader would not make an unconditional statement about not using his nuclear weapons in case of war. After saying something like "you don't have them if you don't plan on using them" the markets sold off again on his comments. A small country carrying a big stick and begging for recognition among major powers. Just my impression. AOL please return Holly's calls. Lehman analyst Holly Becker downgraded AOL today after lowering her outlook for the company. She said online advertising slump may last longer than expected and that risk remains for timing a potential turnaround. AOL fell -.89 to close at $17.20. Greenspaned again. His appearance before an International Meeting of Central Bankers prompted a discussion of the U.S. economy. His statements sent the markets into a spiral once again when he said the giant first quarter bounce in GDP was a one shot affair from a rebuilding of depleted inventory. He said the economy was in a soft spot now after the rapid growth of the 1Q but that the economy was growing, just growing slowly. Investors wanted to hear bullish comments, not qualified boiler plate about a slower than expected expansion. I will bet he is really fun at parties! Pessimism and skepticism is rampant. Phillip Ruffat, SVP at Mizuho Securities said, "It's like the perfect storm for stocks. You have fraud, deceit in accounting, high valuations and the visibility of a brick." He left out war and broker scams but pretty much hit the nail on the head. What is wrong with this picture? The markets finished flat to up. Surprise! Yes, the Dow lost -22 points but it finished +86 points off the low. The Dow tested support at 9600 dating back to January and that support held. The Nasdaq also held 1550 and rallied to close with a gain despite a severe warning from FLEX. Numerous market analysts, when queried about a bottom, have said when bad news no longer has any impact and volume increases. Sounds almost like today. The bears tried to take it down but like that coiled spring it refused to stay and in the case of the Nasdaq even rallied. While I am not claiming the beginning of the next bull market I did issue a signal to go long on the Market Monitor at 1:06 with the Dow at 9606. With strong support at 9600 and strong economic news the market may simply have run out of stock to sell. This may only be a temporary situation but the oversold conditions are strong. The VIX hit 27.94 intraday. The VXN hit 50.12 which correlates with the May-7th low and the Jan-30th and Feb-8th Dow lows in the 9600 range. Nothing is ever certain but the stars are lining up for a rally tonight. One day or multiple days are unknown. Keep those stops tight and don't let the bears bite! Enter Very Passively, Exit Aggressively! Jim Brown Editor ******************** INDEX TRADER SUMMARY ******************** VOLLEY VOLATILITY by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - If you are confusing volleyball and the market (or, ping-pong?), there was a big jump in S&P volatility recently as measured by the CBOE Volatility Index or VIX ($VIX.X) In recent months on the one occasion when VIX got this high, it led to the best rally of the year to date - at that February juncture VIX closed above 27. When VIX then subsequently turned DOWN (on a daily closing basis) a substantial rally followed. High volatility seems to signal climatic type selling. The VIX today climbed well above 27 on an intraday basis, reaching a peak of 27.9. This jump in VIX is the type of volatility event that makes me alert to the possibility of a tradable bottom and a rally of more than 1-2 days. By the way, the best historical VIX tendency I found in recent years, relative to its signaling a sizable trend change, was a tendency for intermediate to major bottoms to occur when the VIX 21-day moving average rose above 35, then turned down. The OEX and SPX were a buy after the 21-day average turned lower from such a peak. Of course, volatility may not get that high again. I find only loose correlations to VIX as a consistent indicator that "signals" market tops or bottoms. S&P 500 (SPX) Daily/Hourly charts: The daily chart lower envelope line, as discussed before, gives one idea of a possible downside target area (in blue - 1027 area) - this line was nearly reached today and is a "normal" volatility or range for SPX relative to its 21-day moving average. The "minimum" downside objective implied by the Head & Shoulders top pattern was fulfilled yesterday so I no longer have this pattern outlined on the hourly chart. I think that the S&P is at or near a significant bottom and would accumulate long index calls on dips, especially if SPX dropped back to or dipped a bit under 1030 again. However, if 1025 was penetrated this would be my exit point. We're still of course vulnerable to outside events causing further panic selling. S&P 100 (OEX) Daily/Hourly charts: I said yesterday that I thought that the OEX could get to the 508-510 area before it would bounce off support implied by the lower (daily chart) envelope band or the low end of the weekly downtrend channel. Take a look. Looks good so far - stay tuned! I also said last night that I expected a rally attempt to set up by today and that if so suggested covering shorts and exiting puts and would turn buyer for a trade, risking to 505. Can't say much more than this tonight. Buy dips. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: My implied Head & Shoulders downside objective was to 27.5, but now doubt that we will go lower than today. In fact, on today's Market Monitor, I suggested covering short positions in the 29.0 area. Moreover, I later suggested going long/buying calls on the first rebound and got filled at 29.25. Then came the yo-yo wild swings, so there was more than one opportunity to buy dips. My exiting stop on long positions is suggested for 28.5. For those looking to cover shorts/exit puts - suggest getting out with QQQ at 29.30 or lower - I would not be surprised to see the Q's at 29 again, as this market is very nervous and prone to sharp price swings. That's what high volatility is all about! In case the Q's take off to the upside - and I don't see what would spark a sustained run up yet, especially ahead of an Intel mid-Quarter earning progress report on Thursday (after the close) - nevertheless, suggest having a protective buy stop set at 30.3 for tomorrow (Wed.). I remain more concerned about protecting against a sharp further sharp decline - it will likely take some positive "spark" to get em up, but any spooky rumor seems enough to take em down. Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** **************** MARKET SENTIMENT **************** Fear On The Street: It's Up To The 200-dma By Eric Utley The CBOE Market Volatility Index (VIX.X) is rising, which means fear is doing the same. That trend is even more evident in the Nasdaq-100 Volatility Index (VXN.X). Both fear measures finished higher Tuesday, despite a rebound in the Nasdaq-100 (NDX.X). The close higher in the VXN.X may reveal that there's staying power to the short covering rally that we witnessed in the NDX names near the close of the day's trading. The ebb and flow of market psychology is amazing, especially near key turning points no matter the time frame. The spike higher in the VIX Tuesday and close above its 200-dma reveals to me that we're close to a short-term turning point for the S&P 100 (OEX.X) names. I think we're even closer in the Nasdaq 100 (NDX.X) issues due to the relatively increased oversold nature of that index. The spike further into extreme readings in the ARMS Index (INDEX:TRIN) helps to reinforce that view. The very short term 5-day reading closed at 1.71, while the 10-day moved within striking distance of extreme oversold readings. The last time we had both the 5 and 10-day ARMS readings in extreme oversold the market staged a pretty good two day rally. The 1.50 level is something to watch for in the 10-day number tomorrow. The difference between the S&P and NDX names is even more compelling in recent developments in bullish percent data. The S&P 500 Bullish Percent ($BPSPX) reversed into bear confirmed Tuesday at 54 percent. While the Nasdaq-100 Bullish Percent ($BPNDX) fell lower to finish at 26 percent, but in bull correction mode. Using this indicator alone, the plan of attack is relatively simple. Look for weak S&P names near resistance because that market holds more downside risk and is in bear confirmed mode. And look for strong NDX names near support for bullish plays, because the downside risk in that group is quite a bit lower than any other market. The bears know that, and will be more inclined to cover their tech shorts. All the tech bulls need is a catalyst. Maybe that will come from Intel? ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 9688 Moving Averages: (Simple) 10-dma: 9972 50-dma: 10125 200-dma: 9882 S&P 500 ($SPX) 52-week High: 1316 52-week Low : 945 Current : 1041 Moving Averages: (Simple) 10-dma: 1070 50-dma: 1097 200-dma: 1114 Nasdaq-100 ($NDX) 52-week High: 2071 52-week Low : 1089 Current : 1178 Moving Averages: (Simple) 10-dma: 1230 50-dma: 1308 200-dma: 1438 Semiconductor ($SOX) The SOX was the best performing sector on the day with its 3.43 percent rally. The gain was fed by short covering ahead of Intel's (NASDAQ:INTC) mid quarter update. Sector leaders included Broadcom (NASDAQ:BRCM), NVIDIA (NASDAQ:NVDA), Linear Technology (NASDAQ:LLTC), and Xilinx (NASDAQ:XLNX). 52-week High: 697 52-week Low : 344 Current : 467 Moving Averages: (Simple) 10-dma: 481 50-dma: 537 200-dma: 526 Defense ($DFX) Here's a new one, the DFX was the worst performing sector on my watch list Tuesday with its 1.73 percent drop. Leading the way to the downside included Alliant Tech Systems (NYSE:ATK), L 3 Communications (NYSE:LLL), Titan (NYSE:TTN), and FLIR Systems (NASDAQ:FLIR). 52-week High: 210 52-week Low : 155 Current : 193 Moving Averages: (Simple) 10-dma: 199 50-dma: 199 200-dma: N/A ----------------------------------------------------------------- Market Volatility The VIX finally broke and closed above its 200-dma. That level is now below at 26.19. The rally is finally showing some real signs of fear, which could eventually lead to a washout event, and from there a rally of duration. The VXN is testing its 200-dma. A breakout here would confirm what we see in the S&P names. I like the way that the VXN closed higher Tuesday along with the NDX. CBOE Market Volatility Index (VIX) - 26.97 +1.27 Nasdaq-100 Volatility Index (VXN) - 48.76 +1.11 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.73 365,435 266,163 Equity Only 0.55 306,482 169,056 OEX 1.01 15,482 15,750 QQQ 0.40 27,820 11,267 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 58 - 2 Bull Confirmed NASDAQ-100 26 - 4 Bull Correction DOW 53 - 3 Bear Correction S&P 500 54 - 4 Bear Confirmed S&P 100 53 - 2 Bear Confirmed 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 1.71 10-Day Arms Index 1.47 21-Day Arms Index 1.33 55-Day Arms Index 1.33 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 1416 1784 NASDAQ 1580 1865 New Highs New Lows NYSE 69 89 NASDAQ 52 205 Volume (in millions) NYSE 1,481 NASDAQ 1,880 ----------------------------------------------------------------- Commitments Of Traders Report: 05/28/02 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 Commercials grew more bearish last week by adding about 5,000 contracts to their net bearish position. They did so by adding more shorts than longs. Listen up! Small traders reached their most bullish position in over a year by adding a big number of long positions to total more than 114,000 net long contracts. The spread here between commercials and small traders has widen considerably over the last two weeks! Commercials Long Short Net % Of OI 05/14/02 343,941 424,893 (80,952) (12.1%) 05/21/02 354,039 429,803 (75,764) (9.7%) 05/28/02 362,607 442,845 (80,238) (9.9%) 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% 05/21/02 172,313 57,803 114,510 49.8% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 Nasdaq commercials grew less bullish last week by reducing their longs more than their shorts. Small traders went in the opposite direction by growing less bearish, reducing their net position by about 3,000 contracts. Commercials Long Short Net % of OI 05/14/02 40,858 35,761 5,097 (5.5%) 05/21/02 51,448 45,375 6,073 (6.3%) 05/28/02 49,669 44,900 4,769 (5.0%) 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 05/14/02 11,920 17,479 (5,559) 8.2% 05/21/02 12,567 19,899 (7,332) 22.6% 05/28/02 12,562 16,969 (4,407) 14.9% 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 were flat on a week over week basis. Their net position lost less than 100 contracts. Small traders grew less bearish, though, by adding a number of long positions. Commercials Long Short Net % of OI 05/14/02 21,080 14,725 6,355 14.4% 05/21/02 20,173 15,317 4,856 13.7% 05/28/02 20,289 15,513 4,776 13.3% 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 05/14/02 4,930 10,899 (5,969) (25.2%) 05/21/02 3,661 9,585 (5,924) (44.7%) 05/28/02 5,709 9,180 (3,471) (23.3%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********************** INDEX TRADER GAME PLANS *********************** THE SECTOR BEAT - 6/4 by Leigh Stevens SECTOR NEWS/TRADING - The big story was software ($GSO.X) and semiconductors ($SOX.X) - in very similar action to the Nasdaq Composite, both indexes held their prior lows from early-May setting up potential double bottoms. More on these two key tech sectors in the Highlights section below. The drug sector ($DRB.X) fell to its lowest level in 2 years, led by a 4% decline in Bristol-Myers (BMY) after attorney generals from some 25 states filed a lawsuit against the company alleging it improperly sought to delay generic competition for its anti- cancer drug Taxol. Pfizer (PFE) bucked the downdraft with an advance (3+%) after reaffirming previous earnings goals for 2002- 2004. HIGHER ON THE DAY ON Tuesday - DOWN ON THE DAY on Tuesday - SECTOR HIGHLIGHT OF THE DAY - Software Index; Goldman Sachs ($GSO.X) STOCKS: ERTS; INFA; INKT; INTU; ISSX; ITWO; IWOV; JDEC; MANU; MENT; MSFT; MUSE; NATI; NOVL; NTIQ; ORCL; PMTC; PRGN; PRSF; PSFT; RATL; RETK; REY; RHAT; RNWK; SEBL; SNPS; SY; SYMC; TIBX; VIGN; VRTS; WEBM; WIND; YHOO The software sector, as a group, had a good-sized rebound after getting slammed on Monday on a bunch of downgrades or lowered estimates. Oracle (ORCL) rallied over 6% after closing down over 7% on Monday. The institutional research firm, Sanford Bernstein had issued a report that indicated investors might want to "revisit" the stock - they saw the possibility of any negative pre-announcement was already priced into the current price of the stock, suggesting that the downside was limited. The Software Index, on a technical basis, looks like it could have formed a double bottom low here. Supporting the view of a possible future upside reversal is the bullish price/RSI divergence, as the RSI oscillator has held well above its prior low, whereas prices fell to its prior low. Moreover, the two (dashed) declining trendlines have the appearance of a bullish falling wedge. The "falling wedge" pattern tends to be bullish due the indication that buying and selling interests are getting more and more in balance so to speak, which I describe as "compression". Like a spring, if/when there is a move above the upper trendline, a substantial rebound often follows. Selling is usually satisfied after the lengthily decline, whereas buyers find reasons to come back when the prospects for the group are perceived to have changed and/or the group is considered to be undervalued. Semiconductor Sector Index ($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 Index ($SOX.X) price activity was again a major feature of today, as it was on Monday, although there was no "new" news to speak of. Buyers simply came in bargain hunting and covering short positions in the stocks, after follow through selling spilled over from Monday but then seemed to dry up. SOX's importance is more than another tech group as strength or weakness in chip making is seen as key for tech stocks in general due to chip use being part of so much technology and hardware. While there was a lower intraday low, there was a rebound that kept the close from equaling or exceeding the early-May closing low. As with the Software sector, we have a double bottom that has set up and may indicate the start of a more sustained turnaround. The 14-day stochastic has now fallen to an oversold area, which is a supportive positive for a rebound. There may be some backing and filling and even a retest of today's low, but I see downside risk as limited based on today's market action - the SOX index appears to have found an area where buyers will support the stocks in this sector. The risk of another down leg seems less than it appeared yesterday. SECTOR REVIEW - ** No new updates today, 6/4 - reviews are being completed for Wed. ** Airline Index ($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: 6/02 Amex Composite Index ($XAX.X) The small cap stocks so predominating in the Amex, as a group, has been in a sideways consolidation. Recent rally attempts have been finding resistance in the 964 area. 947-948 looks like a key near support, with a break under this level suggesting at least a temporary top. LAST UPDATE: 6/02 Bank Index ($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: 6/02 Biotechnology Index ($BTK.X) STOCKS: ABGX; ADRX; AFFX; AMGN; BGEN; CELG; CEPH; CHIR; CRA; DNA; ENZN; GENZ; GILD; HGSI; ICOS; IDPH; IMCL; IMNX; INCY; MEDI; MLNM; MYGN; PDLI; TARO; TEVA; VRTX; XOMA Biotech has been in pronounced downtrend, which may have reversed at the early-May lows in the 380 area. A continued rally from this point would suggests that index can work higher as long as BTK maintains a pattern of higher (up) swing highs and higher (down) swing lows. This pattern would be broken on a downside penetration of 393. A key technical resistance is 449-450, the area of several prior lows and the intersection of daily down trendline. A close above 449-450 would indicate that the trend has reversed higher. Further resistance then comes in at the top of its downtrend channel at 475. Suggested buy of Biotech Holdr's (BBH) at 101.50 on 5/24 open; recommended initial stop/exit point at 92.5; initial objective: 113; longer-term objective: 127, back to area of mid-March highs. LAST UPDATE: 6/02 Computer Technology Index ($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. Resistance is at 658, then 682. Close over these levels would turn the trend up. Early-May lows in the 580 area now looks like major support. XCI has been continuing to trend lower, from its upswing high in the 680 area. LAST UPDATE: 6/02 Computer Boxmaker Index ($BMX.X) STOCKS: AAPL; CPQ; DELL; GTW; HWP; IBM; SNE; SUNW; UIS; VRTS The Boxmaker sector, an unglamorous term for PC manufacturers, had a mid-May rally right to its down trendline at it's 50-day moving average, where BMX reversed - this was also area of its 50-day moving average. Resistance is at 94, then 98. Major support looks like 83-85. LAST UPDATE: 6/02 Cyclical Index; Morgan Stanley; ($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 552-595 trading range since early- March, with current levels closer to the high end of this range. A breakout above 595 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 552 would reverse the trend down. LAST UPDATE: 6/02 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) rebounded strongly from where it needed to maintain its bullish technical chart picture, at its up trendline. However, the prior high in the 644 area now looms as significant resistance. LAST UPDATE: 6/02 ** 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 ($SOX.X) STOCKS: AMAT; AMD; CMOS; CREE; IDTI; INTC; KLAC; LLTC; LSCC; LSI; MOT; MU; NSM; NVDA; NVLS; PMCS; RMBS; TER; TXN; XLNX ** SEE SECTOR HIGHLIGHT OF THE DAY ** Software Index; Goldman Sachs ($GSO.X) STOCKS: ERTS; INFA; INKT; INTU; ISSX; ITWO; IWOV; JDEC; MANU; MENT; MSFT; MUSE; NATI; NOVL; NTIQ; ORCL; PMTC; PRGN; PRSF; PSFT; RATL; RETK; REY; RHAT; RNWK; SEBL; SNPS; SY; SYMC; TIBX; VIGN; VRTS; WEBM; WIND; YHOO ** SEE SECTOR HIGHLIGHT OF THE DAY ** 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 ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. 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The Option Investor Newsletter Tuesday 06-04-2002 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: ***** NOVN $24.50 -1.45 (-2.11) The momentum that carried NOVN up to its relative high in last week's trading has seem to run out of steam as the stock pulled back by nearly 6 percent today on the weakness in its sector. We were looking for a pullback to support for new entries, but that support at the $24 level was broken today, which has us dropping coverage on the play this evening. Look for early strength tomorrow morning for an exit point, or set tight stops to protect against further downside. CI $103.56 -2.09 (-2.49) CI's short term upward trend came to a halt in today's session as the stock broke down from its support line on active trading volume of nearly 1 million shares. The pullback in the broader healthcare sector precipitated the break in CI, and with that we're dropping coverage on the play this evening. Look for a rebound up to the 10-dma near the $104.50 area for an exit point early tomorrow. WFMI $49.25 -1.00 (-1.92) WFMI failed to follow through in its breakout attempt late last week. The stock rolled over in yesterday’s session from below the $51 level and continued lower in today's below the psychologically significant $50 level on increased declining volume. The stock has support at $48, but we don't want to hang around to see if it's going to hold. Use a relief rally bounce early tomorrow to exit plays quickly into strength. THC $71.51 -2.50 (-2.99) So much for the attempted rally in Health Care stocks. The persistent market weakness hit this relatively strong sector again on Tuesday, knocking it back for a 1.6% loss. But that was rather tame when compared to our THC play, which gave up more than double that amount on strong volume. The stock came to rest above our $71 stop, but the daily chart is not pretty. It looks like it is going to see further downside straight ahead and we'll take an early exit from the play. Use any sort of oversold rebound on Wednesday to effect a more favorable exit from open positions. PUTS: ***** PLAB $22.45 +0.87 (-0.42) PLAB rebounded a little more than we were comfortable with today. The stock finished strongly on further short covering in the technology sector, which looks like it may have some legs over the coming days. Instead of risking our gains, we're looking to take profits on further weakness tomorrow. Look for a pullback down into the $22 area for a potential exit point. EXPE $72.03 -1.60 (+0.53) Barry Diller got in the way of what was shaping up to be a nice put play. With EXPE sitting right on the $71 support level, the company received an unsolicited bid from Barry Diller's USA Interactive. That sent the stock soaring as high as $76, before it fell back to earth from a lack of buying interest. While the stock may not rally much from current levels, it appears unlikely that it will fall either, with the outstanding offer. We'll take advantage of the current price weakness to close out the play and focus on plays without any strings attached. VRTS $22.23 +1.21 (-0.44) The bulls have been stepping up to buy VRTS near the $20.50 level and has seen two significant short-covering rallies from this level in the past week. Despite a SoundView downgrade this morning, the stock managed a 5.6% rally to close near its high of the day. With the markets trying to put in a bottom near current levels, risk management dictates that we lock in our gains on the play at current levels and focus on bearish plays that are showing more weakness. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue TEVA 66.40 -0.18 -0.41 Holding support despite BTK weakness ERTS 64.28 -1.07 1.35 Ready to break out above resistance NOVN 24.50 -0.66 -1.45 Dropped, lost last week momentum ADBE 35.84 -0.80 0.54 Refuses to break below $35 support CI 103.56 -0.40 -2.09 Dropped, bullish trend broken Tue THC 71.51 -0.49 -2.50 Dropped, double top roll from $75 DGX 86.69 -0.02 -0.71 Bouncing above the $85 support INTU 43.00 -1.13 0.40 News is out of the way, rally??? WFMI 49.25 -0.92 -1.00 Dropped, failed to follow through BRCD 19.99 -1.38 1.72 New, short covering rally ahead NVDA 33.08 -1.97 1.58 New, support holding above $30 LXK 63.49 -0.53 1.57 New, strengthening printer biz PUTS GS 73.80 -1.66 0.01 Steadily making its way to $70 PLAB 22.45 -1.29 0.87 Dropped, showing signs of strength COHU 22.19 -2.86 0.55 Huge sell off Monday, consolidating WHR 68.32 -1.25 -1.80 Close below 200-dma is very bearish VRTS 22.21 -1.65 1.19 Dropped, possibly put in a bottom WMB 11.21 -3.25 0.26 Late news should spark sell-off!!! DUK 31.70 -1.31 1.00 The next shoe to fall in energy??? EXPE 72.03 2.13 -1.60 Dropped, USA buyout offer on table BLL 39.30 -1.30 -0.98 Steadily moving towards 200-dma IDPH 38.10 -3.13 -1.66 New, breakdown from consolidation ATK 99.26 -3.58 -5.94 New, sector shift to bearishness PMI 82.98 -0.91 -1.71 New, bears are circling near top DHI 22.37 -0.67 -1.48 New, housing heading for trouble??? ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************** PLAY UPDATES - CALLS ******************** TEVA $66.44 -0.41 (-0.69) The weakness so far this week in the AMEX Biotechnology Sector Index (BTK.X) has pressured TEVA back to support right where we want the stock. TEVA has performed well relative to the continued heavy selling in the rest of its sector peers, noting how the $66 level held as support during today's session. That's the level to look for future intraday rebounds following early weakness, using a tight stop just beneath to protect against a possible breakdown below short term support. As long as the $66 level continues to hold, we're comfortable with taking entries on bounces from that level. Preferably look for confirmation in the BTK.X before entering on a rebound in TEVA. The group is oversold and due for a bounce, which could be just right around the corner and the catalyst to break TEVA from its recent consolidation. Look for confirmation to the upside on a breakout above the $68 level. INTU $43.00 +0.40 (+0.73) INTU announced this morning that it planned to buy Management Reports for $92 million in cash. The market's initial reaction to the news had the stock trading lower, but INTU was able to mount a rebound later in the day on the rebound in the broader technology sector. This news may have been the reason that the stock was trading poorly in the last two days, as those in the know may have been dumping ahead of the official announcement. With the news out of the way, the stock should resume its upward climb, especially if the late rally in the Nasdaq follows through into tomorrow's session. Look for bounces from above the $42 level on intraday weakness as potential entry points into this strong software stock. Those who'd rather wait for confirmation should look for the Nasdaq to turn green and watch for INTU to bounce back above the $44 level of short term resistance. ADBE $35.84 +0.54 (-0.26) While it hasn't been able to advance over the past week, ADBE is notable for its refusal to sell off with the remainder of the Technology sector this week. Buyers continue to step up near the $35 level, which is also the level of our stop. While our play is definitely skating on thin ice, it appears to be holding up so far. Adding to the bullish tone was the fact that the Software index (GSO.X) rebounded on Tuesday from the $115 level, the site of both the early-May and September lows. If the GSO is going to stage a meaningful rebound, then ADBE should perform well due to its impressive relative strength over the past few months. Continue to use rebounds from the area of the recent lows to initiate new positions, but keep stops in place at $35. If the rally attempt in the GSO fails, then a close below $35 in ADBE will tell us it is time to let the play go. Traders looking for more confirmation will want to wait for ADBE to clear the $38.50 along with the GSO pushing back above the $126 level before playing. DGX $86.69 -0.71 (-0.73) In contrast to the wild volatility in the broad market in recent days, the action in shares of DGX has been rather sedate, as the stock consolidates in the $86-88 area. What initially attracted us to the play was the fact that DGX once again found support at the $85 level, just above its long-term ascending trendline (currently $84). In light of the widespread market weakness due to earnings concerns and corporate scandals, DGX has been attractive to investors due to its strong earnings growth and a lack of questionable issues regarding the company's income statements. Intraday dips in the $85-86 area look like a good entry point, so long as the stock rebounds off of that level. With the broad market trying to rebound, DGX should continue to see significant buying interest due to the fact that it is still holding its long-term ascending trend. More conservative traders will want to see the stock clear near-term resistance at $88 before initiating new positions. Keep stops in place at $84, as a break of the ascending trendline would be a significant blow to the bullishness that has been supporting DGX. ERTS $64.28 +1.35 (+0.28) To look at the daily chart of ERTS, you would think that the Software sector (GSO.X) had been in a bullish trend. ERTS has been wedging its way higher, posting a series of higher intraday lows for the past 2 weeks as the bulls chip away at the $65 resistance level. This has all come about while the GSO index has been testing its September lows near the $115 level. Well, ERTS looks poised to push through resistance, and if the rebound in the GSO off its lows today has any follow through, it could be the catalyst to help ERTS finally break out. Continue using intraday dips (and bounces) near the ascending trendline (currently $63.50) to establish new positions or else wait for a breakout over $65 resistance. We are raising our stop to $62 tonight due to the fact that the bears have been unable to breach this support level over the past 8 sessions, despite a clearly weak market and sector. Remember that we'll want to see strength in the GSO index to confirm that we're on the right side of the trade. ************** NEW CALL PLAYS ************** LXK - Lexmark $63.49 +1.57 (+1.04 this week) Lexmark International, Inc. is a developer, manufacturer and supplier of printing solutions, including laser and inkjet printers, multifunction products and associated supplies and services for offices and homes. The Company also sells dot matrix printers for printing single and multi-part forms for business users and develops, manufactures and markets a broad line of other office imaging products. Lexmark International, Inc. is the surviving entity of a merger between itself and its former parent holding company, Lexmark International Group, Inc., consummated on July 1, 2000. The office products industry has been doing very well this year despite the weakness in other segments of the economy. Small businesses and home consumers have been spending strongly on supplies such as printers. That trend has boosted the financial performance of LXK this year, as evidenced by the stock's strong showing since the beginning of the year. While most other tech related stocks are trading near March lows, or lower, LXK is threatening to breakout to new relative highs above the $65 level. The strength of the stock may have something to do with the troubles that rival Xerox (NYSE:XRX) has been having, or it may have to do with simply the strength of the printer business. Even Dell Computer (NASDAQ:DELL) is considering entering the printer business because of its strength, which puts LXK in the sweet spot for a little while longer. Traders looking to get into one of the strongest stocks in technology can look for follow through to the upside in tomorrow's session if the short covering in the Nasdaq gets its legs and turns into a rally. Such a move in the rest of technology should allow LXK to breakout from its recent consolidation from above the $60 level. Look for high volume to accompany any breakout attempt above the $65 level as evidence that the move has institutional sponsorship. Pullbacks down into the $62 area, with help from the 10-dma, should offer good entries on a bounce. Our stop is initially in place at the $60 level, at the stock's recent low end of consolidation. BUY CALL JUN-60*LXK-FL OI= 435 at $4.50 SL=2.75 BUY CALL JUN-65 LXK-FM OI=1253 at $1.50 SL=0.75 BUY CALL JUL-60 LXK-GL OI= 965 at $5.80 SL=3.75 BUY CALL JUL-65 LXK-GM OI=1558 at $2.85 SL=1.25 Average Daily Volume = 1.09 mln BRCD – Brocade Communications $19.99 +1.72 (+0.34 this week) Brocade Communications is a provider of Fibre Channel switching solutions for Storage Area Networks (SANs), which apply the benefits of a networked approach to the connection of computer storage systems and servers. The company's family of SilkWorm switches enables companies to cost-effectively manage growth in their storage capacity requirements and improve the performance between their servers and storage systems. This provides the ability of increasing the size and scope of a company's SAN, while allowing them to operate data-intensive applications, such as data backup and restore, and disaster recovery on the SAN. While certainly susceptible to the whims of the bears, stocks of the storage equipment vendors are starting to show some bullish signs that could be signaling a new rally. We last focused on shares of QLGC when it gave a PnF buy signal near the $52 level, but it turned out that we were early to the play as the persistent NASDAQ selling has now dragged that stock down to major support near the $44 level. That stock is looking near a bottom, and as the leader in the group recently, a bullish move in QLGC is likely to have a buoyant effect on the other players in this space. But BRCD looks like an even stronger play after reaffirming both Q3 and Q4 guidance yesterday. The stock certainly doesn't have a bullish trend to work with, but it is looking like the stock is ready to rally after posting a higher low at $18.25 vs. last week's bottom just below $18. If the bulls can push the stock through near-term resistance at $20.50, that could be enough to get the shorts to start covering and that would likely lead BRCD to test its descending trendline near $23. That's where the bulls and bears would likely stage their first major battle, as this trendline has been holding back rallies since early April. Use either another rebound from above the $18.25 level or a breakout over $20.50 to initiate new positions. Due to the proximity of strong support, we are placing a tight stop at $17.75. BUY CALL JUN-20*BQB-FD OI=12425 at $1.45 SL=0.75 BUY CALL JUN-22 BQB-FX OI= 4934 at $0.60 SL=0.25 BUY CALL JUL-20 BQB-GD OI= 2447 at $2.60 SL=1.25 BUY CALL JUL-22 BQB-GX OI= 3317 at $1.50 SL=0.75 BUY CALL JUL-25 UBF-GE OI= 6982 at $0.85 SL=0.25 Average Daily Volume = 17.4 mln NVDA – NVIDIA Corporation $33.08 +1.58 (-0.38 this week) NVIDIA Corporation designs, develops and markets 3D graphics processors, graphics processing units and related software that set the standard for performance, quality and features for every type of desktop personal computer user. Used in a wide variety of application including games, the Internet and industrial design, the company's products were the first to incorporate a 128-bit multi-texturing graphics architecture. This design approach delivers to users a highly immersive, interactive 3D experience with compelling visual quality and stunning effects at real-time frame rates. NVDA sells its products to major PC manufacturers such as Compaq, Dell, Gateway, Hewlett-Packard and IBM. In a rare bright spot in the Technology market, sales of Microsoft's Xbox game system have been picking up lately, helped in part by recent price cuts. Shares of MSFT are unlikely to see much bullish action from the robust sales, due to the reduced margins that will come with the reduced prices. But that won't dampen the profits of company's that are providing critical components in the game units. That's where NVDA comes into the equation, as the company provides the advanced graphics chipsets used in the Xbox game system. NVDA tends to trade in tandem with the broader Semiconductor sector (SOX.X), and the weakness in the sector has kept NVDA under significant selling pressure over the past two weeks. But with the SOX seeming to find a bottom near the $450 level over the past 2 days, and NVDA continuing to find support near the $31 level, it looks like it may be time for the bulls to come out and play. NVDA had a good day on Tuesday, posting a 5% gain after once again finding support near $31. This is an aggressive play, as the hoped-for rally in the stock could be just as quickly erased if the bears get hungry again and take another swipe at the SOX. Look for a renewed bounce from above the $31 level or a rally through the top of yesterday's gap ($34.50) to trigger new entries. Our stop is initially in place at $30, just below the late-April lows. BUY CALL JUN-30 RVU-FF OI=1855 at $4.10 SL=2.50 BUY CALL JUN-35 RVU-FG OI=7586 at $1.35 SL=0.75 BUY CALL JUL-32*RVU-GZ OI= 100 at $3.80 SL=2.25 BUY CALL JUL-35 RVU-GG OI=1116 at $2.55 SL=1.25 BUY CALL JUL-37 RVU-GU OI= 367 at $1.65 SL=0.75 Average Daily Volume = 11.1 mln ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* PLAY UPDATES - PUTS ******************* COHU $22.19 +0.55 (-2.31) What an entry point last Friday! COHU's brief rally attempt that ended at its downward sloping 10-dma turned into a brilliant entry point after yesterday's slide lower and this mornings continuation below the 200-dma. The bounce back on short covering this afternoon was to be expected given the importance of the 200-dma as well as the short covering that came into the broader market. If anything, the rebound today should set up another favorable entry point into new put plays later this week. For now, traders holding open positions from last Friday's rollover might look for further downside into tomorrow's session for a possible quick exit point. We expect some consolidation around the 200-dma in the coming days, so use that level to your advantage as entry and exit points for the rest of this week. If the selling continues in the broader technology sector and pressures COHU lower, then we'll look for a quick trip down to the $20 level as another possible exit point. For new entries, we're best off waiting for some short term resistance to develop above the 200-dma. For open positions, play it with a tight stop to protect this week's profits so far. WHR $68.35 -1.80 (-3.05) We had hoped for some more upside movement late last week in order to give us a good entry point into new put positions, but WHR didn't want to cooperate. We're not complaining with the stock's slide lower, so we'll just have to take what the market gives us. In the last two days, we've seen the rally attempt from last Friday up to the 10-dma completely give way to further selling, which took WHR below its 200-dma in today's session. The stock tried to bounce back above that level, but couldn't quite muster the strength, which may reveal that more selling and downside is on the way. There's not much in the way of immediate support below the 200-dma until the $65 level which is certainly a feasible downside target with the way that this stock is acting. Traders with open positions should simply trail down tight stops to protect profits and let the stock work in your favor. Make sure to monitor the INDU closely for clues into the broad market sentiment for blue chip issues like WHR. For new entry points, we'd like to take rollovers from the $70 level using the downward sloping 10-dma as an upside protective stop. DUK $31.70 +1.00 (-0.31) Energy traders were under attack again yesterday when fellow OI put play WMB was defending against allegations that it had played a role in the manipulation of energy prices in California. And of course the tragic news out of El Paso cast a cloud over the sector for most of the day. The sentiment caused another sharp drop in DUK which saw the stock take out its short term support at the $31 level. The stock and broader sector staged a minor relief rally today, which came on much lighter volume and was unable to take out even yesterday's relatively lower low at the $32 level. Today's short term relief rally could have possibly set up another entry point into this stock as the sentiment in the sector remains incredibly bearish. We'll look for short term resistance to start forming at the $32 level, and look to possible rollovers from that level as entry points through the rest of the week. Of course we'll take breakdowns below short term support as well, if the selling in the sector resumes on a news driven event. BLL $39.30 -0.98 (-2.28) BLL continued trending lower for the seventh straight day in today's session. The stock stopped its fall just short of the $40 level in yesterday's session, but gapped below that level in today's session. After the brief rally attempt earlier in the day, which acted to fill the gap overhead just above the $40 level, the stock rolled over from yesterday's low at the $40.25 level. From there BLL trended lower throughout the day towards the $39 level, for another decline of more than $1. As long as the stock keeps up this $1 a day to the downside, our play will be working nicely in our favor. But not too far away is the 200-dma just above the $37 mark. We should expect a rebound from that level unless a broad market sell off pushes the stock below it. Readers who have taken entries during the last two days might look to the 200-dma as one possible exit point in the next few days. As for new entry points, we would like to see a one or two day rally set up a favorable entry point and rollover from resistance. GS $73.80 +0.01 (-1.65) The broad markets staged an impressive rebound off their lows on Tuesday, but the Broker/Dealer index (XBD.X) was notably absent from the list of sectors staging late-day rallies. Weighing on the group was the news about alleged improper trading practices at Knight Trading (NITE). This wet blanket helped to keep the XBD pinned near its May lows ($432), also the site of the 50% retracement of the fall rally on Tuesday. The lack of buying interest could be seen in shares of GS, as the stock fell back from its intraday high of $74.60 to post its second consecutive close below the $74 level. This is important due to the fact that the $74 level had been viewed as strong support. Once the bears are done breaking this support level, it appears very likely that GS will visit our bearish price objective (from the PnF chart) of $70. Resistance is strengthening at $75 level, with more overhead at $76. Use a failed rally near either of these levels to initiate new positions, or else target a breakdown under the $73 intraday support level. Keep stops in place at $77. WMB $11.21 +0.26 (-2.99) We got just what we were asking for from our WMB play as the stock collapsed to just below the $11 level on Monday, driven by more selling in the energy traders. After achieving its bearish price target of $11.50 and the company reaffirming its trading practices this morning, the stock firmed near the $11 level. This looked like a good point to lock in those gains and move on to the next winning play until the late breaking news that FERC may revoke the company's power trading license. That just goes to show that where there's one cockroach, there are likely more. The news just keeps getting worse and investors responded in the extended-hours session by pushing the stock back below the $11 level. Since we don't want to leave this party before it is truly over, we're going to keep the play open and see how the news plays out over the next couple days. We want to be very careful about initiating new positions here, although any sort of failed rally below the $11.75 level could be used for aggressive entries. We don't want to give back our recent gains in the play, so we are aggressively tightening our stop to $12, just above yesterday's intraday highs. A dramatic drop under the $10.50 level (read:volume) can be used for new entries as well, but watch out for a bounce on any potentially good news. ************* NEW PUT PLAYS ************* ATK - Alliant Tech Systems $99.26 -5.94 (-9.52 this week) Alliant Techsystems Inc. conducts business through three industry segments: Aerospace, Conventional Munitions and Defense Systems. Within these segments, Alliant has four business lanes: Propulsion and Composites, each of which falls within the Company's Aerospace segment; Conventional Munitions, which corresponds to the Company's Conventional Munitions segment; and Precision Capabilities, which corresponds to the Company's Defense Systems segment. In fiscal 2001, the Company moved its missile products business, Alliant Missile Products Company LLC, to its Aerospace segment. Increased insider selling at major defense firms is causing a shift in the previously bullish industry. This comes in spite of heightened tensions in the global conflict. Add to the insider selling a recent wave of downgrades, and the sentiment in the defense sector has switched to downright bearish. Merrill Lynch was the most recent brokerage firm to issue a downgrade on ATK, one of the high flyers in the defense business, from a near term strong buy to a near term buy rating based on the valuation of shares. That was followed by another SEC filing that revealed the CEO of ATK had filed to sell another 60,000 shares. The news inspired fear into investors who are sitting on big gains in this stock after riding it higher following the events of September 11, which increased the appeal of defense related stocks. But with the recent developments, combined with the lofty valuations of the sector, the short term outlook for the group is more bearish than bullish. For its part, ATK broke back below the psychologically significant $100 level in today's trading on a pick up in trading activity. The break should lead to further downside in the coming days, with short term support not seen until the $90 level. We'll target that level, which is reinforced by the 200-dma at the $88 level, as a short term downside target as a rebound from the 200-dma is likely. Use further weakness in tomorrow's session to enter momentum based plays. Use a relief rally followed by a rollover below $105 resistance as another entry strategy. Our stop is at $105 to begin with. BUY PUT JUN-100*ATK-RT OI=118 at $4.00 SL=2.50 BUY PUT JUL-100 ATK-ST OI= 27 at $5.80 SL=3.25 Average Daily Volume = 337 K PMI - PMI Group $82.98 -1.71 (-2.62 this week) The PMI Group, Inc. is an international provider of credit enhancement products and lender services that promote home ownership and facilitate mortgage transactions in the capital markets. Through its wholly and partially owned subsidiaries, the Company offers residential mortgage insurance and credit enhancement products domestically and internationally, title insurance, financial guaranty reinsurance, mortgage servicing and other residential lender services. Residential mortgage insurance protects lenders and investors against potential losses in the event of borrower default. Upward trending stocks since last fall are becoming favorite targets of the bears. It seems as though not even the strongest of stocks are safe from downside in this market environment. PMI has been trending higher since late last fall along its rising support trend line. The support is in danger of breaking with any further downside in the stock this week. Bear Sterns helped to kick off the short term downward trend with its downgrade two weeks ago of PMI from a buy rating to an investment hold rating. The stock gapped lower on the news, and spent the following week consolidating the move lower, when it finally gave way for further selling on relatively heavier volume during yesterday's session and followed through to the downside in today's session. The stock stopped short of breaking below minor short term support at the $83 level, but that support could easily be broken tomorrow on further downside. Momentum traders can look for weakness in the broader market and the INDU for signs that PMI is heading lower on a breakdown below today's intraday low at $82.70. Traders who like rollovers near resistance can wait for a relief rally on relatively lighter volume up to the $85 resistance level before entering new put plays. Our stop on PMI is initially placed at the $86 level, just above its short term congestion from last week. BUY PUT JUN-85*PMI-RQ OI= 32 at $3.20 SL=1.50 BUY PUT JUL-80 PMI-SP OI=150 at $2.20 SL=1.00 Average Daily Volume = 325 K DHI - DR Horton $22.37 -1.48 (-2.15 this week) D. R. Horton Inc. is a national builder that is engaged primarily in the construction and sale of single-family housing in 39 markets and 23 states in the United States. The Company designs, builds and sells single-family houses on lots developed by it and on finished lots that it purchases, ready for home construction. Periodically, the Company sells lots it has developed. D. R. Horton also provides title agency and mortgage brokerage services to its homebuyers. It does not retain or service the mortgages that it originates but, rather, sells the mortgages and related servicing rights to investors. We've had recent success in economically sensitive stocks that have taken a turn for the worse. One segment of the economy that hasn't been hit yet is the housing group. But many market watchers and analysts have suggested in the past that the housing market was sitting on the edge of a bubble that is primed to burst. Recent weakness in a slew of housing stocks reflects the market's growing pessimism for the housing segment of the economy, evidenced by the recent breakdown in DHI. The stock had been trading in a consolidation between the $23 and $27 levels for the last several months, until this week when the stock broke down in a big way. Declining volume really picked up in today's session, reaching more than double the 30 day average trading volume for the stock, indicating that investors wanted out in a big way. The downward spike from consolidation on heavy trading volume may forecast the beginning of a longer term trend of lower prices in this stock. Traders looking to get in early on the trend can look for follow through downside movement in tomorrow's session below the $22 level. The 200-dma below at the $20.92 level could provide a bounce over the short term if the stock's recent decline continues into the rest of the week. Traders can either enter into a breakdown and prepare for a bounce from the 200-dma, or wait for a rollover from resistance just below the $24 level. We're starting the play with a stop just above the 10-dma at $25. BUY PUT JUN-22*DHI-RX OI=30 at $1.10 SL=0.50 BUY PUT JUL-22 DHI-SX OI= 2 at $1.70 SL=0.75 Average Daily Volume = 1.53 mln IDPH – IDEC Pharmaceuticals $38.10 -1.66 (-4.79 this week) IDEC Pharmaceuticals is a biopharmaceutical company engaged primarily in the research, development and commercialization of targeted therapies for the treatment of cancer, autoimmune and inflammatory diseases. IDPH's first commercial product, Rituxan, and its most advanced product candidate, Zevalin (formerly Y2B8), are for use in the treatment of certain B-cell non-Hodgkin's lymphomas. The company is also developing products for the treatment of various autoimmune diseases such as psoriasis, rheumatoid arthritis and lupus. Less than a week ago, it looked like the Biotechnology sector (BTK.X) was poised to help the overall Technology market begin the next rebound. But in the past few days, a lot of technical damage has been done, with the BTK flirting with a breakdown under multi-year support at the $375 level. While the BTK managed to hold above that level at the close on Tuesday, there are several stocks in the sector that didn't fare nearly as well. IDPH broke down in a big way on Monday, falling below its early-May low near $41 at the close. With selling pressure remaining heavy on Tuesday, IDPH continued its slide, briefly falling below the $38 level, and closing near that level to post a new 52-week low. Selling volume was heavy too, running 70% above the ADV. This week's selloff completed a bearish triangle breakdown on the PnF chart. If the BTK does break down under the $375 level, it seems a foregone conclusion that IDPH will be testing its lows from last spring in the $32-34 area. Following the stock's breakdown this week, there is now heavy overhead resistance at the $42 level. A failed rally near that level would make for a great entry point, although we could see any rally attempt turned back at the $41 level or even as low as today's intraday resistance level near $39.50. Given the weakness in the BTK, the next entry point could even be a breakdown below Tuesday's lows. If IDPH heads south tomorrow, look to enter on a drop below the $37.50 level, using a breakdown in the BTK as a confirming indication. Initial stops are in place at $42.50. BUY PUT JUN-40*IDK-RH OI=1531 at $3.50 SL=1.75 BUY PUT JUN-35 IDK-RG OI= 859 at $1.35 SL=0.75 Average Daily Volume = 4.52 mln ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** 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
The Option Investor Newsletter Tuesday 06-04-2002 Copyright 2001, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. ********************* PLAY OF THE DAY – PUT ********************* BLL - Ball Corp. $39.30 -0.98 (-2.28 this week) Ball Corporation is a manufacturer of metal and plastic packaging, primarily for beverages and foods, and a supplier of aerospace and other technologies and services to commercial and governmental customers. Ball's principal business is the manufacture and sale of rigid packaging products, primarily for beverages and foods. Polyethylene terephthalate packaging is Ball's newest product line. The aerospace and technologies segment includes civil space systems, defense operations and commercial space operations. The defense operations business unit includes defense systems, systems engineering services and advanced antenna and video systems, as well as electro-optics and cryogenic systems and components. Most Recent Update BLL continued trending lower for the seventh straight day in today's session. The stock stopped its fall just short of the $40 level in yesterday's session, but gapped below that level in today's session. After the brief rally attempt earlier in the day, which acted to fill the gap overhead just above the $40 level, the stock rolled over from yesterday's low at the $40.25 level. From there BLL trended lower throughout the day towards the $39 level, for another decline of more than $1. As long as the stock keeps up this $1 a day to the downside, our play will be working nicely in our favor. But not too far away is the 200-dma just above the $37 mark. We should expect a rebound from that level unless a broad market sell off pushes the stock below it. Readers who have taken entries during the last two days might look to the 200-dma as one possible exit point in the next few days. As for new entry points, we would like to see a one or two day rally set up a favorable entry point and rollover from resistance. Comments BLL is off the ball. And that's a very good thing. The stock is on the fast track to its 200-dma below current levels at the $37.28 level. Traders with open positions should be looking to book gains on a decline to that level in tomorrow's session. Those looking for a quick scalp trade can look for a breakdown below today's low at the $38.85 level with sights set on the 200-dma as well. BUY PUT JUN-40*BLL-RH OI= 99 at $2.20 SL=1.00 BUY PUT JUL-40 BLL-SH OI=139 at $2.95 SL=1.75 Average Daily Volume = 414 K ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************ MARKET WATCH ************ Many bearish candidates were triggered in the last two days, while the bullish possibles drifted away from action points. We’re replacing two more bullish candidates tonight. To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/060402.asp ************** MARKET POSTURE ************** Much movement in recent sessions. Posture is busy tonight! To Read The Rest of The OptionInvestor.com Market Posture Click Here http://www.OptionInvestor.com/marketposture/060402.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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