The Option Investor Newsletter Thursday 06-06-2002 Copyright 2001, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Earnings and Political Jitters Roll On by Leigh Stevens There are definite backdrops to the market jitters besides whether the king of the chipmakers Intel (INTC) is going to pull out its earnings slump sooner rather than later. Namely, the continued drumbeat of stories on the malfeasance and double dealings on the corporate front and the flare up of the latest mideast violence - a couple of Indian soldiers were shot dead overnight and this dreaded beat goes on. As soon as I saw those tanks in front of Arafat's headquarters in the morning news, I had that sinking feeling again. The market caught the sinking feeling big time over the course of the day. Tech held up relatively better than the S&P, while trader waited for the Intel end of day (mid-Quarter progress) report. After hours was another story as Intel traded lower in active trading, after the company lowered its Q2 revenue outlook because of soft demand in Europe. And we're worried about a falling dollar?! Intel lowered its quarterly sales estimate to a 6.2-6.5 billion dollar range, from a 6.4 to 7.0 billion band. The morning began with a Merrill Lynch downgrade of Intel - never accuse mother Merrill of closing the barn door after the horse is out! How things have changed from their recent reaffirmation of their "strong buy" rating - perhaps all that is different is the pressure on Merrill to show how "objective" they are. Anyway, after some earlier positive Street comments this week on the semiconductor sector, ahead of the end of day Thursday mid- quarter update, Merrill announced a INTC downgrade to "neutral" from a "strong buy". The analyst involved told the firm's clients that the stock was "no bargain" on a price-to-earnings and growth basis. Hey, what tech stock is a "bargain"? Well, Merrill makes it "official" I suppose. They also lowered ratings on LLTC, SMTC, TXN and TQNT, with the assessment: "we believe that the early cycle semiconductor upturn has now played itself out." Thursday is one report day on jobless claims - for the week ending 6/1, there was a decrease of 32,000 new claims from the week before, which saw an upward revision to 415,000. The 383,000 figure was well under the 405,000 forecasted. The 4-week moving average, fell 8,500 to 411,250 from the previous week/ The fly in the ointment was that, while initial jobless claims fell, continuing claims for the week ended May 25 increased by 29,000 to 3.8 million. The four-week moving average was 3.8 million, an increase of 12,250 from the previous week. On balance, the drop in new claims was offset by the rising continuing claims number, as people are just not getting back to work so quickly. This is tough on the people involved, but typical of the early stages of a recovery as companies would rather pay overtime than take back laid off workers or do new hiring. Tomorrow will see the release of the nonfarm payrolls, expected up 50-60,000, and the unemployment report - the jobless totals are expected to rise to 6.1%, from April's 6%. Average hourly earnings are expected to be us have risen 0.3 percent. Biotech, drug and financial stocks took a beating in the non-tech areas, followed by the utility and retail sectors. Investors sold the retailing stocks following lower May same-store sales figures. Only gold and most oil service stocks bucked the trend. The healthcare sector ($HMO.X) was off only marginally (-0.29%), but based on my analysis of the topping looking stocks in this group, am recommending taking profits on stocks in this group (was holding 3 of the stocks) - you can see my Sector Trader analysis for more on the HMO group. Standard and Poor's investment committee came out with a suggestion to lower equity exposure from 60 to 55% and it appears that some of their institutional customers took heed - S&P indicated that "equity valuations remain unjustifiably high." In the late 1990s, higher multiples were "justified by accelerating earnings growth, a U.S. budget surplus, declining rates and a "peace dividend." I don’t recall this statement at Nasdaq 5000, but that's another story! The software sector was down, after Oracle (ORCL) gave back more than half of its 11% Wednesday gain - this after ORCL indicated it would not warn on meeting its 12 cent EPS Q4 target. Of course, there was bound to be some rain on this parade, as UBS Warburg suggested that this would be due to aggressive cost cutting and share buybacks and not sales growth. WorldCom (WCOM) rebounded 4 percent and was the most actively traded stock on the Nasdaq, after the company indicated it would exit the wireless business to cut costs and pare down its long-term debt. On the NYSE, Alcoa (AA), Home Depot (HD), SBC Communications (SBC), Merck (MRK), JP Morgan Chase (JPM) and General Electric (GE) were all off around 3% or more. Bellwether S&P stock GE at its 29.30 close is now under its September closing low at 30.37 and is nearing its Sept. intraday low at 28.50. This is not going to gladden any fund manager's heart! AFTER HOURS - Intel was trading down some $3 to the $24 area, from its closing level of $27.00. Oracle and Microsoft traded lower as well. Tech damage was enough to send the Nasdaq 100 down a further 33 points from the NDX closing level of 1157, to around 1124, but not all 100 stocks were trading actively in the after hours. The NDX has, or should have, technical support in the 1120 area, extending down to 1100. TRADING STRATEGY - The market is getting quite oversold based on numerous ways of measuring it, such as on a price, moving average and bearish sentiment basis. Moreover, the CBOE volatility index ($VIX.X) has closed over 27 for the first time since early-February. The VIX may rise still further tomorrow. When it starts coming back down, it has often been a precursor to a good-sized rally. I would not try to catch a "falling knife", but we are getting down to an area, where bullish news on one of the troubling political fronts and focus on the emerging economic rebound, can cause a strong technical rally. Certainly, the odds of continuing to profit from the short side and put positions is likely less than the potential for even a moderate oversold rebound. Sectors that might be bottoming include the brokers, software and the semiconductors. I suggested a long QQQ position at 29.30 recently in my Index Trader writings and would suggest keeping a 28.5 stop. I will be watching for another opportunity to get long if stopped out. As long as risk is kept reasonable by buying only where the market is already extended on the downside, risk to reward on this type of trade can be favorable in my estimation. I also continue to suggest shorting good-sized rallies - since the indices are traveling again in well-defined downtrend channels, there have been many shorting opportunities at the upper trendlines - it strikes me as amazing how well this has been working. And, so far, the "overnight" risk has been far less than on the long side - witness the Intel sell off after hours Thursday. The charts with the channel definitions I refer to are below. I can imagine overnight news of the capture of Osama Ben Laden might put a little hurt into the bears, but short of that, it's "what me worry"! CHARTS OF INTEREST - S&P 500 (SPX) Daily/Hourly charts: 1030 was where SPX support looked to be but we're likely to get an opening under this area. 1020, if reached, may be the area for a high-potential long position, using a stop at 1015. Selling in the 1050-1054 area looks to also be a good trade, with stop protection 5-6 points higher - who knows, peace may "break out"! The Dow Index (1/100: $DJX.X) - Daily/Hourly charts: 9600 on the Dow has been holding as support, but next stop looks like 9500 (95 on DJX). These trend channels are amazing in terms of the regular reversals at the resistance lines for sure. When we get in a trend channels rule, or rock or whatever - not all the time, but it’s a useful tool. 98-98.5 looms as overhead resistance, then just look at the prior upswing highs stair- stepping up the channel. The Nasdaq Composite ($COMPX) - Daily/Hourly charts: 1530 is expected to be potential support on the daily chart, but with a good possibility of "slippage" to 1523-1520 or a bit lower. Measuring the height of the (dashed lines) "rectangular" hourly consolidation on the hourly chart and subtracting it from the lower line (at 1555) generates an objective to around 1515 in the Composite. With a break of 1555, it immediately "becomes" an area of initial resistance on a rebound. Above 1555, next resistance and an area to trade again on the short side is in the 1580-1585 zone. The Nasdaq 100 ($NDX) - Daily/Hourly charts: The Nasdaq 100 (NDX) was down about 33 points in after hours trading - if this is an indication of the opening tomorrow, it puts the NDX down close to the low end of the hourly downtrend channel and at the lower envelope line (10% under the 21-day moving average) that indicates a "typical" area for the this index to bottom or at least slow its rate of decline. If NDX gets down to around 1020 and stabilizes in this area, I favor buying for a short-term rebound. If over the coming days, no lower lows are seen and the market shows signs of stabilization, this may suggest a longer-term bullish play, looking for a move back up to the 1200 to 1245 area. Leigh Stevens LStevens@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** BULLS GET WHACKED by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - Being an equal opportunity dispenser of punishment, the market turned on the bulls who went bottom fishing yesterday. And, while the market is oversold - per my view that a bottom is in sight yesterday - today's action proved again that what is oversold can get MORE oversold. I was not completely caught unawares as I thought that the indexes might have a lower low before there was a tradable bottom and a more sustained rally. The market has a tendency, especially in a bear market like this one, for when it does bottom, to do so over a 4-7 day period. I still figure risk to reward for NEW positions to be better on buying a sharp further dip than to short on a break at this juncture. I covered the SPX, DJX, COMP and NDX in the Option Investor Market wrap tonight. In this space, will look at the widely traded OEX and QQQ. First, a look at the VIX, which is finally over that 27 closing level last seen in February - the intraday peak was 28.22 - the Feb. intraday high was 28.66. GENERAL MARKET INDICATORS - This close-only chart doesn't show the peak, but at 28.2 was getting up near the peak of early-Feb. at 27.6. When the VIX starts coming back down, this may be the signal that a bottom is in for a while. Before moving to the OEX, SPX in the 1030 area as a buy looked pretty solid yesterday, with a suggested stop at 1014. I would adhere to the stop, but have an expectation that SPX might dip to the 1020 area or less. I suggested a wide stop - it was my thought to exit at 1024. Those who are long around today's lows and can tolerate a wide stop, use 1014 as an exit point for tomorrow only. The low end of the hourly downtrend channel is in the 1020-1018 area, which is where we're vulnerable to in SPX on the downside. It depends on whether the S&P had most of its sell off today or might follow tech sharply lower - some big cap techs of course being in the S&P 500 also. S&P 100 ($OEX.X) Daily/Hourly charts: I suggested buying OEX in the 510 area with a stop/exit point at 505. Anyone using a 505 stop may be hit at this price in the early trading tomorrow - if the fear & loathing of tech that surfaced at the close comes into full play at tomorrow's opening. 503 is the bottom of the hourly downtrend channel on the opening. This looks like an area to cash in some puts if you hold em - take the money and run! Keep some to hedge against more bad news on any war front - at least there will not be any earnings estimates coming on Sat. or Sun! Buying in the in low 500 area looks like a reasonable play IF stabilization appears - with a risk point to 497. I don't think the damage on the downside will be long lasting, but the market is one sour and nervous mood. Tomorrow should tell the story on this. The market is oversold, so the decline may be short-lived - not 2 hours - but perhaps a low tomorrow, a couple of more days of doldrums followed by some buying interest coming again. In the DJX, 96 was offering support but it is threatened tomorrow morning - at least Intel is not in the Dow. Microsoft is, and it actually was up slightly today - not after hours however. I suggest stop protection at 95, but its probably better to set a stop point at 94.5 and stay out way if 95 is seen - this level would likely be a buy on a risk to reward basis; e.g. a half point risk - potential back up to at least the "breakdown" point at 96 assuming a break of this level on the opening. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: Would adhere to stops if long in the 29 area, at prior support - the question is whether to leave them at 28.50. 28 now looks like it could be the area where support might develop. If the opening looks sharply lower, I think its worthwhile to temporarily lower stops to 27.7-27.5, moving them back up to and above 28 if a rebound develops over the next couple of days. Resistance comes in at 29.5-30. The bullish rising wedge on the hourly chart prefaced this downturn, so the technical caution was there to see - my expectation was that prior lows would be tested, not exceeded, however. Stay tuned! - for funky Friday. Again, focus is on INTC, MSFT, ORCL, CISCO and QCOM, which are the key Nasdaq big cap stocks. Especially have liked way MSFT, ORCL and QCOM have been holding up - unless they fall apart, I still am looking for a bottom to be not far away. 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 **************** Oh, Intel By Eric Utley Intel's (NASDAQ:INTC) lowering of guidance after the bell Thursday changed the market's sentiment in one quick swoop. Not to say that it was even remotely bullish ahead of the chip maker's mid quarter update. But any hope that was left before the close of another tough day in the market was most likely dashed after the close. Judging by the way that the PC sensitive stocks were trading in after hours, as well as the futures market, we're in for an ugly opening tomorrow morning. We wondered Tuesday night if Intel could provide the catalyst for the bulls to turn around the oversold nature of the technology heavy Nasdaq market, and spark a short term rally in tech shares. Intel sure enough provided a catalyst, but it wasn't of the type that we had speculated. Tonight, we're wondering if Intel's news will provide the catalyst to spark a short term washout in the market. Let's take a look at the sentiment figures. The sector scorecard wasn't all too surprising Thursday. Every technology sector on my screen was bleeding red, led by the Fiber Optic Index (FOP.X) and Biotechnology (BTK.X). What really stuck out to me was the weakness in the banks, which had been holding up very well prior to the last two days of blood letting in the broader markets. The KBW Bank Sector Index (BKX.X) finished off by more than 2 percent, which is a pretty big move for that index. Two of the lead banks in the sector, Citigroup (NYSE:C) and Bank of America (NYSE:BAC), both look pretty ugly. On the other side, the defensive natured gold stocks were back to their rally. The internals of the market were as ugly as I can remember in a long time. Decliners swamped advancers, volume was relatively heavy, and there were a whole lot of new lows traced during Thursday's session, especially on the Nasdaq market. Not too many new highs were hit. To reiterate what we observed Tuesday night, the short-term ARMS Index indicators are still in extreme oversold readings above the 1.50 level. Both the 5-day and 10-day are now in oversold readings above 1.50. And then there's the fear gauges of the market, the CBOE Market Volatility Index (VIX.X) and the Nasdaq-100 Volatility Index (VXN.X). Both are revealing heightened states of market fear, and both are poised to stage big follow through breakouts during tomorrow's session. We'll see if both can hold above their respective technical levels, or if they pullback on any strength in stocks. The bullish percent data was very active Thursday. The NYSE Composite reversed into bull correction mode, which was probably the most important development because of the broad nature of the index. Meanwhile, the Nasdaq 100 fell down to 24 percent. That index should lose a few more stocks tomorrow, and by doing so grow much more oversold. And the Dow reversed into a bear confirmed mode as well. With several indicators pointing to a very oversold market, I wouldn't be surprised by a washout event tomorrow thanks to Intel. Be prepared to trade either side, though, as the volatility should produce plenty of profit opportunities. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 9625 Moving Averages: (Simple) 10-dma: 9941 50-dma: 10116 200-dma: 9879 S&P 500 ($SPX) 52-week High: 1316 52-week Low : 945 Current : 1029 Moving Averages: (Simple) 10-dma: 1062 50-dma: 1093 200-dma: 1112 Nasdaq-100 ($NDX) 52-week High: 2071 52-week Low : 1089 Current : 1158 Moving Averages: (Simple) 10-dma: 1213 50-dma: 1298 200-dma: 1434 Gold and Silver ($XAU) The shiny stuff was back in the spotlight Thursday. The XAU reclaimed the best performing sector spot after its recent slide. The sector finished 0.77 percent higher Thursday, pathetically earning the day's best performance. Leading to the upside included Gold Fields (NYSE:GFI), Agnico Eagle Mines (NYSE:AEM), Harmony Gold (NASDAQ:HGMCY), Barrick Gold (NYSE:ABX), and Placer Dome (NYSE:PDG). 52-week High: 89 52-week Low : 49 Current : 84 Moving Averages: (Simple) 10-dma: 85 50-dma: 77 200-dma: 63 Fiber Optic ($FOP) The FOP was back in the dog house, falling 5.03 percent for the day. It barely edged out the BTK for the worst performing sector spot for the day. Leading to the downside included shares of Nortel Networks (NYSE:NT), Vitesse (NASDAQ:VTSS), JDS Uniphase (NASDAQ:JDSU), Alcatel (NYSE:ALA), Lucent (NYSE:LU), and ADC Telecommunications (NASDAQ:ADCT). 52-week High: 139 52-week Low : 57 Current : 57 Moving Averages: (Simple) 10-dma: 63 50-dma: 76 200-dma: N/A ----------------------------------------------------------------- Market Volatility The VIX traded above the 28 level Thursday, slightly above its intraday high traced Tuesday. We should see some follow through into Friday's session. But will have to wait to draw any conclusions over the weekend, when we see where the VIX closes Friday. The VXN penetrated its 200-dma to the upside Thursday, but couldn't manage a close above despite the weakness in the Nasdaq-100 (NDX.X). Intel's (NASDAQ:INTC) news should inspire a breakout and close above Friday. CBOE Market Volatility Index (VIX) - 27.36 +2.65 Nasdaq-100 Volatility Index (VXN) - 49.83 +1.81 ----------------------------------------------------------------- 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 57 - 1 Bull Correction*** NASDAQ-100 24 - 3 Bull Correction DOW 50 - 3 Bear Confirmed S&P 500 52 - 1 Bear Confirmed S&P 100 51 - 1 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 1.68 10-Day Arms Index 1.57 21-Day Arms Index 1.32 55-Day Arms Index 1.36 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 993 2192 NASDAQ 965 2477 New Highs New Lows NYSE 63 110 NASDAQ 44 194 Volume (in millions) NYSE 1,611 NASDAQ 1,622 ----------------------------------------------------------------- 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 - 6/6 by Leigh Stevens Intel was trading down some $3 to the $24 area, from its closing level of $27.00, so expect the Semiconductor sector to take a further hit tomorrow, on top of its 3% decline today. The software sector was down, after Oracle (ORCL) gave back more than half of its 11% Wednesday gains - this after ORCL indicated it would not warn on meeting its 12 cent EPS Q4 target. Of course, there was bound to be some rain on this parade, as UBS Warburg suggested that this would be due to aggressive cost cutting and share buybacks and not sales growth. Biotech, drug and financial stocks took a beating in the non-tech areas, followed by the utility and retail sectors. Investors sold the retailing stocks following lower May same-store sales figures. Only gold and most oil service stocks bucked the trend. The healthcare sector ($HMO.X) was off only marginally (-0.29%), but based on my analysis of the topping looking stocks in this group, am recommending exiting the sector - see the Sector Highlight section below. HIGHER ON THE DAY ON Thursday - DOWN ON THE DAY on Thursday - SECTOR HIGHLIGHT - Healthcare Index; Morgan Stanley ($HMO.X) STOCKS: AET; AHG; ATH; CAH; CI; FHCC; HUM; MME; OHP; OPTN; PHSY; TGH; THC; UNH; WLP 645, at the recent top in the HMO Index is a key resistance. The Healthcare Index has of course been in strong uptrend, but selling has been occurring in the group and the momentum has slowed. Analysis of key HMO stocks suggests that the sector is quite vulnerable to a downside reversal and deeper correction than has been seen to date. In a bottoms up approach -- analysis of the individual stocks in the group and than generalizing to the group, I suggest taking profits and exiting the stocks that I suggested previously. Near support is at 600, then 576. A daily close under 600 would suggest possible downside to the later support. UPDATE: 6/6 6/6 UPDATE: Suggest exit at the Friday open on PacifiCare Health Systems (PHSY) bought on suggestion at 23.5-24.7. Stock momentum has slowed and is now sideways to lower. Close: 26.07. 6/6 UPDATE: Suggest taking profits on Wellpoint Health Networks (WLP) relative to entry at 70 and 72.00. Stock may be making a double top. Close: 75.66 6/6 UPDATE: Suggest exit on Humana (HUM) on entry suggested at 15.60 & 15.00-15.15. Close: 15.06. Stock is trending sideways and further upside potential looks doubtful so will preempt the suggested stop and take a small loss. THC good be making a double top; AET is trending sideways and may be building a top; MME shot to new high above a "line" of resistance at 37 - then reversed to close on its lows - in a possible bull trap reversal pattern; OHP may be making a double top here - same pattern on UNH. SECTOR REVIEW - Airline Index ($XAL.X) STOCKS: ALK; AMR; AWA; CAL; DAL; FRNT; KLM; LUV; NWAC; U; UAL So far, the Airlines are holding key closing level support in the 76.50 area. A close under 76.00 would suggest the possibility that XAL could go lower still - next potential support looks like 70. This sector is quite oversold - a further sideways move would suggest basing activity. Resistance, on a closing basis is at 82, then 84. A close over 84 would be a bullish positive and at least suggest that some further upside progress would be made. Conversely Amex Composite Index ($XAX.X) The Amex Composite downside momentum has accelerated as XAZ pierced its up trendline and 50-day moving average. The next downside target area looks like 897. Bank Index ($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 After a significant double top, BKX accelerated to the downside after taking out support in the 860-862 area, falling under its 200-day moving average as it fell. A next downside target is to 830, equal to a 62% retracement of the sharp Feb. to March advance and at a key prior high. LAST UPDATE: 6/6 Biotechnology Index ($BTK.X) STOCKS: ABGX; ADRX; AFFX; AMGN; BGEN; CELG; CEPH; CHIR; CRA; DNA; ENZN; GENZ; GILD; HGSI; ICOS; IDPH; IMCL; IMNX; INCY; MEDI; MLNM; MYGN; PDLI; TARO; TEVA; VRTX; XOMA Looked like double bottom low could set up in the 374-375 area, but the prior low was exceeded, suggesting the biotech (BTK) sector will go lower still. LAST UPDATE: 6/6 Computer Technology Index ($XCI.X) STOCKS: to be listed Bottom may be setting up, but XCI chart also looks like there could be a retest of the early-May lows in the 574-579 area. LAST UPDATE: 6/6 Computer Boxmaker Index ($BMX.X) STOCKS: AAPL; CPQ; DELL; GTW; HWP; IBM; SNE; SUNW; UIS; VRTS Bottom may be setting up here, but further market action and time is needed to tell. Key support is 85, then 83, which were intraday lows of early-May LAST UPDATE: 6/6 Cyclical Index; Morgan Stanley; ($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 Double top was made in March and May in 595 area which suggests strong resistance at that level. Next level to watch is key support in the 552 area. If this level is penetrated, next downside objective and a key support zone looks like 530-535. LAST UPDATE: 6/6 Defense Index; Amex ($DFI.X) STOCKS: ATK; BA; COL; DRS; EASI; EDO; ERJ; ESL; FLIR; GD; INVN; ITT; LLL; LMT; NOC; OSIS; RTN; SSSS; TDY; TTN; UIC Double top and bearish RSI divergence has manifested in a continued weakness and correction, as suggested previously. Think we have lower to go still, perhaps back to the 600 area. LAST UPDATE: 6/6 Disk Drive Index ($DDX.X) STOCKS: ADIC; ADPT; DSS; FLSH; HTCH; IOM; MXO; RDRT; SNDK; STK The Disk Drive Sector has been very week, with continued downside momentum - next objective is to the 75 area; then, if exceeded, we could be looking at a 100%, "round-trip" retracement to the September lows at 59-60. LAST UPDATE: 6/6 Fiber Optics Index ($FOP.X) STOCKS: ADCT; ALA; AMCC; AVNX; CIEN; CORV; CSCO; FNSR; GLW; JDSU; JNPR; LU; MRVC; NEWP; NT; NUFO; ONIS; PMCS; Q; SCMR; TLAB; VTSS; WCG Continues to make new lows, and I have no downside price target for the sector index. The sector is very oversold, but extreme overcapacity continues to weigh on the group. A close above 78 is needed to signal a reversal. LAST UPDATE: 6/6 Financial Index; NYSE ($NF.X) STOCKS: This index is composed of all the financial stocks on the NYSE; e.g., banks, insurance, etc. The financials have continued to weaken, recently falling under its 200-day moving average. Downside momentum has been seen since the rally failure of mid-May. The question is whether NF's second down "leg" has run its course after the double top of March- April. If 580 gives way, a next potential downside target is 570. LAST UPDATE: 6/6 Forest & Paper Products Sector Index ($FPP.X) Relevant to the March-May double top, the further apart (in time) for a double top the more significant it tends to be - months apart is more significant than days or weeks. The key level to watch on the downside now is the prior (down) swing low in the 345 area - this was also the level of price peak in Dec. and the again in late-January. If 345 is penetrated, the next level of potential support looks 338. LAST UPDATE: 6/6 Gold & Silver Sector Index ($XAU.X) STOCKS: ABX; AEM; AU; FCX; GOLD; HGMCY; MDG; NEM; PD; PDG; SIL Recent break in the trend bears watching for a possible downside reversal. Key near support is in the 80 area; then, if exceeded, at 75.00, which would be a 50% retracement of the March-June advance. 88-89, at the recent top, is the key resistance. XAU must climb back above this area to suggest that there is much more upside than seen already year to date. LAST UPDATE: 6/6 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 645, at recent top is key resistance. HMO has been in strong uptrend, but appears to running into some selling in the group as the momentum has slowed. Analysis of key stocks in the group suggests that the sector is quite vulnerable to a downside reversal and deeper correction than has been seen to date. NOTE: SEE SECTOR HIGHLIGHT OF THE DAY AT TOP TO VIEW THE CHART Near support is at 600, then 576. A daily close under 600 would suggest possible downside to the later support. LAST UPDATE: 6/6 6/6 UPDATE: Suggest exit on PacifiCare Health Systems (PHSY) bought on suggestion at 23.5-24.7. Stock momentum has slowed and is now sideways to lower. Close: 26.07. 6/6 UPDATE: Suggest taking profits on Wellpoint Health Networks (WLP) relative to entry at 70 and 72.00. Stock may be making a double top. Close: 75.66 6/6 UPDATE: Suggest exit on Humana (HUM) on entry suggested at 15.60 & 15.00-15.15. Close: 15.06. Stock is trending sideways and further upside potential looks doubtful. THC good be making a double top; AET is trending sideways and may be building a top; MME shot to new high above a "line" of resistance at 37 - then reversed to close on its lows - in a possible bull trap reversal pattern; OHP may be making a double top here - same pattern on UNH. 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 ($SOX.X) STOCKS: AMAT; AMD; CMOS; CREE; IDTI; INTC; KLAC; LLTC; LSCC; LSI; MOT; MU; NSM; NVDA; NVLS; PMCS; RMBS; TER; TXN; XLNX As with the Software sector, a possible double bottom looked like it was forming in the 448-450 area. This now looks doubtful. A close under 450,suggests a further drop, with a target to around 417. The 14-day stochastic is reading oversold of course it can get more oversold. Another down leg would appear to underway based on the Intel price break after hours today. LAST UPDATE: 6/6 Software Index; Goldman Sachs ($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 Index, on a technical basis, has been looking like it was forming a double bottom at 114-115. If there is a break of this area, next potential technical support looks to be well under this, at 100-101. There is also a possible bullish wedge pattern on the daily chart, but this would only be "confirmed" with a move above 123. LAST UPDATE: 6/6 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 Thursday 06-06-2002 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: ***** TEVA $64.30 -1.41 (-2.73) TEVA is getting dragged down by the biotechnology sector, which continues to bleed lower. There's no sense in hanging around to watch our gains disappear in TEVA as its sector drags the stock lower. Look for exit plays if you haven't already into any relief rally in the biotech sector during tomorrow's session ahead of the weekend. In the event of further downside, traders might consider setting a stop just below today's low to protect any built up profits. ADBE $35.20 -1.17 (-0.90) After numerous attempts to move higher, it is clear that the bulls in ADBE are losing traction. The stock ended on Thursday above our $35 stop, but based on the bearish news from INTC tonight after the close, we expect that level to be broken in the morning. The stock has been losing relative strength and appears destined to break down. That definitely isn't the place to be looking long. We're dropping the play tonight so that we can focus on stronger stocks. PUTS: ***** ATK $105.15 +3.25 (-3.63) The buyers came rushing back into the defense sector today after running scared from the technology sector. ATK finished on its day high near its 10-dma. While a rollover from this level could take place in tomorrow's session, the weakness in the broader market could spur more buying in the defense sector and lift ATK even higher. Look to exit plays during any intraday pullback tomorrow. WMB $8.93 -0.19 (-5.27) It was definitely the right move to keep WMB on the active list for a couple more days as FERC's threat to revoke the company's energy trading license sent the stock spiraling lower yesterday and the weakness persisted today with WMB falling below $9. While there could still be more downside in store for the stock, bears are definitely carrying the bulk of the risk here in the event of a short-covering rebound. We'll take this opportunity to close what has been a very successful play. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu TEVA 64.30 -0.18 -0.41 -0.83 -1.41 Dropped, BTK weakness ERTS 62.95 -1.07 1.35 -0.18 -1.15 Waiting at resistance ADBE 35.84 -0.80 0.54 -0.53 -1.17 Dropped, breaking DGX 88.75 -0.02 -0.71 1.48 0.58 Trending higher still INTU 43.83 -1.13 0.40 1.43 -0.60 Still holding strong BRCD 19.77 -1.38 1.72 0.01 -0.23 Ready to breakout!!! NVDA 32.61 -1.97 1.58 -0.48 0.01 Relatively strong!! LXK 61.15 -0.53 1.57 -1.98 -0.36 Downgrade entry point AZO 81.71 -0.84 -2.15 1.81 1.04 New, strong sector!! PSFT 21.06 -1.22 1.05 1.35 -0.63 New, inside day set PUTS GS 73.95 -1.66 0.01 1.95 -1.80 Rolled from 10-dma COHU 20.12 -2.86 0.55 -1.30 -0.77 Trading at $20 level WHR 68.31 -1.25 -1.80 1.97 -2.01 Inside day setting up WMB 8.93 -3.25 0.26 -2.09 -0.19 Dropped, book gains DUK 30.68 -1.31 1.00 -0.38 -0.64 Breakdown points lower BLL 41.80 -1.30 -0.98 1.77 0.73 Entry point at 10-dma IDPH 37.50 -3.13 -1.66 0.80 -1.40 Ticking ever lower ATK 105.15 -3.58 -5.94 2.64 3.25 Dropped, defensive buy PMI 81.81 -0.91 -1.71 -0.48 -0.69 Steadily walking lower DHI 24.38 -0.67 -1.48 1.40 0.61 Resistance entry point ICOS 19.17 -1.30 -0.51 0.15 -1.78 New, key support lost ATN 32.80 -1.50 -0.60 -0.01 -1.64 New, downside momentum ************************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 ******************** BRCD $19.77 -0.23 (+0.12) Unable to get enough buying interest together to stage a meaningful rally over the $20 level and in the wake of INTC's reduced guidance tonight, it looks like we are going to get a fresh opportunity to target shoot new entries near support. BRCD was trading below the $19 level in the after-hours session, and while a lot can change between now and the opening bell, we just might get the opportunity to initiate new positions on a rebound from the $18.50-19.00 area. But a note of caution is necessary. We only want to consider buying the dip if it is followed by solid buying volume, both in BRCD and the broader technology market. We are managing our risk with a stop at the $18 level. A close below there will bring our play to an early end. The more cautious approach may be to wait for the bulls to clear the $20.25 resistance level before taking the plunge. DGX $88.75 +0.58 (+1.33) A lone island of green in a sea of red was DGX's destiny again on Thursday. With virtually every sector of the market going into free-fall, the fact that the stock could close out the day with a gain is a measure of its relative strength. It hasn't been exciting, but DGX has been gradually marching higher over the past several sessions as investors are looking for a safe haven for their money. Thursday's gains managed to push the stock back above its 20-dma at $88.41 and if the bulls can get back over the $89.25 level they stand a decent shot at challenging the $92 resistance level over the near term. Look to enter the play either on a breakout over resistance or on a dip and bounce from the vicinity of the recent congestion zone between $87-88. Following the recent bullish action, we are raising our stop to $85.50. ERTS $62.95 -1.15 (-1.05) Back and forth, back and forth. The bulls keep trying to push through resistance at $65, while the bears continue to test the $62 support level. Given the dramatic weakness in the Technology market on Thursday, it is impressive that ERTS managed to hold above the $62.50 level. Intraday dips near this level still look attractive for new entries, as the bullish outlook for the stock is still predicated on consumers' willingness to spend money on video games for home entertainment. The breakout above $65 is unlikely to occur this week in light of the bad news out from INTC tonight after the closing bell, but so long as ERTS doesn't violate its $62 support level (also the site of our stop), tomorrow morning's (expected) dip will likely make for a solid entry point. Buy the rebound if we get it, but keep those stops in place. NVDA $32.61 +0.01 (-0.85) After tracking consistently higher for the past 2 days, all of NVDA's recent gains are likely to evaporate before the opening bell on Friday due to the bearish news out from INTC after the closing bell. The proverbial line in the sand will be the $30 level. If the bulls can successfully defend that level, then the morning dip could make for an attractive entry point into the play. But if the bearish sentiment created by INTC's revenue reduction dominates and pushes NVDA below that level, all bets are off. A close below the $30 level will have NVDA moving to the drop list this weekend. Even though a good portion of NVDA's business is not PC-related, concerns about that portion of its revenue stream could be enough to sink our play. Wait to see where price stabilizes and then look for renewed buying in the overall Semiconductor sector (SOX.X) before buying the dip. A more cautious approach will be to wait for the bulls to push NVDA back through the $33.50 level before playing. INTU $43.83 -0.60 (+0.10) INTU continues to hold up very well in this weak technology market. The stock out paced the market to the upside during yesterday's short covering rally, and showed a little follow through early today to the $44.70 level. But the market dragged the stock back lower into the close of trading. Still, INTU held up well again today, losing 1.35 percent for the session compared to the 2.50 percent drop in the Nasdaq. Looking forward, the best entry approach in this play is going to be taking bounces from support. That could mean a rebound from the 10-dma at the $43.12 level in tomorrow's session. As long as the recent series of relatively higher lows holds at the 10-dma, then INTU will hang on to its strong technical position and be ready to breakout once the Nasdaq turns higher. But until that happens, play any new entries with tight stops. LXK $61.15 -0.36 (-1.30) An analyst downgrade sent LXK reeling lower during yesterday’s session, but the stock showed signs of stabilization in today's session. We view the downgrade in yesterday's session as a gift of an entry point into this super strong technology stock, as the downgrade did nothing more than put LXK back near its ascending support line that has been in place since early May, and from which the stock tried to rebound from during today's session but was unable to due to the weakness in the broader technology sector. Look for bounces from above the $60 level in tomorrow's session as entry points, and look to set tight stops just below the $60 level just in case the broader market drags the stock lower. ************** NEW CALL PLAYS ************** AZO – AutoZone, Inc. $81.71 +1.04 (-0.14 this week) AutoZone is a retailer of automotive parts and accessories, primarily focusing on do-it-yourself customers. Each of its more than 2900 stores in 42 states and Mexico carries an extensive product line for cars, vans and light trucks, including new and re-manufactured automotive hard parts, maintenance items and accessories. Approximately half of its domestic stores also have a commercial sales program, which provides commercial credit and prompt delivery of parts and other products to local repair garages, dealers and service stations. After the drubbing the broad markets have taken over the past few weeks, it may seem difficult to imagine that one of last year's best performing stocks is still trading near its all-time highs. But that is precisely what we have for you tonight. Shares of AZO ran up to new all-time highs last week, before suffering a bit of profit taking early this week. After dropping to test the $78.50 support level on Tuesday, the stock got a solid bounce off the 20-dma (currently $77.87) and has been marching steadily higher over the past 2 days. A trade at $84 will put the stock on a fresh PnF buy signal with a triple top breakout, but first the stock is going to need to get through that resistance level. Clearly, AZO is demonstrating good strength relative to the rest of the market and is even looking stellar when compared to the rest of the Retailers. The broad markets are likely going to open sharply lower tomorrow following the bearish news out from INTC tonight. We want to take advantage of that weakness if it causes a dip in AZO. A dip and bounce from the $80 level seems likely and a bounce from the $78.50 area would be a gift, but only if the buying volume on the rebound is strong. On the other hand, AZO could see flight-to-quality buying without the dip and that could propel the stock to new highs in short order. Conservative traders may want to wait for the stock to trade through the $84 level before taking a position. We are initially placing our stop at $78. BUY CALL JUN-80 AZO-FP OI=3051 at $3.10 SL=1.50 BUY CALL JUN-85 AZO-FQ OI=2244 at $0.75 SL=0.25 BUY CALL JUL-80 AZO-GP OI= 201 at $4.70 SL=2.75 BUY CALL JUL-85*AZO-GQ OI= 731 at $2.10 SL=1.00 Average Daily Volume = 1.07 mln PSFT – PeopleSoft, Inc. $21.06 -0.63 (+0.53 this week) PSFT designs, develops, markets and supports a family of enterprise application software products for use throughout large and medium-sized organizations. The company provides enterprise application software for customer relationship management (CRM), human resource management, financial management and supply chain management (SCM), along with a range of industry-specific products. In addition to enterprise application software, PSFT offers a variety of services to its customers, including implementation assistance, project planning, online analytical processing deployment, consulting, maintenance, customer education, product support and training. Other than Biotechnology stocks, it is hard to find an area of Technology that has performed worse than the Software sector (GSO.X) in recent months. The GSO has dropped to test the September lows (near $115) twice in the past month. But ORCL's failure to warn for its current quarter has some investors (us included) thinking that the GSO may be in the process of successfully testing its September lows. PSFT has mirrored the action in the GSO index, dropping down near its September lows over the past couple weeks, but refusing to break them. The $19 level is shaping up as strong support and it has been encouraging to see the stock moving upwards over the past few days. We are expecting to see a drop at the open tomorrow due to INTC's negative guidance tonight, but that drop is likely to provide us with an attractive entry point. Look to initiate new positions on a successful rebound from above the $19 level, possibly near $20. Alternatively, look for strong buying to propel PSFT through the $22 level before entering. Due to the strong support at $19, we can set a tight stop at $18.50. BUY CALL JUN-20 PQO-FD OI=3458 at $2.15 SL=1.00 BUY CALL JUN-22 PQO-FX OI=7434 at $0.95 SL=0.50 BUY CALL JUL-20*PQO-GD OI= 413 at $3.00 SL=1.50 BUY CALL JUL-22 PQO-GX OI=2260 at $1.80 SL=0.75 BUY CALL JUL-25 PQO-GE OI=5910 at $1.00 SL=0.50 Average Daily Volume = 8.82 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 ******************* GS $73.95 -1.80 (-1.50) Yesterday's late-day rally proved to be just another opportunity to enter bearish plays, as the sellers re-emerged in force on Thursday. After rising as high as $76 again this morning, shares of GS sold off with the rest of the broad market, closing again just below the $74 level, while the Broker/Dealer index ended the day right on major support at $435. With the major indices closing right on support and a lack of positive news after the close, it looks like more selling could be in the future. Lower highs are keeping the bulls on the defensive and a breakdown under the $73 level will likely usher in a fresh wave of selling. Use failed rallies below the $76 level to initiate new positions or else enter on a volume-backed move below $73. Lower stops to $76 tonight. IDPH $37.50 -1.40 (-5.39) Once again leading the list of losers, the Biotechnology sector (BTK.X) gave up 5% on Thursday. But that wasn't the bad news. The really bad news is that the BTK collapsed to its lowest closing level since late 1999, as the $375 support level gave way under the latest bearish assault. Our IDPH play is hanging onto support by its fingernails, as it fell to a fresh yearly low on continued heavy volume. With little in the way of support for the BTK below current levels until the $300 level, should IDPH give up its support in the $33-35 area, the resulting drop could be dramatic. Looking at the weekly chart, the next level of support rests near $22. The late-day short-covering bounce is unlikely to follow through tomorrow. Use a rollover in the $38-39 area to initiate new positions or else wait for a drop below $36. We are lowering our stop to $40 tonight. COHU $20.12 -0.77 (-4.38) Just like that, COHU traded down to the psychologically significant $20 level during today's session. The stock actually briefly traded below the $20 level, but rebounded to finish back above that level. We've seen about a $4.50 point swing in our favor in the last four days, so don't be bashful about taking profits if you haven't already done so. Given Intel's news after hours, we should see some more downside in COHU tomorrow to give traders with open positions an opportunity to exit plays for a profit ahead of the weekend. Just don't get greedy. As for new entry points, we still like put plays on COHU, but at higher prices from where the stock is currently trading. A relief bounce early next week could bring about the next round of entry points. WHR $68.31 -2.01 (-3.09) After the test of the 200-dma in Tuesday's session when the stock actually closed below that level, WHR rebounded back above its 200-dma during yesterday's session along its way to a strong relief rally. The rally fell short once again of the downward sloping 10-dma, plus the bounce came on relatively lighter volume than we've seen during down days in the stock recently. Today's reversal lower created an inside day situation in the stock in which we could see a major breakdown in tomorrow's session. Those traders looking for new entry points into a breakdown can look for a decline below yesterday's low at the $68 level on heavier volume. DUK $30.68 -0.64 (-1.33) DUK broke down from its inside day set-up yesterday during today's session after the stock gapped lower and took out short term support at the $30.80 level. The stock went on to confirm its breakdown from the inside day with the decline below the $30.60 level. Although the stock rebounded into the close of trading to finish back above the $30.60 level, we can still expect further downside ahead because of the breakdown below the inside day. Failed rollovers from between the $31 and $32 levels are now the entry points to watch for as the short sellers look to sell into any strength that the stock offers. Tight stops just above $32 can be used to manage risk in any entries taken between the overhead resistance range. Short term support might be found at the $30 level, but below that we could see a move down into the mid $20s. BLL $41.80 +0.73 (+0.22) The short covering bounce that we have been waiting for finally came in BLL in yesterday's and again in today's session. The stock traded up to its declining 10-dma in today's session, but failed to close above it as broad market weakness dragged BLL back lower as the day wore on. The news that sparked the short covering rally this morning was Salomon Smith Barney's upgrade to an out perform rating from neutral based on improving industry conditions. The vague upgrade was just the kind of catalyst that we were looking for to offer a better entry point into new put plays. Traders can start looking for rollovers in tomorrow's session from below the 10-dma for new entry points into put plays. Above the 10-dma exists solid overhead resistance at the $43 that should help to contain any intraday rally attempt. Use a tight stop just above that level in new entries near the 10-dma. Confirm further weakness in the Dow to drag the stock back down towards its 200-dma now at the $37.45 level. PMI $81.81 -0.69 (-3.79) PMI continued walking lower in today's session on the further spread of weakness into the broader market. The stock's decline in yesterday and today's session came on relatively active volume, which suggests that the sellers are still many and strong. Short term support might come into play at the $80 level in tomorrow's session, or early next week, which may result in a short term relief rally in shares. Any such rally should set up another good entry point into bearish positions given the downside momentum in the stock. Traders can look to take profits from the $80 level if the stock does bounce, then look to establish new positions once again after any relief rally runs its course. Below the $80, there's a wide gap without support to the $75 level which can be used for a downside target over the next several weeks. DHI $24.38 +0.61 (+0.14) The bullish analysts were out again trying to defend the housing sector in the last few days. The relief rally in the group set up another excellent entry point into DHI near its resistance level. The stock rallied up to its 10-dma and its downward sloping resistance line in today's session from which it promptly rolled over. We would actually like to see a brief trade higher in tomorrow's session from current levels to give an entry point that is slightly closer to resistance. That way traders can set even tighter stops in new plays and look for a rollover going into next week's trading. In DHI, look for the sellers to emerge once more below the $25 level. Use a tight stop just above the $26 level in any such entries. Target $22 to the downside next week, and breakdown below the 200-dma thereafter. ************* NEW PUT PLAYS ************* ICOS - ICOS $19.17 -1.78 (-2.34) ICOS Corporation develops pharmaceutical products with significant commercial potential by combining its capabilities in molecular, cellular and structural biology, high-throughput drug screening, medicinal chemistry and gene expression profiling. The Company applies its integrated approach to erectile dysfunction and other urologic disorders, sepsis, pulmonary arterial hypertension and other cardiovascular diseases, as well as inflammatory diseases. The Company has established collaborations with pharmaceutical and biotechnology companies to enhance its internal development capabilities and to offset a substantial portion of the financial risk of developing its product candidates. The biotech sector is crumbling and it doesn't look to be getting any better. Former high flyers are now trading in single digits. And that's where ICOS appears to be headed. Following its huge gap down from negative developments in late April, the stock spent most of may bouncing below the $25 level consolidating its huge breakdown. Once the consolidation was complete last week, the stock began to drift lower towards the $20 level. And in today's session, the $20 level was broken down below. The level is a key technical price for institution who hold the stock, because many large fund companies don't permit holding stocks below certain prices such as $20. Plus the bears like to jump on stocks that breakdown below the $20 for the first time in several years because it generally represents a further serious deterioration in the company's business. Given the negative sentiment in the biotechnology sector and the growing downside momentum in ICOS, the stock should continue heading lower into the summer doldrums ahead. Traders looking for new positions into the stock's breakdown can look for further weakness in the biotechnology sector index (BTK.X) in tomorrow's session to pressure ICOS below its intraday low today at the $19.05 level. Those looking for a relief rally ahead of further downside can wait for a short covering pop to first the $20 level, or slightly higher near the 10-dma at the $22.31 mark. Our stop is initially in place just above the 10-dma at $22.50. BUY PUT JUN-20*IIQ-RD OI=331 at $1.60 SL=0.75 BUY PUT JUL-20 IIQ-SD OI=131 at $2.60 SL=1.75 Average Daily Volume = 1.60 mln ATN - Action Performance $32.80 -1.64 (-3.75 this week) Action Performance Companies Inc. is engaged in the design and sale of licensed motorsports collectible and consumer products. The Company's products include die-cast scaled replicas of motorsports vehicles, apparel, including t-shirts, hats and jackets, and souvenirs. Action Performance markets its products through United States and German subsidiaries under an extensive portfolio of license arrangements with various drivers, team owners, sponsors, sanctioning bodies and others. Third parties manufacture all of the Company's motorsports collectibles and most of its apparel and souvenirs, generally utilizing Action Performance's designs, tools and dies. Good news is not always enough to keep a stock moving higher. Sometimes the delivery of good news is the catalyst for a reversal of a bullish trend. That's exactly what happened after ATN's most recent earnings report in which the company reported record sales and earnings for the most recent quarter. The company's heavy bet on the popularity of Nascar Racing is starting to worry some investors due to the prospects of a weakening consumer segment of the U.S. economy. Since late April, ATN's long standing bullish trend was reversed and the stock has been trapped in a steep, ugly descending trend that has taken ATN down below the $34 level through today's trading. The momentum appears to be building to the downside along with an increase in daily trading activity on the way down. The sellers don't appear any where near finished with this stock as the trend remains solidly to the downside. Look for further weakness and entries into downside momentum on a breakdown below today's intraday low at the $32.70 level during tomorrow's session, which looks to be weak for stocks in general judging by the after hours action in the futures market. A relief rally in the coming days could set up a favorable entry point near resistance such as the downward sloping 10-dma at the $36.50 level. Our stop is initially in place at $36.75, just above the 10-dma. BUY PUT JUN-35*ATN-RG OI= 42 at $3.30 SL=1.50 BUY PUT JUL-30 ATN-SF OI=141 at $2.40 SL=1.00 Average Daily Volume = 1.53 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 Thursday 06-06-2002 Copyright 2001, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. ********************* PLAY OF THE DAY - PUT ********************* WHR - Whirlpool $68.31 -2.01 (-3.09 this week) Whirlpool Corporation is a worldwide manufacturer and marketer of major home appliances. The Company manufactures in 13 countries under 11 major brand names and markets products to distributors and retailers in more than 170 countries. The Company manufactures and markets a full line of major appliances and related products, primarily for home use. The Company's principal products are home laundry appliances, home refrigerators and freezers, home cooking appliances, home dishwashers, room air-conditioning equipment, and mixers and other small household appliances. The Company also produces hermetic compressors and plastic components, primarily for the home appliance and electronics industries. Most Recent Update After the test of the 200-dma in Tuesday's session when the stock actually closed below that level, WHR rebounded back above its 200-dma during yesterday's session along its way to a strong relief rally. The rally fell short once again of the downward sloping 10-dma, plus the bounce came on relatively lighter volume than we've seen during down days in the stock recently. Today's reversal lower created an inside day situation in the stock in which we could see a major breakdown in tomorrow's session. Those traders looking for new entry points into a breakdown can look for a decline below yesterday's low at the $68 level on heavier volume. Comments We have another inside day set up in WHR. The stock is poised dangerously on its 200-dma, and could breakdown in a big way during tomorrow's session. Look for a decline below the $68 level on an increase in volume. Short term traders with open positions can set a tight stop at the near term relative high traced Wednesday at the $70.54 level. Look for downside to the $65 level next week upon a breakdown from the inside day setup. BUY PUT JUN-70*WHR-RN OI=602 at $2.80 SL=1.75 BUY PUT JUL-70 WHR-SN OI= 25 at $4.20 SL=2.75 Average Daily Volume = 555 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 ************************************************************** ************** TRADERS CORNER ************** Milking Q-Charts, Part XIV, An Owner's Manual, Plus Loose Ends Now Tied Up Buzz Lynn buzz@OptionInvestor.com I love our readers. I wish I could answer all the mail that comes in. Were it not for the constraints of the time, everyone would get a personal response to their e-mails. So please, take heart and know that just because an individual does not hear from me, the question or comment has been received in vane. With that kind of an intro, can you guess what some of the most common questions are? If you guessed Q-Charts, three gold stars and pats on the back for everyone! I hope today's episode answers a few of the most common questions. For those just joining in this never-ending series on Q-Charts and its functions, feel free to check in on the links below to know where we've been so far. Most of these episodes I - XII deal with an earlier version of Q-Charts. Part XIII pertains mostly to the new version 4.2. http://www.OptionInvestor.com/traderscorner/011002_1.asp http://www.OptionInvestor.com/traderscorner/011702_1.asp http://members.OptionInvestor.com/traderscorner/012402_1.asp http://www.OptionInvestor.com/itrader/archive/traderscorner/031801_1.asp http://www.OptionInvestor.com/traderscorner/013102_1.asp http://www.OptionInvestor.com/traderscorner/020702_1.asp http://www.OptionInvestor.com/traderscorner/021402_1.asp http://www.OptionInvestor.com/traderscorner/022602_1.asp http://www.OptionInvestor.com/traderscorner/022802_1.asp http://www.OptionInvestor.com/traderscorner/030702_1.asp http://www.OptionInvestor.com/traderscorner/031402_1.asp http://www.OptionInvestor.com/traderscorner/032102_1.asp http://www.OptionInvestor.com/traderscorner/032902_1.asp At first, version 4.2 had too many bugs for practical usage. Since those have been worked out, we think the new version 4.2 upgrade has some pretty neat features, some of which we outlined in the previous installment. This week, we're going to spend some time customizing some studies - studies meaning moving averages, Bollinger bands, stochastics, and the like. I'm at a lack for words here, so lets get started. One of the biggest problems with using Q-Charts in the past has been the requirement to re-invent the wheel (so to speak) every time we put a particular study in place on a chart. Wouldn't it be great if the program remembered that we like our 50-dma in magenta three lines thick? Or that we like our Bollinger bands two lines thick without the thin, red line representing the 20 period MA in the middle? Or how about that we like our stochastic oscillator lines in two thicknesses of red and blue? It used to be that we had to set those by hand every time we added them to a chart. No more. Follow along as we take the easy road to making a new chart. Let's start with the moving averages. I like my 50-dma to be magenta so it stands out, and my 200-dma in gray so that it's visible but doesn't get in the way. To do this, let's first go to Studies in the top dropdown menu and select Preferences. It looks like this: Once we click on Preferences, the following huge dialogue box with tabs shows up: In this case working with Moving Averages, we simply click on the Moving Averages tab to get the following: Note in the above example the red-circled variables that we may want to change. Simply type in the number of periods for the moving average, choose the color and thickness, and then click OK. Say we want a magenta 50-pma with three thicknesses. Complete the following: POOF! Done! Now every time you plug a moving average on to a chart, it will show up per our custom selection. Let's see that chart: Select Moving Average to get the following box: Click OK and it will pop up on our chart as follows: Voila' - the finished result. So what if we want to add other moving averages in a different color? Follow the same steps. Select Studies from the top menu bar, select Moving Average. The same dialogue box pops up that now has the 50-pma. Again, it looks like this: How about we add the 200-pma three lines thick in gray? From this box, click Add. The following again pops up: Change the criteria to show 200 in length with three thicknesses of gray, and then click OK as follows: Use the same process as before to add it to any other chart by selecting Studies, Moving Averages, highlight the gray 200-pma, then click OK. Here's what it looks like once we hit OK.: Very nice! Now how about those Bollinger bands in blue without the red line in the middle? Piece of cake - let's go! Again, select Studies form the top menu bar, highlight Preferences, click OK, and then select the Bollinger Bands tab. The following box pops up: From here, we can set these as we see fit. Again, select blue in color, change the numbers box to three thicknesses, and be sure to UN-check the Display box to remove the red line from the chart (if that is your preference). Last, click OK. Shall we install it in our chart now? One more time, click on Studies and select Bollinger Bands to get the following box: Simply click OK, and the band will appear (sans red line if we've unchecked the Display box) in the chart as follows: Now you all know how my charts get so cluttered! Lots of information in one convenient, compact place. Last thing. . .let’s add that stochastic. Same process - Studies, Preferences, Stochastic - in a lesson from weeks gone by, we used 5(5),3, but let's use 10(5),3 with two thicknesses of blue and red, both. Insert the settings, and then click OK. We can then install it into our chart the same as before by selecting Studies, Stochastic, and then click OK. It pops into our chart with the following finished look: Simple, no? That's it for Q-Charts tonight. I could just leave it here and say, "The End". However, I've got two housekeeping items to handle here in a quick closing paragraph. First, in Monday's "Wrappin' Rant" article I speculated the John Templeton may have picked Australia, Canada, and New Zealand for his list of stable economies that might be suitable for bond purchases based on those countries possibly still adhering to a gold standard. NNNGGG! WRONG! Many thanks to Andrew R., presumably from "Day-own Undah" (Australia) for writing in that Australia has been off the gold standard since 1914 and simply tied its currency to a floating exchange rate. I have yet to hear from Canada or New Zealand - will report as soon as somebody writes in. Second, I got a great follow-up note to "Seize the Debt", an article I did last Thursday on debt/equity ratios. The reader offered a great suggestion that I follow up with "contingency lines of credit". Those are bank promises, as part of bigger loan packages, to offer umbrellas to those companies for whom it is really starting to rain. They were essentially extorted from lenders by corporate borrowers for which lenders were paid a pittance to provide. The corps demanded the coverage for a rainy day as part of the deal if the lender was going to get the business. As companies in financial trouble exercise those lines, the banks will be on the hook. Guess what? Those contingent liabilities cannot be found on the lenders' balance sheets! Can you say "off balance sheet accounting"? Keep an ear open for mentions of this. We'll have to get to it in another column. Thanks, Alan, for the suggestion! Make a great weekend for yourselves! ************************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 ************************************************************** ************ MARKET WATCH ************ Bears beware. A squeeze is around the corner in tonight's two new watch list plays. To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/060602.asp ************** MARKET POSTURE ************** Financials are at resistance. Will they breakout? To Read The Rest of The OptionInvestor.com Market Posture Click Here http://www.OptionInvestor.com/marketposture/060602.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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