The Option Investor Newsletter Sunday 06-09-2002 Copyright 2001, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. Entire newsletter best viewed in COURIER 10 font for alignment Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 6-07 WE 5-31 WE 5-24 WE 5-17 DOW 9589.67 -335.58 9925.25 -179.01 10104.26 -248.82 +413.16 Nasdaq 1535.48 - 80.25 1615.73 - 45.76 1661.49 - 79.90 +140.54 S&P-100 507.32 - 21.88 529.20 - 10.72 539.92 - 13.38 + 30.06 S&P-500 1027.53 - 39.61 1067.14 - 16.68 1083.82 - 22.77 + 51.60 W5000 9752.69 -353.80 10106.49 -144.15 10250.64 -223.54 +456.71 RUT 470.51 - 16.96 487.47 - 6.17 493.64 - 15.30 + 16.21 TRAN 2686.66 - 62.60 2749.26 + 5.59 2743.67 - 54.69 +155.26 VIX 26.65 + 3.75 22.90 + 1.64 21.16 + .88 - 4.75 VXN 52.24 + 6.29 45.95 + 3.09 42.86 - .08 - 7.79 TRIN 1.30 1.11 1.59 0.78 Put/Call .79 .73 .82 .72 ****************************************************************** Intel To Gross $25 Billion, Market Loses Billions? by Jim Brown What a fun day! The hangover from the Intel party on Thursday night lasted through the day on Friday. The chipmaker lowered guidance to $6.2 to $6.5 billion for the quarter and margins to about 50%. Would you like to have a business with that type of earnings potential? A flock of investors decided that was not good enough and they dumped over 150 million shares for a -$5 loss over yesterday's close. The rest as they say is history. Friday morning started out bad with a -100 point gap down but all the major indexes struggled back into positive territory in late afternoon. End of day profit taking pushed them back to negative but floor traders were mostly satisfied with the results. They would have liked a roaring V bottom rebound reminiscent of the olden days but were happy to just settle close to even for the day. The Intel guidance drew downgrades faster than a picnic in July draws flys with everyone jumping on the bandwagon to get their name in print. The key here is how long it will take before somebody like Merrill jumps back on the Intel bus at this "attractive" level as they say. Knock them down before the meeting and prop them back up after the smoke clears. How else are you going to generate commissions. Am I the only one that thought the news was not that bad? Now before you answer that remember I was bearish the chip/upgrade cycle process in last Sunday's commentary. They said the weakness was an "overly enthusiastic estimate" of business in Europe that caused the guidance change. The sales in Europe in the first quarter were so good they used too large an estimate for the second quarter. They said sales were still good, just not at the same growth rate as in 1Q. Is that bad? They also said they were still expecting a ramp up in business for the second half. Did I miss something? Their profit margins were 3-4 points lower because of product mix. They were selling more Celeron processors than they expected. That could mean AMD is selling less of their products? Gaining market share is not negative even if it means -3% lower margins. It did mean the higher priced, high performance P4 processors were not selling at the expected pace. That ties in with the slower upgrade cycle comments from last week. Intel still expects this segment to pick up as pent up business demand accelerates in the second half. Buy good stocks when nobody else wants them. Sounds like a long-term opportunity to me. I am not saying Intel does not have problems but compared with other available tech stocks it looks like a "safe" port in the storm. Safe because much of the risk was removed on Friday with the -$5 drop back to October levels. In a related news event Dell announced it had dumped IBM in favor of Intel and is jointly developing a new chipset with Intel. Dell was going to offer servers based on IBM's proprietary "Summit" technology. They are now going with Intel to develop a high-end server to compete with Unix platforms. This should boost sales for each company since these servers tend to be sold to larger clients and include storage systems and other computer products. If it is Biogen it must be warning season. The company warned today that increased competition was eroding sales and profits would suffer. The warning cut nine cents off the 40 cents analysts had expected. The warning itself is only a passing news item but the more critical point is it telegraphs the advent of the 2Q warning season which begins in earnest next week. While the trend has been fewer warnings so far this quarter that does not mean they will not happen. Many companies face an extremely back end loaded quarter and will not know had bad "bad" is for a couple more weeks. They may have put off warning until the last minute to put things in the best light possible. The sum of all fears stock, Tyco, took another pounding Friday when Moody's and S&P cut their debt to one notch above junk. This happened during a conference call where Tyco management was trying to circle the wagons against the onslaught of accusations being brought by authorities. No interest loans, undisclosed compensation and criminal probes continue to plague the company. The IPO for the companies CIT Group could be delayed and the value received could be much less due to the negative connotations. TYC lost another -4.50 to $10.15 on the news with 200 million shares traded. (10% of the NYSE volume) Just when you thought it was safe to go outside (in Kashmir) things went to heck again. Several press stories about cooling tensions between India and Pakistan made the rounds during the trading day and the possible resolution of the nuclear war worries was a positive impact to the market bounce. After the close it was announced that an Indian spy plane was shot down by Pakistan and the heated rhetoric flamed once again. India/Pakistan, Israel/Palestine and now Argentina and Brazil heating up again. At least there are no war worries in South America but economic woes are growing. A friend told me last week that people in Argentina wait in lines three blocks long just to get an "application" for a visa to the few countries that will accept them. They have to prove they have sufficient assets in Argentina to convince authorities they will actually come back. Economically the Employment situation in the U.S. improved with 41,000 jobs created in May. This was less than the 65,000 expected but just another plus in the recovery column. The unemployment rate fell to 5.8% from 6.0% in April. Not a particularly exciting report but the overall evidence of the recovery is growing. Next week is going to be critical. (How many times have you heard that in the last few months?) The Dow closed under key support at 9600 and the Nasdaq barely finished above the key 1525 level. For the S&P it seems that every close is one step closer to retesting the September lows. The intraday low on Friday of 1012 was an exact -71% retracement of the gains since the 9/11 attack. That post 9/11 low was 944.75 which suddenly does not seem that far away. The trading on Friday was not your typical V bottom rocket rebound. It was slow, orderly and while it was on heavier than recent volume, it set no records. The NYSE volume was 1.7 billion and the Nasdaq was just over 2.0 billion. Good volume but not great and up volume was only slightly higher than down volume on the NYSE and down volume won on the Nasdaq. This was not a capitulation day as everyone had hoped. Traders look for a monster dip followed by 2:1 or even 3:1 or 4:1 up volume to down with advancers beating decliners 3:1 or 4:1. They barely broke even today. New lows at 385 beat new highs at 96 by a landslide. The best indication of the broader market direction, the S&P, closed at 1027.53. The low for the day was 1012, the 71% retracement level as stated above but the high of the day at 1033 was the 61.8% retracement. The S&P stopped dead in its tracks at that 1033 level which is also just below down trend resistance from May-24th to present. These resistance levels would tend to indicate that the broader markets could struggle to make substantial gains from the current levels. With heavy resistance coming together around the 1034 level that would be my target for any bounce on Monday morning. This is very reminiscent of the dip and bounce on June 4th/5th. The markets dropped to the bottom of the channel (and the 61% retrace) only to fail again at the top of the channel. This is key for the bulls. They must show up with money in their pocket on Monday. Considering $6.8 billion flowed out of mutual funds in the week ended on Wednesday according to TrimTabs.com this could be a tall order. The economic calendar is void of any material events until the PPI and Retail Sales on Thursday. Not that stocks had been trading on economic news lately but for the first three days next week they will be on their own. Supported by stock news only and that is where the earnings warnings will come into play. We will be hostage to anybody that warns and to whatever world news captures traders attention. There are rumors that IBM will have a negative announcement soon to compensate for bankruptcies of some high profile customers impacting nearly $4 billion in services orders. That could be a market mover! The bottom line remains KEEP THOSE STOPS TIGHT regardless of which direction you are trading. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor **************************** Option Investor Fall Seminar **************************** It is with great pleasure that we announce our fall seminar in Denver. It will be October 12th to 15th with an optional boot camp on Friday the 11th for those that would like a better foundation in the basic strategies. We will announce the speaker list in the coming weeks but you know we always have 12-15 well known personalities including your favorite Option Investor writers. What I can tell you is that we will start the event off on Friday night with a casino party with craps, roulette, black jack, etc. This get acquainted event will offer prizes for everyone and provide a relaxed atmosphere to rub shoulders with the speakers and other guests. Ask anybody who has been to one of our seminars. We start at 9:am Saturday morning and run non-stop until the close. We stop only to eat and sleep but we do feed you five times a day! You can save $200 off the registration price if you sign up before July-31st. Don't wait. Click here: http://www.OptionInvestor.com/seminar/fall2002/ ******************** INDEX TRADER SUMMARY ******************** HOLY COW! by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - In the words of the great Phil Rizuto - Holy Cow! Friday was some day, hey. I would like everyone to remember that THIS day is what it means to be "oversold" in a market. Bad news does not have the same impact as otherwise. Imagine if the Market was "overbought" - we would have been down Dow 200 points as a starter and ended up down 250, rather than trading down 152 Dow points at the low, then closing off 35 points. Part of my thinking that we were bottoming (with an "ing") is that the indexes might have a lower low before there was a tradable bottom and a more sustained rally given the tendency for significant bottoms to do so over a 4-7 day period. Todays action is why I figured risk to reward for NEW positions as better to buy a sharp further dip than to short on a break at this juncture. Again, that's why I use those envelope lines and that daily (14- day) stochastic on the daily charts that you see in this column night after night. Hey, catch 3-4 intermediate-term bottoms and a similar number of tops in a year, before the index option premiums get jacked to the moon and ride them so you are not making Charles Schwab even RICHER and pretty soon you are talking about REAL money from index options trading. GENERAL MARKET INDICATORS - Very bullish normally when the NYSE 10-day Arms Index (TRIN) gets above 1.5 - "three times the charm"? Would like to see it (the 10-day moving average) turn down next. Also, am encouraged, re the S&P and Dow that bellwether GE has made an apparent double bottom low. Trader "sentiment" got pretty bearish on Thursday - along with the other oversold and bullish indicators, this one is pointing to a good-sized rally ahead. This is not to say that there won't be another pullback on Monday. I suspect there will. Don't get too bearish! S&P 100 ($OEX.X) Daily/Hourly charts: Suggested buying higher, before this break, and then buying in the 500 area, with a risk/exit point to 497 (Friday low: 498.5). This rec (recommendation) made up for the earlier one hopefully. Suggest keeping the stop point, for now, at 497. Buy another dip on Monday - the chart pattern looks like we could see another bout of weakness - anywhere in the low-500 area looks like an area to accumulate some calls for a "position" type play, going out beyond June expiration, say to July. I also suggested on my last daily update (Thursday night) as I surveyed the tech rout, the Friday decline might be sharp, but short-lived. Time will tell on this. I think 500 is a definite area that will find buying interest. On the use of the trading envelope lines - when there is a dip under them AND the market is oversold on a price oscillator basis AND the general market indicators are also at oversold extremes, risk to reward is very favorable if you just go "against" the panic and keep to a game plan. Dow Index (1/100: $DJX.X) - Daily/Hourly charts: Again, on a risk to reward basis suggested buying if 95 were seen, with stop protection at 94.5. Someone asked me if I it was wise to buy in an area that you identify as "support", but before you see if that area will hold (e.g., catch a "falling knife?"). Well, the point is a good one, but yes I will have orders in to play an likely support, if I have a good reason off the charts to do so PROVIDED that: - the market is oversold - the decline is an extension of a decline - there is a good technical "reason" to do so; e.g., the price point is at the low end of a well-defined downtrend channel - AND there is also a fairly tight stop point entered at the same time. I was forced to try to perfect this technique - of trying to ANTICIPATE buy/sell areas - cause I used to work during the day at something other than watching and commenting on the market and because it was the only way I could hope to catch index options premiums when before the market makers raised them so much that the odds were all in their favor when they sold them to me. Subscriber NOTE: "I think it's very important to point out to readers that a price change of $1 for (each stock) in the DJIA does NOT have the same impact on the Average and that it varies according to the stock and that stock's relative weight" RESPONSE: It would be better to say each stock's relative PRICE (not "weight"), as divided by a special "divisor". There is a factor (divisor) involved in the price-weighted Dow Industrial average, so it is not a straight-line division, unlike the Value Line Index. "Weighting" here in the DJIA average is not capitalization weighting like the S&P - simply an arithmetic adjustment to account for how many price splits the stocks have had. The reason the Dow was called an "average" was that Charles Dow just added the 30 stock prices and divided by 30; i.e., the divisor was 30. Now the divisor is .14452124. Add the stock prices at end of the day and divide by .1445. If Intel (INTC) is down 4.76 - divided by .1445 - the stock is accounting for -33 Dow points. The habit of calling the Dow, an "Average" has stuck however. The Nasdaq 100 ($NDX) - Suggested Thursday night, that if NDX got down to around 1120 and stabilizes in this area, buy for a rebound. Well, NDX got to an intraday low around 1107, then rebounded the next hour to well above 1120 - nothing like playing an index that MOVES! Suggest using stops at 1103 if long. I thing that we can get a move back up to the 1200 to 1245 area in the coming 3 weeks. Time will tell. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: I was long QQQ per my suggestion to buy in 29 area, but figured I would lose on the Friday drop, so suggested 27.50 as a hopefully, out of the way stop. Low was within 2 ticks of it. My strategy is normally to adhere to risk points. Sometimes it can pay to stay out of the bear's way, when we smell capitulation final blow off type lows AND the market is quite oversold. If long QQQ, suggest leaving a stop in at 27.50 for one more day. Will update Monday night. Stay tuned! Continue to like buying dips, such as back to the 28 area. Key overhead resistance is at the top of the downtrend channel, currently intersecting around 29.4. The lower envelope band on the Q's was pointing to a good place to buy also, just like the last low. Friday was funky but had a nice surprise - there is life in tech if it's cheap enough or oversold enough. The bears are getting a little more nervous at this point. Notice how surprises come not JUST on the short side, which suggests not getting complacent on either side of the market. As said before watch MSFT, ORCL, CISCO and QCOM, beside INTC - the first 4 of the "Fab 5" are holding up pretty well and may be poised to rally. I think Intel can at least "fill in" most if not all of its downside gap from Thursday-Friday, at some point. 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 ************************************************************** ************** Editor's Plays ************** Long Term Thinking Before we get into this weekend's play I need to update the SMH semiconductor puts from last week. The $40 puts profiled last week at $2.65/$3.50 hit highs of $6.40/$7.00 on Friday with the SMH closing at $34.60. While I would expect the SOX/SMH to go lower based on the Intel guidance, they could bounce on Monday on oversold conditions. Snug up your stops and take your profits. Look for a bounce if you want to get back in. *********************** Intel - Call Options, A Free Play Did I get your attention? For the reasons spelled out in my commentary this weekend I think Intel at a $22 close on Friday is a gift. The slight change in guidance knocked them back in time to October 10th. That was the last time Intel traded at this level. This is only $3 above the September disaster lows of $19.08 and you have to go back to Oct-1998 to find a lower low. Despite all the gloom and doom you would be hard pressed to find anyone who does not expect the economy to not only recover but grow again over the next two years. The longer we tread water at these levels the stronger the eventual recovery will be. Computers will need to be upgraded from the Y2K replacement wave and even if it is only half of them it will be a huge jump in IT spending. Add in any new growth and business development and Intel could be back at peak earnings potential within two years. Consider also that they have cut costs substantially which will increase profits. Excess chip production capability at competitors has been shut down which will lead to higher prices when the demand picks up. Two years is a lifetime in chip development. With power doubling every 18 months that puts another generation of processors in the hands of the public. Their 64 bit processors will be online and entirely new server models will be commonplace. The 2.2 GHZ PC I bought last week will be obsolete and a 5 GHZ or faster will be the "standard" for business computers. Not upgrading your 3yr old 400-600 mhz computer today may be ok but when the world moves to the next 5 GHZ level it will be on Intel chips. Your PC will then be 5 years old and qualify as "antique" in computer terms. All this drum beating is simply to convince investors that Intel at $22 in Jan-2005 is not a very likely possibility. The way to play this is with Call leaps. The Jan-2004 $25 leap is $4.50 as of the close on Friday. The Jan-2005 $25 leap is only $6.10. Both of these are much less than simple call options a year ago. If that is too much money to risk on a two year investment then sell the same strike Leap Put to offset the price of the call. The Jan-2004 $25 put is $6.50. Subtract the $4.50 price of the call and you have a $2 credit and unlimited upside. Should Intel close under $25 you will own the stock with a basis of $23, only $1 more than today's price. Sell the Jan-2005 $25 put and you get $6.80, which produces only a $.70 credit but you have an extra year for Intel to increase in profits and price and reduce the odds of a close under $25 at expiration. You cannot get a much better deal than this in option investing. *********************** Remember, these are all high risk plays and should only be made with 100% risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** Bears To The Rescue? By Eric Utley I think Friday's saviors were, ironically enough, the shorts. What had the potential to be a very ugly day turned out to be not so bad after all. Over the intermediate- and longer-terms, I think Friday's reversal bodes poorly for stocks. I don't have an intelligent idea for what the short-term holds, so I won't even try to speculate. From what I observed on the tape Friday morning, supply coming from longs selling dried up at the open. Without the necessary supply to cover into without causing an imbalance, the shorts did just that. Two high profile warnings from very important sectors should have caused more fear on the part of the bulls. Of course I'm talking about Biogen (NASDAQ:BGEN) in the Biotech arena, and Intel (NASDAQ:INTC) in the semis. These two were enough to induce a capitulation, but they didn't. For whatever reason, the longs weren't scared enough to throw in the towel, which I think only delays the inevitable, or we're in store for more of the bleed lower. But enough of the news, let's take a look at the sentiment indicators. The sector spotlight was pretty interesting Friday, with two commodity-based sectors earning the best and worst spots. The Oil Service Index (OSX.X) rebounded after a big slide lower earlier in the week. Yet Gold (XAU.X) was dismantled. My thinking is that the rally in the OSX.X was in relief, and that the group gets weaker into the coming weeks. As for gold, I don't know if Friday's move was enough to remove the excessive bullishness in that corner of the market, or if it was the beginning of a deeper contraction. The CBOE Market Volatility Index (VIX.X) had the makings of a big day in the early going, but failed to penetrate the 30 level. Above the 30 level is generally when we'll hear the VIX start being talked about in the financial media. For some reason, that is a level of importance. And they were most certainly watching it Friday as the index rolled over from 29.94, reaching the same level it did back in late January. Two things stick out to me in the VIX. The first is that fear is on the rise judging by the close above the 200-dma. But the second, which I've been writing for about for quite a while, is the VIX's inability to hold onto a gain in conjunction with a rally in stocks. Heck, stocks didn't even finish in the green Friday, but the VIX still closed lower. In other words, there's no skepticism among the big money crowd once they see stocks lift from the mat. This indicator alone, and I think it can be used as a stand alone indicator, and the way that it is acting suggests to me that the worse is not yet over. Plus, the disadvantage of a higher VIX to options traders means that you'll have to pay up for premium in the form of increased implied volatility. All that means is that it's much more difficult to control risk in options trades in the current market environment. Next the VIX, the most compelling action is taking place in the bullish percent data. The five markets we track are in either a corrective phase, or downright bearish. The one that I'd like to focus on this weekend in the Nasdaq-100 Bullish Percent ($BPNDX) which fell to 20 percent last Friday on a drop of another 4 stocks during Friday's session. At 20 percent, the indicator is just above where it was prior to the Cisco (NASDAQ:CSCO) ignited rally. The NDX is getting very, very oversold. That doesn't automatically mean that it's going to rally. But what it does tell us is that risk to the downside is growing smaller and smaller with the loss of each stock. If risk is smaller to the downside by a wide margin, then it makes sense to be managing your short positions closely, and looking to start getting bullish. I don't know what will finally shift the market back into a bullish mode, but the catalyst is usually unknown just like CSCO was about a month ago. The final piece of evidence that I'd like to examine this weekend in the activity among the Nasdaq traders in the Commitments of Traders (COT) report. Nasdaq commercials reached their most bullish reading in more than a year last week, while, get this, small traders just missed their most bearish reading of the year. The divergence between the two groups is what to really focus on when examining COT data, and that's exactly what we're getting with the most recent report. This piece of data combined with the oversold nature of the $BPNDX I think warrants a closer look to the bullish side of the tech sector FOR A TRADE. I did just that last Friday by putting some of my money to work in NDX names that were either at support levels or had achieve price targets during last Friday's session. We'll see how they pan out next week. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 9590 Moving Averages: (Simple) 10-dma: 9825 50-dma: 10084 200-dma: 9871 S&P 500 ($SPX) 52-week High: 1316 52-week Low : 945 Current : 1027 Moving Averages: (Simple) 10-dma: 1054 50-dma: 1090 200-dma: 1111 Nasdaq-100 ($NDX) 52-week High: 2071 52-week Low : 1089 Current : 1140 Moving Averages: (Simple) 10-dma: 1198 50-dma: 1291 200-dma: 1431 Oil Service ($OSX) The OSX narrowly out paced the HMO last Friday to earn the day's best performing sector spot. The OSX gained 2.04 percent on the day on what appeared to be a reaction to the sell-off in the first half of the week Leaders to the upside included Varco (NYSE:VRC), Transocean (NYSE:RIG), Rowan Companies (NYSE:RDC), Baker Hughes (NYSE:BHI), Noble (NYSE:NE), and Nabors (NYSE:NBR). 52-week High: 130 52-week Low : 58 Current : 100 Moving Averages: (Simple) 10-dma: 102 50-dma: 103 200-dma: 87 Gold and Silver ($XAU) Forget about the SOX, the real beating took place in the XAU last Friday. The index shed nearly 6 percent, easily earning the day's worst performing sector spot. The selling was pretty broad, and most likely a sector related sell program as there wasn't an individual disaster. The leading downside movers included Harmony Gold (NASDAQ:HGMCY), Anglogold (NYSE:AU), Newmont Mining (NYSE:NEM), and Gold Fields (NYSE:GFI). 52-week High: 89 52-week Low : 49 Current : 79 Moving Averages: (Simple) 10-dma: 85 50-dma: 77 200-dma: 63 ----------------------------------------------------------------- Market Volatility Well, the VIX ticked up to, but barely missed, the key 30 level from which it promptly reversed to finish, get this, lower for the day. Amazing, just amazing. I think it points to more downside eventually. A lot more. The VXN is getting more bullish, however, noting its ability to hold onto a more than 6 percent rally. It's now above the 200-dma. CBOE Market Volatility Index (VIX) - 26.70 -0.76 Nasdaq-100 Volatility Index (VXN) - 52.78 +3.02 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.79 636,476 504,550 Equity Only 0.67 509,336 340,841 OEX 1.29 33,953 43,796 QQQ 0.47 67,057 31,248 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 56 - 1 Bull Correction NASDAQ-100 20 - 4 Bull Correction DOW 47 - 3 Bear Confirmed S&P 500 50 - 2 Bear Confirmed S&P 100 50 - 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 1.72 10-Day Arms Index 1.63 21-Day Arms Index 1.36 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 1794 1694 NASDAQ 1367 1711 New Highs New Lows NYSE 43 131 NASDAQ 43 259 Volume (in millions) NYSE 1,800 NASDAQ 2,111 ----------------------------------------------------------------- Commitments Of Traders Report: 06/04/02 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 brought in a few of their shorts last week and added a few longs. Small traders grew slightly less bullish, but not by a meaningful amount. Commercials Long Short Net % Of OI 05/21/02 354,039 429,803 (75,764) (9.7%) 05/28/02 362,607 442,845 (80,238) (9.9%) 06/04/02 369,298 440,027 (70,729) (8.6%) 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 05/14/02 163,035 58,587 104,448 49.8% 05/21/02 172,313 57,803 114,510 49.8% 06/04/02 167,713 58,885 108,828 48.0% 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 quite a bit more bullish last week by bringing in a large number of short positions. Small traders meanwhile grew increasingly bearish with their addition of a number of short positions, to just off of their yearly high in bearishness. Commercials Long Short Net % of OI 05/21/02 51,448 45,375 6,073 (6.3%) 05/28/02 49,669 44,900 4,769 (5.0%) 06/04/02 47,875 39,100 8,775 (9.3%) Most bearish reading of the year: (15,521) - 3/13/01 Most bullish reading of the year: 8,775 - 06/04/01 Small Traders Long Short Net % of OI 05/21/02 12,567 19,899 (7,332) 22.6% 05/28/02 12,562 16,969 (4,407) 14.9% 06/04/02 12,162 21,420 (9,258) 27.2% Most bearish reading of the year: (9,877) - 12/21/01 Most bullish reading of the year: 8,460 - 3/13/01 DOW JONES INDUSTRIAL Dow commercials added a few more shorts than longs last week for a reduction in their new bullish position. The small traders were much more active with a significant drop in their bearish position. Commercials Long Short Net % of OI 05/21/02 20,173 15,317 4,856 13.7% 05/28/02 20,289 15,513 4,776 13.3% 06/04/02 20,564 16,169 4,395 11.0% 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 05/21/02 3,661 9,585 (5,924) (44.7%) 05/28/02 5,709 9,180 (3,471) (23.3%) 06/04/02 7,114 9,639 (2,525) (14.7%) 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 ************************************************************** *************** ASK THE ANALYST *************** Summer Time Blues By Eric Utley It's shaping up to be a long, cold summer for the bulls. Unless something gives real soon, a summer rally is looking very elusive to me. The lack of earnings, negative sentiment, mistrust of corporate America, and heightened global tensions are combining to put some serious pressure on this market. They like to say that it's always darkest before dawn, but I sure don't see any light on the horizon. When it gets so negative as it has during the last few weeks, it almost always pays to go against the prevailing sentiment since the crowd is generally wrong at major turning points. But doing so in a reckless way is a recipe for losses. If you're going to try to fight the crowd, do so in an intelligent way with precise stock picking. This weekend's column includes the review of one such stock that I would be looking at from a bullish perspective in this market environment. The point and figure charts that appear in this column were created using www.StockCharts.com. Please send your questions and suggestions to: Contact Support ---------------------------- Apple Computer (NASDAQ:AAPL) I was wondering what your thoughts were on AAPL after the INTC news. AAPL is holding above what looks like strong support even after the sell off today. Would you play this one or stay away? - Vingh Excellent observation, Vingh. Thanks for the question. AAPL has been one of the stronger stocks in the realm of technology. It has essentially traded sideways since the beginning of the year, consolidating its rally from last fall. For the most part, the stock has held onto its rally as it has yet to give a sell signal this year even after last Friday's draw down because of Intel. Yet, as Ving pointed out, AAPL's decline last Friday stopped at a very key support level at $21. I don't know what's going on at AAPL from a fundamental perspective, but Steve Jobs is obviously doing something right currently, or at least that is the perception of the market. I don't think that the stock would be displaying such relative strength in this market environment if at least a few things weren't going right at AAPL. The support level that Vingh observed is at $21. At current levels, that support level has held four times now, or it's become a quadruple-bottom. I'm of the belief that support grows weaker on each subsequent retest of a specific level because demand is finite. Nevertheless, I think AAPL represents an interesting bullish trade at current levels given the risk to reward dynamic at play in the stock, plus its relative strength ranking versus the Nasdaq. The stock hasn't displayed any signs whatsoever of deterioration in price versus the Nasdaq, which tells me that its most recent slide lower was purely a function of the broad market weakness. The $21 level is not only a quadruple bottom, but it's also the site of the stock's bullish support line coming off of the September low. What I like about the stock currently from a bullish perspective is that a tight stop can easily be determined and set at the $20 level. From current levels you're taking about $1.50 of risk, while the upside should be about twice that much if not more if the stock does in fact rebound. AAPL - Strong Support ---------------------------- Gold - (XAU.X) I don't have a stock question for...was wondering if you could share your thoughts on the gold sector and its recent round of weakness. Is this a buying opportunity in the sector. What do your point and figure charts say about the sector? - Thanks, Ray Thanks for the question, Ray, and good timing! Gold has been on fire this year for several reasons. The first is because of a defensive bid in the asset due to the crumbling of confidence in Wall Street as well as the nature of the political world. Gold will go up for two reasons, which are fears of inflation and turmoil of one sort or another. In the current case, there's turmoil all over the place. But there may also be some fear of inflation on the horizon, which is adding to the strength in the metal and the equities. The falling dollar versus other majors is a cause for concern for inflation watchers as a weaker currency diminishes purchasing power. That much has been talked about a lot in the financial media. Furthermore, I haven't traded currencies, but from what I've researched and studied, the currency markets tends to trend in long, deliberate moves, so I don't know if the trend in the dollar is about to end. It didn't show any signs of letting up last week, so that's something to keep in mind as we move forward. The move lower in the gold stocks last week was quite a divergence from the metal itself. Spot prices closed up around the $325 per ounce level, just off of the recent highs up around the $330 mark. Yet the XAU.X was off by more than 6 percent. I haven't done much valuation work in the gold sector due to a lack of time, but from what little I've studied the gold stocks seem pretty expensive on a historical basis and relative to the where the metal is trading. I'm wondering if last Friday's sharp sell-off was a correction of that imbalance. To directly answer the question, I think there's more downside to come for gold equities but the index is setting up for a bounce from a significant trend line in the not too distant future which may be tradable. From there I don't have a guess, although I'm thinking that gold and the equities have NOT reached their yearly highs yet. XAU – ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ************* COMING EVENTS ************* ================================================== Market Watch for the week of June 16th ================================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- RYAAY Ryanair Holdings Mon, Jun 10 Before the Bell 0.18 ------------------------- TUESDAY ------------------------------ None ----------------------- WEDNESDAY ----------------------------- HRB H & R Block Wed, Jun 12 After the Bell 2.44 ------------------------- THURSDAY ----------------------------- ADBE Adobe Systems Thu, Jun 13 -----N/A----- 0.25 HNZ Heinz Thu, Jun 13 Before the Bell 0.62 SIGY Signet Group Thu, Jun 13 Before the Bell 0.38 ------------------------- FRIDAY ------------------------------- AEP American Electric Pwr Fri, Jun 14 After the Bell 0.90 ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable AWR American States Water 2:1 06/07 06/10 FOSL Fossil, Inc. 3:2 06/07 06/10 ATK Alliant Tech 3:2 06/10 06/11 SABB Pacific Capital 4:3 06/10 06/11 APPB Applebees 3:2 06/11 06/12 IFIN Investors Fincl. Srvcs 2:1 06/13 06/14 WTRS Waters Instruments 3:2 06/14 06/17 OZRK Bank of the Ozarks, Inc. 2:1 06/14 06/17 MI Marshall & Ilsley 2:1 06/14 06/17 ALFA Alfa Corp 2:1 06/14 06/17 SGA Saga Communications 5:4 06/15 06/17 HCBK Hudson City Bancorp 2:1 06/17 06/18 WL Wilmington Trust 2:1 06/17 06/18 YUM Tricon Global Restaurants 2:1 06/17 06/18 PMI PMI Group, Inc. 2:1 06/17 06/18 MHO Schottenstein Homes 2:1 06/18 06/19 KSWS K-Swiss Inc. 2:1 06/21 06/24 JNC John Nuveen Co 2:1 06/21 06/24 -------------------------- Economic Reports This Week -------------------------- Earnings are finally out of the way. So look for investors to concentrate on this week's indications of economic activity. Although the Federal Reserve releases its "Beige Book" report on Wednesday, more influential reports will be presented on Thursday (PPI & Retail Sales). Don't forget, though, that Friday will shoulder the bulk of potentially market-moving data: Industrial Production, Capacity Utilization, Business Inventories and Consumer Sentiment. ============================================================== -For- Monday, 06/10/02 ---------------- None Tuesday, 06/11/02 ----------------- None Wednesday, 06/12/02 ------------------- Export Prices ex-ag. (BB)May Forecast: N/A Previous: 0.3% Import Prices ex-oil (BB)May Forecast: N/A Previous: 0.4% Fed’s Beige Book (DM) Thursday, 06/13/02 ------------------ Initial Claims (BB) 06/08 Forecast: N/A Previous: 383K PPI (BB) May Forecast: 0.1% Previous: -0.2% Core PPI (BB) May Forecast: 0.1% Previous: 0.1% Retail Sales (BB) May Forecast: 0.0% Previous: 1.2% Retail Sales ex-auto (BB)May Forecast: 0.3% Previous: 1.0% Friday, 06/14/02 ---------------- Business Inventories (BB)Apr Forecast: -0.2% Previous: -0.3% Industrial Production(DM)May Forecast: 0.4% Previous: 0.4% Capacity Utilization (DM)May Forecast: 75.6% Previous: 75.5% Mich Sentiment-Prel. (DM)Jun Forecast: 97.0 Previous: 96.9 Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************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 ************************************************************** 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 $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 06-09-2002 Sunday 2 of 5 ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************** INDEX TRADER GAMEPLANS ********************** THE SECTOR BEAT - 6/9 by Leigh Stevens Software Index ($GSO.X) - This was one of 3 sectors that looked like they could have been bottoming, based on possible double bottom lows - Semi's and the Broker group being the others, with these 2 taking out their prior early-May lows on Fri. Not so with the software group, GSO, which, at Friday's low at 114.75 held above its prior bottom (114.75). The Broker sector index ($XBD) did stop going down Friday at low end of its daily downtrend channel (at 423.84) and then closed well above (438.5) key prior technical support 429.10 - this close is suggesting we've seen at least a temporary bottom in the brokers - maybe even mother Merrill will regain its credibility as it scrambles to make changes! (CHART is below under "B's".) The Gold sector ($XAU.X), fell under its March-May up trendline at 81.00 - see chart below - suggesting that a full-blown correction has finally hit this high-flying group. (See CHART below under "G's".) HIGHER ON THE DAY ON Friday - DOWN ON THE DAY on Friday - SECTOR HIGHLIGHT - I think the small and midcap "size" sectors, as represented by the various iShares shown in the charts below, are a buy at current levels. The S&P SmallCap 600 and the Russell 2000 are the areas that I would target as buying opportunities for a longer term buy and hold and there are iShares that can purchased. The profit taking and rotational correction may have run its course as seen especially in the rebounds in IJR and RUT from areas of important prior lows. I suggest purchase at the Monday opening. Within the S&P 600, the iShares "Value" segment iShares (SYM: IJS - Friday close: 90.74) represents my preferred choice. However, if both value and S&P 600 "Growth" iShares (SYM: IJT - Fri. close: 74.64) were bought, along with the Russell 2000 iShares (SYM: IWM - Fri. close: 93.55), it would also offer a diversified selection within the small to mid-cap sectors. Stops are suggested at: IJS - 87.30; IJT - 72.00; IWM - 89.70 iShares, S&P SmallCap 600 (IJR): iShares, S&P SmallCap 600, "Growth" segment (IJT): iShares, S&P SmallCap 600, "Value" segment (IJS): iShares, Russell 2000 ($RUT.X): SECTOR REVIEW - Airline Index ($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. LAST UPDATE: 6/6 Amex Composite Index ($XAX.X) The Amex Composite downside momentum has accelerated as XAZ pierced its up trendline and 50-day moving average. The next downside target area looks like 897. LAST UPDATE: 6/6 Bank Index ($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 ($BTK.X) STOCKS: ABGX; ADRX; AFFX; AMGN; BGEN; CELG; CEPH; CHIR; CRA; DNA; ENZN; GENZ; GILD; HGSI; ICOS; IDPH; IMCL; IMNX; INCY; MEDI; MLNM; MYGN; PDLI; TARO; TEVA; VRTX; XOMA Looked like double bottom low could set up in the 374-375 area, but the prior low was exceeded, suggesting the biotech (BTK) sector will go lower still. LAST UPDATE: 6/6 (Securities) Broker Dealer Index ($XBD.X) Stopped going down Friday at low end of its daily downtrend channel (at 423.84) and then closed well above (438.5) key prior technical support 429.10 - this close is suggesting we've seen at least a temporary bottom in the brokers - maybe even mother Merrill will regain its credibility as it scrambles to make changes! The other bullish aspect, like the Software sector, is the bullish RSI/Price divergence that has set up in this sector, as the move to new lows was unconfirmed by a similar lower relative low in the RSI. LAST UPDATE: 6/9 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 ($XAU.X) STOCKS: ABX; AEM; AU; FCX; GOLD; HGMCY; MDG; NEM; PD; PDG; SIL 75.00 is the next potential support, after the decisive downside penetration of the March-May up trendline, a 50% retracement of the March-June advance. XAU needs to climb back above 82 to suggest that its bullish trend is back on track and that is more upside than seen already year to date. LAST UPDATE: 6/9 Health Providers Index; Morgan Stanley ($RXH.X) Healthcare Index; Morgan Stanley ($HMO.X) STOCKS: AET; AHG; ATH; CAH; CI; FHCC; HUM; MME; OHP; OPTN; PHSY; TGH; THC; UNH; WLP 645, at recent top is key resistance. HMO has been in strong uptrend, but appears to running into some selling in the group as the momentum has slowed. Analysis of key stocks in the group suggests that the sector is quite vulnerable to a downside reversal and deeper correction than has been seen to date. Near support is at 600, then 576. A daily close under 600 would suggest possible downside to the later support. LAST UPDATE: 6/6 6/6 UPDATE: Suggest exit on PacifiCare Health Systems (PHSY) bought on suggestion at 23.5-24.7. Stock momentum has slowed and is now sideways to lower. Close: 26.07. 6/6 UPDATE: Suggest taking profits on Wellpoint Health Networks (WLP) relative to entry at 70 and 72.00. Stock may be making a double top. Close: 75.66 6/6 UPDATE: Suggest exit on Humana (HUM) on entry suggested at 15.60 & 15.00-15.15. Close: 15.06. Stock is trending sideways and further upside potential looks doubtful. THC good be making a double top; AET is trending sideways and may be building a top; MME shot to new high above a "line" of resistance at 37 - then reversed to close on its lows - in a possible bull trap reversal pattern; OHP may be making a double top here - same pattern on UNH. High Tech Index; Morgan Stanley ($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) 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. GSO, at Friday's low at 114.75 has held its prior bottom (114.75) and this sector is looking more like it is forming a double bottom. LAST UPDATE: 6/9 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 *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu Week ERTS 63.25 -1.07 1.35 -0.18 -1.15 -0.75 Dropped DGX 90.93 -0.02 -0.71 1.48 0.58 3.51 Trending higher INTU 44.03 -1.13 0.40 1.43 -0.60 0.30 Wait on NASDAQ BRCD 19.49 -1.38 1.72 0.01 -0.23 -0.16 Holding steady NVDA 32.32 -1.97 1.58 -0.48 0.01 -1.14 Dropped LXK 60.99 -0.53 1.57 -1.98 -0.36 -1.46 Dropped AZO 82.95 -0.84 -2.15 1.81 1.04 1.10 Market leader PSFT 20.94 -1.22 1.05 1.35 -0.63 0.43 Ready to pop WLP 78.06 0.48 -0.56 2.42 -0.84 3.90 New, new high! OHP 49.05 -0.22 -1.23 1.30 -0.45 0.85 New, breakout PUTS GS 73.95 -1.66 0.01 1.95 -1.80 -1.55 Still sliding COHU 20.52 -2.86 0.55 -1.30 -0.77 -3.98 Entry approach WHR 68.75 -1.25 -1.80 1.97 -2.01 -2.65 Consolidating DUK 30.00 -1.31 1.00 -0.38 -0.64 -2.01 More bad news BLL 42.18 -1.30 -0.98 1.77 0.73 0.60 Dropped IDPH 38.24 -3.13 -1.66 0.80 -1.40 -4.65 More to come PMI 82.80 -0.91 -1.71 -0.48 -0.69 -2.80 Short covering DHI 25.00 -0.67 -1.48 1.40 0.61 0.48 Dropped, stop ICOS 19.63 -1.30 -0.51 0.15 -1.78 -2.98 Sector relief ATN 36.62 -1.50 -0.60 -0.01 -1.64 0.07 Dropped, stop MMC 96.34 -2.40 -0.06 1.12 -1.64 -4.56 New, no support MIL 37.22 -1.44 0.42 -0.02 -0.96 -2.36 New, breaking OMC 72.69 -2.96 -1.41 -1.63 -4.85 –13.64 New, panic ************************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 ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* WLP - Wellpoint Health Networks $78.06 (+3.90 last week) See details in play list Put Play of the Day: ******************** OMC – Omnicom Group $72.69 (-13.68 last week) See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ ERTS $63.25 (-0.75) After more than 2 weeks of banging its head on resistance at the $65 resistance level, it is looking less and less likely that the stock is going to be able to break out above that level. While nothing material has changed in terms of the company's business growth prospects, the sentiment in the broader Technology market is continuing to worsen in the wake of INTC's reduced revenue guidance. With daily Stochastics continuing to roll over and the series of lower highs on the daily chart over the past several days, it is time to remove ERTS from our call list in favor of stronger candidates. NVDA $32.30 (-1.16) As if INTC's reduced revenue guidance wasn't bad enough, JP Morgan came out on Friday morning and reduced their rating on NVDA to Market Perform. Given that bearish environment, it was impressive that the stock could battle back from its early deficit to close more than $2 higher, near the high of the day. But with the technical damage that has now been done to the Semiconductor sector and sentiment taking another blow from the downgrade, it is hard to justify the risk of looking bullish at NVDA. We're dropping the play this weekend in an effort to avoid getting caught in a downdraft next week. LXK $60.99 (-1.46) The woes in the technology sector continued to pressure LXK into Friday's session, two days after the stock was downgraded. That analyst downgrade changed the tone of sentiment in this not too long ago strong stock, plus the mounting troubles in technology are making matters worse. Given last Friday's breakdown, we're dropping coverage this weekend. Look for a relief rally to follow through early next week to cut losses in this play. PUTS ^^^^ DHI $25.00 (+0.48) The strength in the housing stocks continued last week despite the less than friendly broader market environment. DHI continue up through its 10-dma and closed right on our coverage stop at the $25 level. The stock may rollover from this level early next week, but we don't want to hang around in the event of further upside in the sector and this stock. Use any such rollover to exit plays into intraday weakness. ATN $36.62 (+0.07) What was shaping up to be another good move lower in ATN last Friday turned into a complete reversal of trend as the shorts came in to cover the stock following its trade down below the $32 level. The stock powered through its short term congestion and slightly above its 10-dma and our coverage stop. The reversal probably didn't offer too many good entry points, but in case you did pull the trigger on puts last week, look to use very tight stops above Friday's close or for any pullback as an exit point early on in Monday's session. BLL $42.18 (+0.60) It seems that the Salomon Smith Barney upgrade in BLL Thursday helped the stock gain some momentum in Friday's session when it again tested the 10-dma and tried to breakout. We fear further upside in this stock, so we're dropping coverage this weekend ahead of the next possible round of short covering. Use a tight stop just above Thursday's intraday high or use an pullback during intraday action early next week to exit plays. *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************************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 ************************************************************** ********** 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 Sunday 06-09-2002 Sunday 3 of 5 ************************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 ************************************************************** ************** NEW CALL PLAYS ************** WLP - Wellpoint Health Networks $78.06 (+3.90 last week) WellPoint Health Networks Inc. is a managed healthcare company. As a result of the January 2002 completion of its merger with RightCHOICE Managed Care, Inc., the Company had approximately 12.5 million members as of January 31, 2002. The Company offers a broad spectrum of network-based managed care plans, including preferred provider organizations (PPOs) and health maintenance organizations (HMOs), as well as point-of-service (POS) and other hybrid plans and traditional indemnity plans. In addition the Company offers managed care services, including underwriting actuarial services, network access, medical cost management and claims processing. Healthcare is on fire! After a very brief consolidation, the group headed back for yearly highs last week. The Morgan Stanley Healthcare Index (HMO.X) hit a multi year high in late April/early may just below the 650 level. Following that move higher, the sector spent the better part of May consolidating its big rally since the beginning of the year. And just last week, it began to emerge from its consolidation between the 575 and 625 levels. The index is poised to make a run for the relative high near the 650 level, if not stage another big time breakout. That has us turning our bullish focus back to some of the stronger stocks in the group that are already trading at or near yearly highs. WLP turned up on the scan as one such stock that is once again ready to break into a new upward trend. The stock broke out from and closed above the $78 level during last Friday's session and appears to be ready for another run higher. Bullish healthcare traders can look for the momentum to continue into next week's trading. Watch for further weakness in the broader market to drive HMO index higher as investors seek a place of relative safety. A pullback down into the $75 support level would offer favorable entries on profit taking. Our stop is initially in place at $74.50. ***June contracts expire in two weeks*** BUY CALL JUN-75 WLP-FO OI=820 at $4.00 SL=3.00 BUY CALL JUN-80*WLP-FP OI=144 at $1.20 SL=0.75 BUY CALL JUL-77 WLP-GW OI=461 at $4.00 SL=3.00 BUY CALL JUL-80 WLP-GP OI=277 at $2.75 SL=1.75 Average Daily Volume = 2.41 mln OHP – Oxford Health Plans, Inc. $49.05 (+0.85 last week) Oxford Health Plans is a healthcare company providing health benefit plans primarily in New York, New Jersey and Connecticut. The company's product line includes its point-of-service plans, the Freedom Plan and the Liberty Plan, health maintenance organizations, preferred provider organizations, Medicare+Choice and third-party administration of employer-funded benefit plans. It is hard to find a stronger sector of the market than Health Care right now, and a big part of that is due to the fact that the companies in the sector are continuing to grow their earnings, demonstrating their relative insensitivity to the vagaries of the economy. After its stellar run this spring, the Health Care Payor index (HMO.X) has been catching its breath in a healthy consolidation pattern. Judging by the recent series of higher lows and higher highs, it looks like the bulls are ready to run again. Friday's nearly 2% rally brought the HMO index within 10 points of its all-time closing high set in early May. As one of the stronger HMO stocks, OHP likewise needed some time to consolidate its gains from the spring, and judging by Friday's breakout to a new high, the stock is ready to run again. With volume 30% above the ADV supporting Friday's 3% rally, it is clear that there is some bullish conviction at work here. Going back to the long column of X's on the PnF chart that were posted as the stock recovered from its October lows, we can see that the stock still has plenty of room to run before reaching its bullish price target of $71. And Friday's move through the $49 level created a fresh buy signal. As a measure of the stock's strength, note how it once again found support at its ascending support line (beginning in early October) 2 weeks ago and has been moving strongly ever since. Entering on a pullback would be the preferred method of initiating new positions, but given the breakout on Friday, we may not get that lucky. Consider new positions on a bounce from the $48 level, but the really solid entry would come on a rebound near the $46.50 support level, also the site of the ascending trendline. Alternatively, a push through the $50 level can be used for momentum-based entries, but keep a sharp eye out for profit taking. Afterall, it is still a nervous market. Initial stops will be set at $46. *** June contracts expire in 2 weeks *** BUY CALL JUN-47 OHP-FT OI=1962 at $2.45 SL=1.25 BUY CALL JUN-50 OHP-FJ OI=1019 at $0.90 SL=0.50 BUY CALL JUL-47 OHP-GT OI= 264 at $3.30 SL=1.75 BUY CALL JUL-50*OHP-GJ OI= 27 at $1.80 SL=1.00 BUY CALL AUG-50 OHP-HJ OI=1655 at $2.60 SL=1.25 Average Daily Volume = 764 K ************************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 ************************************************************** ****************** CURRENT CALL PLAYS ****************** AZO – AutoZone, Inc. $82.95 (+1.10 last 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. Apparently relative strength still counts for something in this market, and AZO has got it in spades. Following the profit-taking dip early in the week, the stock bucked the broad market trend and marched right back up the chart over the past 3 days, ending the week by posting a new all-time closing high. While volume hasn't been explosive, it is definitely solid, with Friday's tally coming in about 10% above the ADV. For the reason behind the stock's bullish behavior, all we have to do is look at the earnings. AZO blew away estimates again on May 21st and in the weak market environment, investors continue to be attracted to companies that are posting solid earnings growth. Even with the huge gap down in the broad market averages, AZO didn't so much as blink on Friday before continuing on its northward trek, opening where it left off on Thursday and moving up to close just below its high of the day. Intraday dips to support are proving to be high odds entry points, and we want to look to initiate new positions on a rebound from the $81-82 area or possibly near strong support at the $80 level. Given the strength of the stock's trend, we don't expect the $80 level to be violated even if the broad market has another hiccup next week, so we are raising our stop to $79.50 this weekend. Momentum traders will want to watch the $83.50 level, as a breakout over the stock's intraday highs at that level will likely usher in a fresh wave of buying. And we want to point out that a print at $84 will generate a fresh triple-top buy signal on the PnF chart, adding to the bullish outlook. *** June contracts expire in 2 weeks *** BUY CALL JUN-80 AZO-FP OI=3133 at $4.10 SL=2.50 BUY CALL JUN-85 AZO-FQ OI=2258 at $1.20 SL=0.50 BUY CALL JUL-80 AZO-GP OI= 201 at $5.40 SL=3.50 BUY CALL JUL-85*AZO-GQ OI= 731 at $2.65 SL=1.25 Average Daily Volume = 1.05 mln BRCD – Brocade Communications $19.49 (-0.16 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. Technology stocks don't seem to be the place to look for bullish plays, given the recent weakness in the NASDAQ, but there are areas of relative strength that seem to deserve our attention. The storage stocks like BRCD and QLGC recently tried to get some bullish action going, but were unable to overcome the weakness in the overall Technology arena. But with the Bullish Percent on the NASDAQ-100 now entering oversold territory, perhaps it is time to start looking for select bullish plays. BRCD has been finding support in the $18 area for the past week and it is encouraging that in the midst of the most recent NASDAQ decline, the bears couldn't put a dent in that support level. If you're looking for some bullish news to hang your hat on, then look no further than the company's recent guidance. On Wednesday, BRCD reaffirmed its revenue and earnings guidance for Q3 and Q4, and investors have cheered that news by not pummeling the stock with those areas of Technology that have fallen out of favor. Friday's action was a picture perfect entry point, with the stock falling right to major support at $18.25 before rebounding and rallying throughout the day. Sure the stock ended the day with a fractional loss, but in light of where it started the session, it made for a nice recovery. Continue to target intraday dips to support in the $18-19 area, or else enter new positions on a volume-backed rally through the $20.50 intraday resistance level. Above that there is significant resistance at the $23 level, the site of the descending trendline, but it looks like we can definitely post some gains between here and there. *** June contracts expire in 2 weeks *** BUY CALL JUN-20 BQB-FD OI=14590 at $1.25 SL=0.50 BUY CALL JUN-22 BQB-FX OI= 5064 at $0.45 SL=0.00 BUY CALL JUL-20*BQB-GD OI= 2605 at $2.20 SL=1.00 BUY CALL JUL-22 BQB-GX OI= 3556 at $1.30 SL=0.75 BUY CALL JUL-25 UBF-GE OI= 7408 at $0.70 SL=0.25 Average Daily Volume = 17.0 mln DGX – Quest Diagnostics $90.93 (+3.51 last week) Quest Diagnostics was the result of a 1996 Corning spinoff, and currently holds the title of the world's #1 clinical laboratory. DGX performs more than 100 million routine tests annually, including cholesterol, HIV, pregnancy, alcohol, and pap smear tests. Operating laboratories throughout the US and in Brazil, Mexico, and the UK, DGX also performs esoteric testing (complex, low-volume tests) and clinical trials. The company serves doctors, hospitals, HMOs, and other labs as well as corporations, government agencies, and prisons. Health Care-related stocks flexed their relative strength muscles again on Friday, with the Health Care Payor index (HMO.X) ending the day with a nearly 2% gain and closing at its highest level in over a month. The pattern of higher lows and higher highs over the past four weeks seems to be pointing to a move to new all-time highs in short order. While not a component of the HMO index, DGX is benefiting from the strength in the group along with its own positive earnings growth trend. After falling back in late May to the $85 support level, we suspected that DGX had been gathering its strength for another bullish run and we were right. The flight-to-quality buying propelled the stock through near-term resistance at $88 on Thursday and that close over the 20-dma led to a stellar performance on Friday. DGX blasted through the $90 resistance level on solid volume. While the stock actually pushed as high as $92 intraday, DGX couldn't hold that level with the broad markets backing off from their highs in the final hour of trade. It is no surprise to see the late day weakness in DGX, as $92 is a significant level of resistance that will take a bit of momentum to get through. DGX will likely need to pull back a bit before advancing further, so we want to look to initiate new positions on intraday dips near support. Look for buyers to show up first at $90, but more likely in the $88-89 area. The recent bullish move gives us the freedom to move our stop up to $87. *** June contracts expire in 2 weeks *** BUY CALL JUN-90 DGX-FR OI= 744 at $2.60 SL=1.25 BUY CALL JUN-95 DGX-FS OI=2174 at $0.55 SL=0.25 BUY CALL JUL-90 DGX-GR OI= 154 at $4.40 SL=2.75 BUY CALL JUL-95 DGX-GS OI= 71 at $2.05 SL=1.00 Average Daily Volume = 904 K PSFT – PeopleSoft, Inc. $20.94 (+0.41 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. The sharp market decline that resulted on Friday in the wake of INTC's reduced revenue guidance hit every area of Technology hard. The Software index (GSO.X) was interesting though in that it once again fell to its September lows and then rebounded to end the day with a fractional gain. It seems that each time this level is tested, the bulls come out of hiding to support it. Could it be that the GSO is ready to stage a meaningful rally? If we can believe the news from ORCL earlier in the week, the answer may be a cautious "Yes". A quick look at the GSO chart certainly doesn't show a screaming buy signal in place, but it is encouraging that the worsening sentiment in the Technology sector hasn't been able to pressure it below its major support. PSFT is presenting a very similar picture, as it continues to hold the $19 support level, and it is encouraging that the stock hasn't yet tested its September lows. This is clearly a play where we're looking to pick a bottom, but risk should be easy to manage. Intraday dips near the $20 level continue to provide solid entry points (Friday's early dip was the latest proof of that) as the bulls continue to whittle away at overhead supply between $21-22. Buy the dips near that level or else wait for a breakout over $22 on solid volume. Monitor the GSO index too, as a failure of the index to hold its current support near the $115 level would be a very bad sign. We are currently protecting ourselves with a stop set at $19. *** June contracts expire in 2 weeks *** BUY CALL JUN-20 PQO-FD OI=3244 at $2.00 SL=1.00 BUY CALL JUN-22 PQO-FX OI=7141 at $0.90 SL=0.50 BUY CALL JUL-20*PQO-GD OI= 410 at $2.95 SL=1.50 BUY CALL JUL-22 PQO-GX OI=2371 at $1.75 SL=0.75 BUY CALL JUL-25 PQO-GE OI=5922 at $1.00 SL=0.50 Average Daily Volume = 8.82 mln INTU - Intuit $44.03 (+0.30 last week) Intuit, Inc. is a provider of small business, tax preparation and personal finance software products and Web-based services that simplify complex financial tasks for consumers, small businesses and accounting professionals. The Company's principal products and services include Quicken, QuickBooks, Quicken TurboTax, ProSeries, Lacerte and Quicken Loans. Intuit offers products and services in five principal business divisions, which include Small Business, Tax, Personal Finance, Quicken Loans and Global Business. INTU put in another week of relative out performance to the upside versus the broader Nasdaq measures. The stock finished the week fractionally higher, which was not a small feat given the meltdown in the technology sector. Still, we're not going to make any profits on stock that is moving sideways given the decay of time value in options, not to mention the bid/ask spread. We need to see some upside movement start taking place in INTU next week, which is very likely as long as the Nasdaq doesn't continue pushing lower. The oversold nature of the broader technology segment of the market should mitigate any further downside. And if the market isn't going down, INTU has a good chance of moving higher. The stock worked along its 10-dma late last week, finding support near that short term moving average during its intraday pullbacks. Friday's session saw the stock trace an inside day within Thursday's range of the low at the $43.38 level to a high of $44.70. Those are the two points of reference for support and resistance going into next week's trading. A breakdown below the low could reverse the stock's short term trend higher, while a breakout above Thursday's high could set up an ultimate move higher out of the recent consolidation and above the $46 level. Either level is tradable depending on style and risk tolerance. ***June contracts expire in two weeks*** BUY CALL JUN-40 IQU-FH OI=1557 at $4.60 SL=3.75 BUY CALL JUN-45*IQU-FI OI=1983 at $1.25 SL=0.75 BUY CALL JUL-40 IQU-GH OI=3835 at $5.40 SL=4.00 BUY CALL JUL-45 IQU-GI OI=2058 at $2.40 SL=1.75 Average Daily Volume = 2.41 mln ************* NEW PUT PLAYS ************* MIL - Millipore $37.22 (-2.36 last week) Millipore Corporation is a multinational bioscience company that provides technologies, tools and services for the discovery, development and production of new therapeutic drugs. The Company's products serve the worldwide life science research, biotechnology and pharmaceutical industries. Millipore's products are based on a variety of enabling technologies, including the Company's membrane filtration and chromatography technologies. In life science research, Millipore offers products for genomics, proteomics, drug discovery and general laboratory applications. The recent slump in the Biotechnology industry is spreading down to other segments dependent on its success. Unfortunately, many are struggling under the weight of the bearish momentum in the BTK. MIL is a company that provides biotech concerns with the technology and tools to conduct research on new drugs, and drugs already in developmental stages. The thinking is that the large biotech companies that are issuing big earnings warnings, Biogen being the most recent company to deliver bearish news, aren't going to be spending a lot of new money on capital expenditures such as research and development tools such as the ones that MIL provides. That much is being reflected in the stock that is coming out of a two month consolidation following its own earnings warning in late February. The stock is now slipping into a new negative trend and looks to be heading much lower over the short term as the trend picks up speed and downward momentum. Bearish traders can look for further weakness in the biotech sector next week to continue pressuring MIL lower along its descending trend line. Use rollovers from the upper end of the declining trend near the $39 level as entry points during any intraday relief rallies. Or look for a breakdown below last Friday's low at the $36.90 level to usher in more selling. Or stop is initially in place at the $40 level, about 0.75 above the stock's 10-dma. ***June contracts expire in two weeks*** BUY PUT JUL-40*MIL-SH OI=40 at $3.70 SL=1.75 BUY PUT JUL-35 MIL-SG OI=13 at $1.05 SL=0.50 Average Daily Volume = 401 K MMC - March Mclennan $96.34 (-4.56 last week) Marsh & McLennan Companies, Inc. is a professional services firm. MMC subsidiaries include Marsh Inc., a risk and insurance services firm; Putnam Investments, LLC, an investment management company in the United States; and Mercer Consulting Group, Inc., a global provider of consulting services. Approximately 58,000 employees worldwide provide analysis, advice and transactional capabilities to clients in over 100 countries. MMC operates in three principal business segments: risk and insurance services, investment management and consulting. The prospects of another terrorist attack on the United States is a foregone conclusion. That is putting pressure on the major insurers. But the bigger theme at work that is hurting the major insurers is the growing belief that the U.S. economy is heading for a double dip after the most recent recession was declared ended recently. Major insurers are breaking down left and right, and MMC appears to be the next one ready to move lower. The stock closed precipitously just above key support at the $95 level in last Friday's session on another nearly 2 percent drop on very heavy declining volume. The stock's fall from grace began earlier this spring when it rolled over from relative highs up above the $110 level. From there, the stock sank to as low as the $97 level before staging a month long consolidation between that support level and just below the $105 mark. The formation is a classic long liquidation pattern, and it appears ready to enter the next leg of selling upon the breakdown and confirmation below the $95 level next week. Look for further weakness in the broader market to pressure the stock lower, especially in the Dow Jones Industrial Average ($INDU) and the S&P 500 (SPX.X). Further breakdowns in those two should most likely be enough to pressure MMC below its short term support. We would just as happily take new put entry points from a rollover near resistance. The closest short term area of congestion lies overhead at the $100 level, where the 10-dma closed last Friday. Our stop is just above that level at the $101 mark. ***June contracts expire in two weeks*** BUY PUT JUL-100*MMC-ST OI= 277 at $6.10 SL=4.75 BUY PUT JUL- 95 MMC-SS OI=1029 at $3.40 SL=1.75 Average Daily Volume = 906 K OMC – Omnicom Group $72.69 (-13.68 last week) Omnicom Group is a marketing and corporate communications company. The company has grown its strategic holdings to over 1500 subsidiary agencies operating in more than 100 countries. OMC's wholly and partially owned businesses provide communications services to clients on a global, pan-regional and national basis. The company's agencies provide an extensive range of marketing and corporate communications services, including advertising, brand consultancy, crisis communications, custom publishing, database management, digital and interactive marketing, business-to-business advertising, employee communications and environmental design. OMC also provides field marketing, healthcare communications, marketing research, promotional marketing and sports and event marketing. As one weak stock after another has been taken apart in recent weeks, it is increasingly easy to find stocks that are breaking major levels of support. What is harder to do is find a stock breaking down that still has room to fall. Have we got a candidate for you! And as a bonus, there are issues of potential accounting irregularities at play. OMC has been in free fall for much of the past week, and the slide seemed to accelerate once major support at $83.50 and the 200-dma were violated. With heavy volume (6 times the ADV on Friday) confirming the stock's weakness, it goes without saying that there must be an underlying catalyst. On May 30th, Merrill downgraded the stock to Buy on valuation concerns and then the rumors started flying about accounting irregularities. A few days later and OMC was trading more than $11 below where it was when the downgrade was issued. That prompted Merrill to come out with an upgrade to Strong Buy on Friday morning, followed by a statement from the company reaffirming guidance and stating that it knows of no corporate development to account for the recent price weakness. That good news was good for another 3.75% haircut on Friday on extremely heavy volume. Investors have clearly gotten into a pattern of disbelieving what companies have to say and OMC is now responding to the effects of the technical breakdown. In recent history, stocks have shown a pattern of not recovering from this sort of news, even if the rumors are later proved to be false. Given the deeply oversold nature of OMC, a bounce is to be expected in the near-term, and the best entries will come as that bounce runs out of steam. Look for a rollover near the $75-76 area to provide the best entry point. We don't want to rule out the possibility that OMC could just continue to fall either, as the recent double-bottom sell signal is pointing to $54 as an eventual target. Momentum traders can look to enter the play on a drop under the $72 level. Judging by the way the price collapsed in the final hour, this might be the most likely scenario next week. To make room for a possible oversold bounce, we are setting a wide stop at $79. Traders that enter on a breakdown will want to set a tighter stop, ideally at $76. *** June contracts expire in 2 weeks *** BUY PUT JUN-75 OMC-RO OI= 925 at $4.10 SL=2.75 BUY PUT JUL-75*OMC-SO OI=2671 at $5.20 SL=3.25 BUY PUT JUL-70 OMC-SN OI=1199 at $3.00 SL=1.50 Average Daily Volume = 1.47 mln ************************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 ************************************************************** ********** 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 Sunday 06-09-2002 Sunday 4 of 5 ************************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 ************************************************************** ***************** CURRENT PUT PLAYS ***************** COHU - Cohu Inc. $20.52 (-3.98 last week) Cohu, Inc. is the owner and operator of businesses in the semiconductor equipment segment, and the television camera segment. The Company's wholly owned subsidiary Delta Design, Inc., designs, manufactures and sells semiconductor test handling equipment to semiconductor manufacturers and semiconductor test subcontractors throughout the world. The Company's Electronics Division designs, manufactures and sells closed circuit television cameras and systems to original equipment manufacturers, contractors and government agencies. Here we are, a week later, and COHU is about $4 lower from the last weekend review, when the stock was poised to rollover from its 10-dma which at the time was up above the $24.50 level. The last week was kind to put players in COHU, who should be either looking to protect profits or lock in gains going into next week's trading, if those measures haven't already been taken. As for the latest price action, we started to see the short covering that we have been preparing for during last Friday's rebound in the broader technology segment of the market. COHU dipped down to about the $19 level during the day, along the way offering plenty of exit opportunities for those in plays from last week. The stock then rebounded to close the week back above the $20 level and looks to be exposed to further short covering next week, which would be a welcome development as far as we're concerned. Another round of short covering would help to remove some of the stock's oversold nature and offer another good set of entry points. We will be watching closely for rollovers near the 200-dma in next week's trading. That level is currently above current levels at the $21.70 mark. The falling 10-dma, now at $22.50, should reach the 200-dma by next week, and possibly give a bearish crossover sell signal. The 10-dma should help to reinforce the longer term moving average as resistance, which is why we like the prospects for a rollover from the $21.75 area. ***June contracts expire in two weeks*** BUY PUT JUN-25*QCH-RE OI=49 at $4.80 SL=4.00 BUY PUT JUL-22 QCH-SX OI=20 at $2.95 SL=1.75 Average Daily Volume = 160 K WHR - Whirlpool $68.75 (-3.15 last week) Whirlpool Corporation is a worldwide manufacturer and marketer of major home appliances. The Company manufactures in 13 countries under 11 major brand names and markets products to distributors and retailers in more than 170 countries. The Company manufactures and markets a full line of major appliances and related products, primarily for home use. The Company's principal products are home laundry appliances, home refrigerators and freezers, home cooking appliances, home dishwashers, room air-conditioning equipment, and mixers and other small household appliances. The Company also produces hermetic compressors and plastic components, primarily for the home appliance and electronics industries. WHR didn't display much conviction in either direction during last Friday's session despite the volatility in the broader market and the Dow Jones Industrial Average ($INDU). The stock did though shed more than $3 for the week, making it a most successful put play given the lack of implied volatility in the options for WHR. In last Friday's session, we saw the stock breakdown from its inside day set up from the previous session, which should help to shift the short term bias even lower going into next week's trading. The stock's consolidation during the latter half of last week's trading above its 200-dma should prove to be only a short term pause in the overwhelming downward trend now in place for the last three weeks. A little consolidation before the next leg lower is to be expected as no stock moves down in a straight line, so let's try to be patient with this stock. Future rollovers from below the $70 level would offer favorable entry points into new put positions, with pressure coming from the downward sloping 10-dma, which closed last Friday's session at the $70.68 level. To the downside, we've seen support around the $67.75 level hold several times, but that level should give way to further pressure from the broader market. Below that short term support, let's target the $65 level to the downside. ***June contracts expire in two weeks*** BUY PUT JUN-70*WHR-RN OI=602 at $2.65 SL=1.75 BUY PUT JUL-70 WHR-SN OI= 25 at $3.90 SL=2.75 Average Daily Volume = 555 K DUK - Duke Energy $30.00 (-2.01 last week) Duke Energy Corporation offers physical delivery and management of both electricity and natural gas throughout the United States and abroad. Duke Energy provides these and other services through seven business segments: Franchised Electric, Natural Gas Transmission, Field Services, North American Wholesale Energy (NAWE), International Energy, Other Energy Services and Duke Ventures. DUK reported Friday morning that the U.S. government had requested additional information on round trip trades from the company. The SEC asked last week for additional documents relating to potential wash trades, but the company didn't disclose the specifics of the request because it was a non public request by the SEC. DUK issued another press release later in the day trying to clarify its earlier announcement, saying that it was fully cooperating with the request and that it believe that it had not done anything wrong. The earlier news item caused the stock to drop as low as the $28.75 level before rebounding back above the $30 level to close out the week slightly better than might have happened if the massive short covering had not come into the stock. The trade lower during the morning should have offered traders a good exit point from the inside day set up earlier in the week when we highlighted DUK as a play of the day. Plus the trade down helped to further break short term support, and keep the stock's series of lower relative lows alive and well. From here we'll look for future rollovers from resistance as additional entry opportunities. A relief rally up to and rollover from the $31 level should offer the next solid entry point into put plays. And try to keep an eye on the news wires for the latest events surrounding the energy sector. ***June contracts expire in two weeks*** BUY PUT JUN-32*DUK-RZ OI=2591 at $2.90 SL=1.75 BUY PUT JUL-30 DUK-SF OI=6462 at $2.10 SL=1.00 Average Daily Volume = 4.16 mln PMI - PMI Group $82.80 (-2.80 last 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. PMI staged a very weak relief rally during last Friday's session when the broader market finished lower for another day. Coming into Friday's session, PMI had closed lower for six consecutive days, making the stock quite oversold over the near term and due for a relief rally. That's exactly what happened in last Friday's session as the shorts decided to take some profits off the table going into the weekend, and the longs decided to hold off on liquidations for the time being. The stock's relief rally came on extremely light volume as a mere 186,900 shares crossed the tape. Compare that volume to the previous days of trading activity that were close to 400,000 shares per day while the stock was moving lower. Even the 30-day average trading volume of 325 K is well above Friday's mark, which is all the more reason to believe that the stock's strength was nothing more than short covering. But PMI did trace a bullish engulfing candle on its daily chart, meaning that Friday's low and high took out the prior day's range and the stock closed above that range. The pattern hints at a very short term reversal, which would be fine by us as it would set up yet another great entry point into this trending stock. Look for further strength to run into resistance at the 10-dma now overhead at the $84.32 level, and watch for a rollover to target shoot new entry points from. ***June contracts expire in two weeks*** BUY PUT JUN-85*PMI-RQ OI= 37 at $3.20 SL=1.50 BUY PUT JUL-80 PMI-SP OI=150 at $2.15 SL=1.00 Average Daily Volume = 325 K ICOS - ICOS $19.63 (-2.88 last week) 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 earnings warning from industry heavyweight Biogen cast a dark cloud over the biotechnology sector during last Friday's early going as ICOS, along with the broader sector, gapped lower into further weakness. But the stock turned on a dime at the $17.88 level following its sector higher through the rest of the day on a sector wide case of short covering ahead of the weekend. The biotech sector had been heavily sold going into Friday's session, and Biogen's bearish earnings warning was the news event that the shorts were looking for to cover their bearish bets and take short term profits. But the Biogen warning did help to reveal just how difficult the earnings environment has become in the biotechnology sector, and why the group is still a good bearish bet after this current round of short covering runs its course. As for ICOS, its rebound during last Friday's session will set up another entry point near resistance sometime next week. That could come as soon as the $20 level is touched on the way back up as institutional investors look to unload at what is now a serious resistance level for the stock. If the $20 level is breached on the way back up to retracing its recent downward push, then the 10-dma now overhead at the $21.79 level should come into play as a potential rollover point and as such an entry point into new put plays. Just make sure to confirm the direction in the Biotechnology Sector Index (BTK.X) before attempting to enter on a rollover near resistance. ***June contracts expire in two weeks*** BUY PUT JUN-20*IIQ-RD OI=349 at $1.45 SL=0.75 BUY PUT JUL-20 IIQ-SD OI=133 at $2.60 SL=1.75 Average Daily Volume = 1.60 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 ************************************************************** ***** LEAPS ***** Capitulation? I Think Not! By Mark Phillips mphillips@OptionInvestor.com The VIX wins again! Despite much speculation to the contrary, that pesky VIX creeping along in the low 20's once again presaged a significant market decline. I've said it before and I'll say it again (as much to remind myself, as all of you), the markets are unable to stage any kind of meaningful rally if the rally attempt begins with the VIX near the lower end of its historical range. Every meaningful rally over the past 4 years has begun with the VIX trading at or above the upper end of its historical range. File this little factoid away and revisit it every time you are thinking the markets are poised to rally. If the VIX is near the lower end of the range, then I would strongly recommend staying away. More important than making money is preserving capital, and just following this one simple rule will save you a bundle over the course of your investing career. I should have paid more attention to this fact before allowing myself to believe that we might see some bullish action over the past few weeks. Simply put, it just didn't happen with all of the major indices violating important support levels. Certain areas of the market are already testing their September lows (Software stocks) and others like the Biotechs have already broken well below the lows set shortly after the terrorist attacks. The good news is that we're starting to see signs of disgust in the investing community and once this cycle of despair runs its course, we should be poised for the next substantial bear-market rally. The bad news is that I don't think we're there yet. On the contrary, I think the old bear is just getting warmed up, despite the fact that the VIX came within striking distance of the 30 level on Friday. There is nothing magical about 30, just that it is a level that seems to typify the upper edge of the typical trading range. What causes me to doubt that we are ready to have a meaningful rally here (aside from the fact that the market internals were still pretty bad even after the recovery throughout the day) is the rapidity with which the fear denoted by the sharp rise in the VIX dissipated. After running to a high of 29.94, the VIX backed off to close out the day at 26.65. I'm sorry, but that does not signal real fear in the market when the VIX can reverse that quickly. I'll go out on a limb here (although I think it's a pretty sturdy limb) and say that all of the lows in the major averages from last week will be broken before the 4th of July. Heck, it could even happen before Flag day, which is a mere 2 weeks away. There just isn't anything to prop them up and I expect that they will fall under their own weight. With that being said, you are probably going to think I've taken leave of my senses when you see a new Call play on the NASDAQ-100 Trust (AMEX:QQQ) this weekend. But take the time to read it and I think you'll see the logic in my thought process. It is definitely an aggressive play, but if our bearish target is hit, I think it has high odds for success. What will likely puzzle you even more is the new bearish play on the Biotech HOLDR (AMEX:BBH). Yes, that's right. I pulled the plug on the bullish play due to another broken level of support, this one far more significant in my mind than any of the prior levels that have given way over the past couple months. Even if the broad technology sector manages to firm up, the negative fundamentals in the Biotechnology sector should continue to drive this group significantly lower than where it is this weekend. It appears I've already started ruminating on plays, so let's go through the whole list in an orderly fashion. Portfolio: JNJ - Stopped out again on this play as it continues to be pressured by the poor action in the Pharmaceutical sector. It's a drop this weekend and we're done with this one. MDT - Still consolidating and drifting slightly lower throughout the week, but actually holding up fairly well. Look for a rebound (however mild) in the broad markets (along with more bullish action in the Health Care sector) to propel the stock through its recent resistance near the $47.50-48.00 level. MSFT - It wasn't a pretty week for any play even remotely tied to the PC market, and for that reason we were actually pretty pleased with Mr Softee's performance. Even with INTC's major misstep on Thursday night, MSFT managed to hold support near $49 and bounce back to close out the week with a gain. As long as the lows near $48 are not violated, buying the dips continues to make sense. XOM - While it clearly hasn't gone anywhere since we added it, the action in XOM is actually encouraging. Even with the price of Crude Oil drifting down to the $25 level, the stock is holding up nicely. In fact, the relative strength chart of XOM relative to the August Crude Oil contract (CL02Q) is just about to break to a new 6-week high. Continue to use intraday dips near support in the vicinity of $39 to initiate new positions, but keep those stops in place just in case. PG - Well the initial euphoric pop off the ascending channel didn't get very far before the bearish tone in the broad markets dragged it back to earth. But that worked out nicely for late comers to the play, as it gave them an opportunity for an entry on the rebound from the $88 level on both Tuesday and Friday. Dips near the lower channel line are still buyable and we're protected with our stop at the $86 level. Watch List: WMT - I didn't really care for the action in WMT this week, although it did hold up rather well. After dipping to the $52 level, the stock meandered in the $54-55 range. Note how the 50% retracement of the fall rally is acting as a price magnet right now. I'm looking for it to give way as support and for the stock to gravitate down towards the 62% level near $51.50. Then we'll look to take an entry on an intraday dip near the $50-51 level, which should provide very strong support going forward. BRCM - A bit more weakness appeared this week, but did you notice how well the stock held up relative to the overall Semiconductor index (SOX.X)? Definitely starting to see some support build and it looks like the current entry target could give us a very nice entry point once the SOX finds a bottom and carries BRCM along with it on the rebound. AMAT - Dropped BBH - Dropped BBY - That was interesting little drop to the $42 level now wasn't it? That's precisely why we're looking aggressively lower for our entry into the play. BBY reaffirmed its Q1 earnings estimates on Thursday and that was all the bulls needed to hear to push it off its lows. Friday's early weakness filled the gap left on Thursday, allowing the stock to hold above the 200-dma, despite a downgrade to Hold by Jefferies. Despite the solid rebound, the $40 level still has my attention as a solid entry point. So where do we go from here? Look for a short-lived rebound next week so that the markets can somewhat relieve their oversold condition and then it should be back to the bearish party. The bears are starting to hit their stride again, and are feeding off the increasing fear in the marketplace. It is worth noting that the bullish percent on all of the meaningful broad market measures have now moved in favor of the bears (see Market Sentiment this weekend) and this should help to propel the markets down and volatility measures higher over the next few weeks. When we finally get some capitulation, look for the rebound to provide a solid trade to the upside. In the meantime, keep your powder dry and get ready to rumble. Have a great week! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: MDT 05/15/02 '03 $ 45 VKD-AI $ 4.00 $ 4.40 +10.00% $44 '04 $ 45 LKD-AI $ 7.30 $ 7.70 + 5.48% $44 MSFT 05/13/02 '03 $ 55 MSQ-AK $ 5.90 $ 5.60 - 5.08% $48 '04 $ 55 LMF-AK $10.20 $10.50 + 2.94% $48 XOM 05/22/02 '03 $ 40 XOM-AH $ 3.00 $ 2.85 - 5.00% $38.50 '04 $ 40 LXO-AH $ 5.10 $ 4.80 - 5.88% $38.50 PG 05/30/02 '03 $ 95 PG -AS $ 3.70 $ 4.40 +18.92% $86 '04 $ 95 KBJ-AS $ 9.00 $10.30 +14.44% $86 Puts: None LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: BRCM 10/28/01 $18-20 JAN-2003 $ 25 OGJ-AE CC JAN-2003 $ 20 ORD-AD JAN-2004 $ 25 LGJ-AE CC JAN-2004 $ 20 LGJ-AD WMT 03/31/02 $50-51 JAN-2003 $ 55 VWT-AK CC JAN-2003 $ 50 VWT-AJ JAN-2004 $ 55 LWT-AK CC JAN-2004 $ 50 LWT-AJ BBY 06/02/02 $40 JAN-2003 $ 50 VBY-AJ CC JAN-2003 $ 45 VBY-AI JAN-2004 $ 50 LBS-AJ CC JAN-2004 $ 45 LBS-AI QQQ 06/09/02 $25 JAN-2003 $ 28 OZC-AB CC JAN-2003 $ 25 OZC-AY JAN-2004 $ 28 LRI-AY CC JAN-2004 $ 25 LRI-AJ PUTS: BBH 06/09/02 $100-102 JAN-2003 $90 GBZ-MR JAN-2004 $90 KOV-MR JAN-2005 $90 XBB-MR New Portfolio Plays None New Watchlist Plays BBH - Biotech HOLDR $85.35 **Put Play** Don't ever let it be said that I'm not flexible. With the bearish action in the Biotechnology sector (BTK.X) again last week, I had to pull the plug on our bullish play. With the BTK breaking multi-year support at the $375 level along with an earnings warning from BGEN, sentiment in the group has taken a nasty turn for the worse. Expect the broken support to now become formidable resistance and we want to take advantage of that on any sort of oversold rebound. The PnF charts now tell an interesting story, with the recent breakdowns pointing to bearish objectives of $320 for the BTK and $76 for the BBH. Now keep in mind that the bullish percent is already deep in oversold territory, as is the daily Stochastics oscillator. We obviously don't want to plunge into this play early on Monday morning, but want to take advantage of the time it takes for the oversold condition to relieve itself, by getting set up to play the next downward leg. Looking at the chart of BBH, we can see that there is solid resistance at $100-102, which could make for a solid entry into the play. Be patient and wait for the bulls to exhaust themselves on the upside and then we'll step in for the easy pickings on the way back down. Even though I have listed the 2005 Put below, I don't favor its use for this play. I think that is buying more time than is necessary, limiting the potential return on what will likely be a relatively quick (2-4 month) bearish move. BUY LEAP JAN-2003 $90 GBZ-MR BUY LEAP JAN-2004 $90 KOV-MR BUY LEAP JAN-2005 $90 XBB-MR QQQ - NASDAQ-100 Trust $28.30 **Call Play** Given my bearish outlook for Technology stocks in general you may be scratching your head, wondering what I'm thinking. First off let me be clear on 2 things. This is an aggressive play and is NOT predicated on the belief that we saw a successful test of the September lows on Friday. For a downside target on the QQQ, I am relying on the PnF chart, which currently has a bearish price target of $25 for the QQQ. While a bearish target can be exceeded, I am expecting that with a bit more selling in the broad market, we could see a real spike in the volatility measures resulting from real capitulation. I'm looking for that to take the NASDAQ below the September lows and would consider the $25 level to be a good risk/reward play on the overall Technology sector. Don't jump the gun on this one, as I expect any bounce that we see next week will be short-lived. That isn't the bounce we want to trade. Note that the weekly Stochastics oscillator is still diving back to earth from the last failed rally attempt. We want to wait for the one that comes on heavy volume, significantly heavier than the 2 billion shares we saw on Friday. The NASDAQ could bleed lower through the summer or it could get the pain over with in short order (which would be my preference) but once the QQQ drills down to the $25 level (assuming it is achieved), we could see a solid rally off the lows and I would expect that rally to be a tradable event over the intermediate term. As a secondary indicator, keep an eye on the VXN.X, the NASDAQ Volatility indicator. Look for it to spike up above the 60 level (possibly much higher) in conjunction with the QQQ falling to the vicinity of our price target. Then when price begins to recover, with Stochastics emerging from oversold (on both the daily and weekly timeframes) and the VXN falling back from its extreme high reading, that will be the time to strike. Because of the fact that we will be target-shooting a bottom on this play, it will give us the freedom to set a tight stop just below the lows once we enter the play. BUY LEAP JAN-2003 $28 OZC-AB BUY LEAP JAN-2003 $25 OZC-AY For Covered Call BUY LEAP JAN-2004 $28 LRI-AY BUY LEAP JAN-2004 $25 LRI-AJ For Covered Call Drops JNJ $59.40 How frustrating! The Great Humiliator showed up on Tuesday to remind me that I should have left well enough alone when JNJ kicked us out of our play with a violated stop the first time. Stubborn as I am, I insisted on jumping right back in and it was a mistake. The consolidation pattern broke lower on Tuesday and things worsened from there right into the close on Friday. Note that JNJ is now below its 200-dma for the first time in over a year, and with the 50-dma now curling lower and the rising bearish sentiment in the Drug sector, it is definitely time to get out. For those of you still holding onto open positions, I would recommend using the next cycle up on the daily chart to exit the trade before things get worse. AMAT $20.62 It was a safe bet that INTC was going to set the tone for the Semiconductor sector (SOX.X) for the summer, but few investors (myself included) expected the news to be as bad (or badly received) as it was. The SOX plunged as low as $421 on Friday, and while there may be a short-term rebound from oversold, there is likely to be more pain in the group over the weeks and months ahead. And AMAT didn't fare too well on Friday either, falling below the $20 level on an intraday basis and generating the first PnF sell signal since last September. That sell signal projects a price target of at least $11! Clearly, we don't even want to contemplate new bullish positions here until both the broad market and the sector can show renewed signs of bullish life. BBH $59.40 Forget about it! While I was looking for some sort of bounce from above the early May lows, the Biotech sector (BTK.X) spent another week in free fall, taking out every form of support subsequent to the end of 1999. Sure there was a bit of a bounce on Friday afternoon, but with multi-year support giving way, this is clearly not the arena in which we want to be speculating. We may revisit the BBH in the future, but not until it shows some definitive signs of bottoming. And that may not occur until we see levels well below $300 for the BTK. ************************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. 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The Option Investor Newsletter Sunday 06-09-2002 Sunday 5 of 5 ************************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 ************************************************************** ************* COVERED CALLS ************* Charting Basics: Is It Finally Time To Buy? By Mark Wnetrzak In response to a reader's request for information about reversal signals in technical analysis, today we will review some popular candlestick patterns. The majority of technicians use historical price charts to reflect the daily movement and volume action in a specific instrument. A chart is simply a representation of the conditions that exist in the underlying instrument. Technical traders watch for clues that alert them to changes in the market psychology and primary trend and reversal signal implies that a prior trend (or its character) is likely to change in the near future. Common bar-chart reversal indicators include "double-top" (or bottom), "head-n-shoulders," and "island" formations. Although the term "reversal pattern" is commonly used to identify a relatively abrupt change in direction, most trend reversals occur over a slightly longer period, often days or even weeks. Primary trends usually transition to sideways price actions or consolidation patterns before continuing with a definitive directional movement and for this reason, it is more accurate to think of reversals as simply changes in the current trend. The majority of candlestick patterns are trend-change or reversal indicators. Two of the most common formations are the "hammer" and "hanging-man." These candlesticks have long lower shadows and small real bodies that are near the top of the daily range. The color of the body is not as important but it is slightly more bullish if the body of the hammer is white, and in contrasts, more bearish if the body of the hanging man is black. The long lower shadow should be twice the height of the real body and it ideally it will have almost no upper shadow. The longer the lower shadow and the smaller the real body the more meaningful the indication. These candlestick lines can be bullish or bearish depending on when they appear in a trend. When this candlestick emerges in a downtrend, it is a signal that a bullish change in character may soon occur. If this line appears after a rally, the bullish move may be at an end. It may seem strange that the same candlestick can identify both bullish and bearish reversals but the outlook is based on results similar to those that follow "Island" formations in standard bar charts. As with any technical indication, it is important to confirm the trend with this type of signal. The difficulty is determining when the actual reversal will occur and one of the most important components of technical reversal patterns is the trading volume. When trading volume is light during the final phase of a trend (the first candlestick) and increases during the beginning stages of a reversal (the candlestick following the last Star), there is a higher probability of follow-through in the new character. The enthusiasm with which investors accept the new direction can be defined by the presence (or lack) of trading activity. In fact, when the overall trend is less defined, the change in volume can be almost as significant as the actual candlestick formation. Another commonly used reversal indicator in candlestick chart analysis is the "Star." The Star is a signal that a trend may be coming to an end. The pattern occurs when the current day's candlestick has a small body that gaps away from a large body in the prior session. Stars can occur near resistance or support and the color of the Star is generally not significant. If the Star has no body, it is called a "Doji" Star. The significance of this pattern is a change in the market environment. The appearance of a Star during a substantial rally indicates that buying strength is dwindling and the stock is susceptible to a correction. In contrast, a Star that occurs in the middle of a major downtrend suggests that buyers may be gaining control of the issue. Overall, the emergence of a Star indicates that the previous bias in the market (buying or selling) is beginning to equalize and thus a change in character may soon occur. The Star is the primary indication in a number of basic reversal patterns; Shooting Star, Doji Star and the Morning/Evening Star. The Morning Star pattern occurs at the end of a downtrend. It consists of a lengthy black body followed by a small body which begins below the previous day's (closing) low. The final line is a white body that is enveloped by the black body of the first session. The appearance of the small body (the Star) after a major downtrend suggests that selling is at an end and when the following session produces an opening gap with a white body, the bullish pattern is confirmed. While the gap-up is not necessary to define the pattern, it does produce much better results. Of course there are many variations of the Morning Star, the most common of which includes more than one Star in the reversal pattern. Recognizing the emergence of reversal patterns is a valuable tool that will help increase profits in all of your trading positions. With timely knowledge of a prospective change in character, you can adjust your trading style to reflect the new outlook for the issue. There is one important fact to remember. When a potential change is underway, new positions should be opened only when the reversal pattern signals a move in the direction of the primary trend. Trade Wisely! SUMMARY OF PREVIOUS CANDIDATES ***** Note: Margin not used in calculations. Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield COB 5.29 5.35 JUN 5.00 0.55 *$ 0.26 7.9% MACR 20.32 19.77 JUN 20.00 2.25 $ 1.70 6.8% INFA 8.16 8.76 JUN 7.50 1.30 *$ 0.64 6.8% EXTR 11.28 11.16 JUN 10.00 1.70 *$ 0.42 6.4% UNTD 11.00 10.60 JUN 10.00 1.75 *$ 0.75 5.9% NTIQ 22.10 23.49 JUN 20.00 3.50 *$ 1.40 5.5% PCLE 10.59 11.14 JUN 10.00 1.15 *$ 0.56 5.2% VVTV 21.99 20.10 JUN 20.00 3.10 *$ 1.11 5.1% SIE 18.50 19.16 JUN 17.50 2.00 *$ 1.00 4.4% SRP 7.81 7.30 JUN 7.50 0.75 $ 0.24 3.8% VVTV 21.75 20.10 JUN 20.00 2.40 *$ 0.65 3.8% KROL 23.40 22.75 JUN 22.50 1.45 *$ 0.55 3.6% QSFT 15.06 13.91 JUN 15.00 1.70 $ 0.55 3.6% DLTR 40.27 38.99 JUN 40.00 1.55 $ 0.27 1.0% ACXM 17.78 17.04 JUN 17.50 0.85 $ 0.11 0.9% MEDC 14.00 12.00 JUN 12.50 2.00 $ 0.00 0.0% INET 7.95 7.05 JUN 7.50 0.90 $ 0.00 0.0% USU 8.05 6.95 JUN 7.50 1.10 $ 0.00 0.0% USU 9.34 6.95 JUN 7.50 2.30 $ -0.09 0.0% VSNX 11.49 9.48 JUN 10.00 1.90 $ -0.11 0.0% ULGX 15.63 14.00 JUN 15.00 1.15 $ -0.48 0.0% GIVN 13.99 11.15 JUN 12.50 2.25 $ -0.59 0.0% MEDC 16.30 12.00 JUN 15.00 1.80 $ -2.50 0.0% *$ = Stock price is above the sold striking price. Comments: Should we be encouraged by the rebound on Friday after the Intel (NASDAQ:INTC) warning? Or, should we be frustrated that the major averages continue to avoid a capitulation sell-off? Maybe investors are keying off a potential "double-bottom" in the NASDAQ and S&P-500? Unfortunately, the answer may be: No panic = no bottom! We closed more positions this week as now is not the time to disregard money management. Quest Software (NASDAQ:QSFT) did manage to end the week positive as it held the line at $13. The biggest disappointment was the reversal in Med-Design (NASDAQ:MEDC). The $15 position will be shown closed and the $12.50 position may be closed also. The "early exit" watch-list grew a bit this week. Monitor the following stocks closely and exit or adjust as appropriate: Quest Soft- ware (NASDAQ:QSFT), Sierra Pacific Resources (NYSE:SRP), Acxiom (NASDAQ:ACXM), USEC (NYSE:USU), Macromedia (NASDAQ:MACR), and Given Imaging (NASDAQ:GIVN). Positions Closed: Northfield Labs (NASDAQ:NFLD), Endocare (NASDAQ:ENDO), AirGate PCS (NASDAQ:PCSA), MIPS Technologies (NASDAQ:MIPS), CheckFree (NASDAQ:CKFR), and Retek (NASDAQ: RETK) NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield CANI 11.26 JUL 10.00 CDU GB 1.85 33 9.41 42 4.5% CLHB 11.76 JUN 10.00 QPB FB 2.15 868 9.61 14 8.8% COB 5.35 JUL 5.00 COB GA 0.70 23 4.65 42 5.5% EXTR 11.16 JUN 10.00 EXJ FB 1.50 2385 9.66 14 7.6% HPLA 13.95 JUL 12.50 QHP GV 2.40 23 11.55 42 6.0% IPXL 8.01 JUL 7.50 UPR GU 1.10 24 6.91 42 6.2% MCDT 8.99 JUL 7.50 DXZ GU 1.90 193 7.09 42 4.2% Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield CLHB 11.76 JUN 10.00 QPB FB 2.15 868 9.61 14 8.8% EXTR 11.16 JUN 10.00 EXJ FB 1.50 2385 9.66 14 7.6% IPXL 8.01 JUL 7.50 UPR GU 1.10 24 6.91 42 6.2% HPLA 13.95 JUL 12.50 QHP GV 2.40 23 11.55 42 6.0% COB 5.35 JUL 5.00 COB GA 0.70 23 4.65 42 5.5% CANI 11.26 JUL 10.00 CDU GB 1.85 33 9.41 42 4.5% MCDT 8.99 JUL 7.50 DXZ GU 1.90 193 7.09 42 4.2% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** CANI - Carreker $11.26 *** Break-Out! *** Carreker (NASDAQ:CANI) is a provider of integrated consulting and software solutions that enable banks to identify and implement e-finance solutions, increase their revenues, reduce their costs and enhance their delivery of customer services. The company's offerings fall into four groups: Revenue Enhancement, which enable banks to improve workflows, internal operational processes and customer pricing structures; PaymentSolutions, which address the needs of a critical function of banks, the processing of payments made by one party to another; Enterprise Solutions, which provides conversion, consolidation and integration consulting services and products on a bank-wide basis; and CashSolutions, which optimizes the inventory management of a bank's cash on hand. CANI rallied sharply this week after reporting revenues for the 1st quarter of $37.9 million (a 33% increase) and operating income of $2.6 million, 87% higher than the year-ago period. We simply favor the bullish break-out on heavy volume and this position offers a conservative entry point in the issue. JUL 10.00 CDU GB LB=1.85 OI=33 CB=9.41 DE=42 TY=4.5% ***** CLHB - Clean Harbors $11.76 *** The Last Bidder Standing? *** Clean Harbors (NASDAQ:CLHB) provides a wide range of environmental services to a diversified customer base in the U.S. and Puerto Rico through its subsidiaries. The services provided by Clean Harbors are classified in four primary categories: treatment and disposal of industrial wastes (Treatment and Disposal); site services provided at customer sites (Site Services); specialized repackaging, treatment and disposal services for laboratory chemicals and household hazardous wastes (CleanPack), and out- sourcing of customer's environmental management program (Onsite Services). Clean Harbors also provides transportation for all forms of hazardous wastes, analytical testing services, inform- ation management and training services. Clean Harbors rallied strongly on Friday after the company announced that its bid to acquire assets of Safety-Kleen chemical services division has been designated by Safety-Kleen as the only qualified bid and will present the bid to bankruptcy court on June 13 for approval. Investors cheered the news and this position offers a way to conservatively speculate on the final outcome. CLHB stock has been down recently due to fears that Vivendi Environment would win the bidding and a court hearing on the sale process which was challenged by Vivendi is still set for June 10. JUN 10.00 QPB FB LB=2.15 OI=868 CB=9.61 DE=14 TY=8.8% ***** COB - Columbia Labs $5.35 *** Stage I Speculation *** Columbia Laboratories (AMEX:COB) develops women's healthcare and endocrinology products, including those intended to treat infertility, endometriosis and hormonal deficiencies. Columbia is also developing hormonal products for men and a buccal delivery system for peptides. The company's products primarily utilize its patented Bioadhesive Delivery System technology. Products include Crinone, a vaginally delivered, natural pro- gesterone product; Advantage-S, a female contraceptive gel; Replens, a vaginal moisturizer, and other products, as well as a testosterone-progressive hydration buccal tablet, a testost- eroned progressive hydration vaginal tablet, and a peptide delivery system. In early May, Columbia announced favorable results in the company's analyses of clinical pharmacokinetic trials. On May 14, the company announced that it had sold 454,545 shares of its common stock to Acqua Wellington North American Equities Fund, Ltd, raising $2.0 million. Last week, Columbia announced a supply agreement with Mipharm S.p.A. for the manufacture and supply of commercial forms of Columbia's testosterone buccal tablet. We simply favor the move above the October-November 2001 resistance area and the current "bullish" momentum in the issue. JUL 5.00 COB GA LB=0.70 OI=23 CB=4.65 DE=42 TY=5.5% ***** EXTR - Extreme Networks $11.16 *** Change Of Character *** Extreme Networks (NASDAQ:EXTR) is a provider of network infra- structure equipment for business applications and services. The company delivers high-performance application and services infra- structure for enterprise, service provider and metropolitan area networks (MANs)-based on technology that combines high performance, intelligence and a low cost of ownership. The company's family of Summit stackable, BlackDiamond and Alpine chassis switches share the same consistent hardware, software and management architecture, enabling businesses to build a network infrastructure that is simple, easy to manage and scalable to meet the demands of growing businesses. Prudential recently initiated covered on Extreme with a "buy" rating as analysts believe the company's fourth quarter will come in strong. We like the strong technical support area at $10 and the move through the long-term down-trend line (two-year chart) which suggests a positive change of character. JUN 10.00 EXJ FB LB=1.50 OI=2385 CB=9.66 DE=14 TY=7.6% ***** HPLA - HPL Technologies $13.95 *** Bracing For A Rally *** HPL Tech. (NASDAQ:HPLA) provides yield-optimization software that enables semiconductor companies to enhance the efficiency of the semiconductor production process. The company's products include a flexible software platform supported by over 600 software modules, which allow customers to accelerate the process in which they identify, and measure and correct sources of failure in the production process. By accelerating this learning and corrective process, HPL enables its customers to recognize the higher levels of revenue and profitability that are typically associated with the early part of a new semiconductor product cycle. Identifying production failures early in a semiconductor product cycle also allows customers to improve the quality of their products, reduce production costs and meet volume production requirements in a timely manner. HPL recently announced that it has signed a major multi-year volume purchase agreement (VPA) with leading integrated circuit manufacturer, STMicroelectronics (NYSE:STM). We favor the current technical signals which suggest higher future prices for this relatively new issue. JUL 12.50 QHP GV LB=2.40 OI=23 CB=11.55 DE=42 TY=6.0% ***** IPXL - Impax Laboratories $8.01 *** Drug Sector Speculation *** Impax Labs (NASDAQ:IPXL), formerly known as Global Pharmaceutical, is a technology-based, specialty pharmaceutical company focused on the development and commercialization of generic and brand name pharmaceuticals. In the generic pharmaceuticals market, Impax is primarily focusing its efforts on selected controlled-release generic versions of brand name pharmaceuticals. In the brand name pharmaceuticals market, the company is developing products for the treatment of central nervous system disorders. Impax's initial brand name product portfolio consists of development-stage projects to which it is applying its formulation and development expertise to develop differentiated, modified or controlled-release versions of marketed drug substances. The company intends to expand its brand name products portfolio primarily through internal develop- ment, and, in addition, through licensing and acquisition. Impax announced at the end of May that it received tentative approval from the Food and Drug Administration for a generic version of Claritin-D 12-Hour extended-release tablets. Good news, but final approval is contingent upon the resolution of the lawsuit filed by Schering-Plough against Impax, the expiration of the 30-month stay process under the Hatch-Waxman amendments or the expiration of any generic marketing exclusivity. Investors who believe Impax will prevail can speculate on the future performance of the company with this conservative position. JUL 7.50 UPR GU LB=1.10 OI=24 CB=6.91 DE=42 TY=6.2% ***** MCDT - McDATA $8.99 *** Bottom Fishing! *** McDATA (NASDAQ:MCDT) is a provider of open-storage networking solutions and provides highly available, scalable and centrally managed storage area networks (SANs) that address enterprise-wide storage problems. The company's core-to-edge enterprise solutions consist of hardware products, software products and professional services. Its SAN solutions improve the reliability as well as the availability of data, simplify the management of SANs and reduce the total cost of ownership. In May, McData reaffirmed its second quarter 2002 guidance as the company continues to anticipate that revenue for the second quarter will be roughly comparable to its $64.5 million first quarter revenue results. McDATA will report actual second quarter results in mid-July. We simply favor the stock's recent move back above its 30-dma as McData forges a Stage I base. A reasonable entry for those who wish to speculate on the company's future. JUL 7.50 DXZ GU LB=1.90 OI=193 CB=7.09 DE=42 TY=4.2% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield OPMR 15.25 JUN 15.00 OQG FC 1.10 580 14.15 14 13.1% PSFT 20.94 JUN 20.00 PQO FD 1.90 3244 19.04 14 11.0% SOI 8.27 JUL 7.50 SOI GU 1.35 477 6.92 42 6.1% SLAB 24.35 JUN 22.50 QFJ FX 2.40 26 21.95 14 5.4% SCH 12.50 JUL 12.50 SCN GV 0.70 736 11.80 42 4.3% ***************** NAKED PUT SECTION ***************** Technical Analysis 101: Q&A With The Naked-Puts Editor By Ray Cummins This week's question concerns the use of technical indicators to determine the turning point in the market or a specific issue. Subject: Technical Signals for Reversals Attn: and Ray Cummins and Mark Wnetrzak Dear Ray, I know you and Mark focus on technical analysis in your sections so I am sending this question to both of you. One of the expressions I have heard often over the past few days is "the market is oversold"...but, based on what I see in the overall trend, there is no good reason to be buying stocks other than they "appear" to be cheap. Just what is it that makes the market or a particular stock "oversold" and what chart indicators should I use to identify this condition for myself? Also, how do I know when the stock is really beginning to reverse direction, as opposed to simply making a whip-saw in reaction to a let up in the selling pressure? Thanks, TY Concerning technical indicators used to identify reversals: With regard to the broad market definition, the condition of being "overbought" or "oversold" is generally based on the number of stocks advancing or declining. When an excessive number of issues have advanced, the stock market is said to be "overbought." If an excessive number of issues have declined, it is said to be "oversold." If the overall market is in an overbought condition, that's usually a sign that euphoria has overwhelmed investors and it's time to stop buying, or at least start taking profits. When the major indices appear to have declined to a relatively low point in the cycle and the market technicals suggest it is oversold, you may want to start buying again, as the risk will generally be lower in bullish positions. Indicators that identify market extremes are universally popular as technical trading tools. The most important concept investors should understand is that overbought and oversold indicators can only provide a method of determining when a market is approaching historical excesses. They do not suggest that the market is at a turning point merely because it has moved beyond a specific level. In addition, simply establishing these arbitrary ranges can often create a major problem for traders. The key to success with this type of analysis is that the condition of overbought or oversold must only be indicated when the instrument reaches an excessive state; one which occurs rarely over time. After all, any trader who applies relatively lax boundaries when searching for such an extreme condition will seldom be able to correctly identify the few occasions when the gauges are truly extended beyond the norm. The first step is to use a reliable indicator that works well with this type of technical analysis. One of the most common tools for viewing overbought and oversold is the Relative Strength Indicator or RSI. This measure of price momentum was developed by J. Welles Wilder in 1978 and is commonly included in the "oscillators" group because it varies between fixed upper and lower boundaries. The RSI is based on the fact that a stock, when advancing, will tend to close nearer to the high of the day than the low, and of course the reverse is true for declining issues. The indicator compares the price performance of a stock to that of itself, rather than to a stock market index or another stock, and it must not be confused with other relative strength gauges. In this case, the oscillator is indexed from 0 to 100 and it is most useful in a well-defined trading channel as trending prices tend to distort overbought and oversold signals. Using the basic values, a "buy" signal occurs when the oscillator is at 20 or less (the stock is oversold) and "sell" signals are issued when the RSI value is 80 or greater (the stock is overbought). Another overbought/oversold indicator is the stochastic oscillator. The stochastic oscillator compares the current stock price to its price range over a specifically identified period of time. This technique is based on the idea that in an upward trending market, stocks tend to close near their highs and in a downward trending market, stocks tend to close near their lows. That would indicate that as an upward trend erodes, stocks close further away from the highs and vice versa. The stochastic indicator attempts to show when prices start to group around their lows in an bullish market, and just the opposite in a down-trending market. The theory is that these are the conditions which indicate a trend reversal is about to occur. The stochastic indicator is plotted as two lines on a chart with values ranging from 0 to 100. They are the %D line and %K line, and the %D line is considered the more significant of the two. Readings above the 80 line are strong and indicate that the price is probably closing near its high and likewise, readings below 20 indicate that price is closing near its low. Ordinarily, the %K line will reverse direction before the %D line but, when the %D line changes direction prior to the %K line, a slow and steady reversal in the stock price is usually indicated. A very powerful move is indicated when the plot approaches 0 and 100. When the stochastic nears these extremes following a pullback in price, a good entry point is generally indicated. Many times, when the %K or %D lines begin to flatten out, this is an indication that the trend will reverse during the next trading range. One of the simplest applications of stochastics is to identify the divergence between price and momentum. That situation occurs when the stock price is making higher highs but the stochastic oscillator is making lower lows (or the opposite). Remember, the purpose of an oscillator is to alert traders to a potential failed rally or the possible conclusion of a sell-off. If the stochastic indicator fails to confirm a stock's new high, traders should wait for %K to cross below %D and to drop below 70 before considering an exit. When the stochastic indicator fails to achieve a new low along with the share value, investors should wait for %K to cross above %D and to climb above 30 before entering a new position. In any case, a bullish or bearish stochastic divergence should always be validated by the market's price action. When used correctly, the stochastic oscillator can often demonstrate a change in price before the reversal actually occurs, and that can be very helpful in determining the appropriate time to enter or exit a position. Technical analysis can play a vital role in identifying stocks that are in the process of becoming winners and those that may quickly turn into losers. Establishing the correct parameters in which the terms "overbought" and "oversold" apply only to truly exceptional conditions is an important requirement in the study of historical pricing. Many otherwise intelligent traders regard this type of indication as a clear-cut signal when the market is beyond the relatively arbitrary boundaries of the oscillator. In reality, this measure of momentum is simply showing whether the price line is speeding up or slowing down and when an extreme is achieved, the condition cannot be expected to exist for extended periods. The result is generally a consolidation, followed by a renewed trend or a reversal and because it's almost impossible to determine which will occur, additional indicators are used to help predict the likely outcome. Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS CANDIDATES ***** Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield WFR 8.30 7.40 JUN 7.50 0.60 $ 0.50 11.6% AMZN 19.47 18.58 JUN 17.50 0.65 *$ 0.65 11.3% OSTE 8.30 7.50 JUN 7.50 0.20 $ 0.20 10.7% NTIQ 23.12 23.49 JUN 20.00 0.45 *$ 0.45 9.9% ENDP 11.56 10.44 JUN 10.00 0.55 *$ 0.55 9.5% AMZN 19.16 18.58 JUN 15.00 0.40 *$ 0.40 8.2% ADRX 45.22 38.54 JUN 35.00 0.70 *$ 0.70 8.1% JBL 22.96 21.21 JUN 20.00 0.35 *$ 0.35 7.7% RMCI 27.46 25.50 JUN 22.50 0.70 *$ 0.70 7.5% CKFR 23.89 20.49 JUN 20.00 0.65 *$ 0.65 7.4% GG 9.36 11.75 JUN 8.75 0.35 *$ 0.35 7.3% 2-1 split BJS 37.52 35.45 JUN 35.00 0.65 *$ 0.65 7.2% RMCI 31.23 25.50 JUN 25.00 0.55 *$ 0.55 7.0% PHSY 30.06 26.51 JUN 25.00 0.60 *$ 0.60 6.9% EMLX 30.11 29.91 JUN 22.50 0.30 *$ 0.30 6.9% NOVN 24.37 25.99 JUN 22.50 0.50 *$ 0.50 6.7% SIE 19.88 19.16 JUN 17.50 0.65 *$ 0.65 6.5% PHSY 25.87 26.51 JUN 20.00 0.50 *$ 0.50 6.4% TTWO 25.60 22.04 JUN 20.00 0.40 *$ 0.40 6.3% TTWO 25.50 22.04 JUN 20.00 0.30 *$ 0.30 6.3% NOVN 26.61 25.99 JUN 25.00 0.40 *$ 0.40 6.1% MACR 22.00 19.77 JUN 17.50 0.25 *$ 0.25 6.1% AMZN 16.94 18.58 JUN 12.50 0.30 *$ 0.30 5.9% TDY 21.24 19.89 JUN 20.00 0.50 $ 0.39 5.7% TDY 19.17 19.89 JUN 17.50 0.60 *$ 0.60 5.6% WIN 19.20 18.69 JUN 17.50 0.30 *$ 0.30 5.4% MACR 23.89 19.77 JUN 20.00 0.60 $ 0.37 5.1% VVTV 21.74 20.10 JUN 20.00 0.25 *$ 0.25 5.0% RDC 26.12 23.59 JUN 22.50 0.50 *$ 0.50 4.9% FLM 25.35 22.14 JUN 22.50 0.80 $ 0.44 3.9% TTWO 25.67 22.04 JUN 22.50 0.40 $ -0.06 0.0% IDXX 31.10 29.10 JUN 30.00 0.55 $ -0.35 0.0% DCN 22.67 18.15 JUN 20.00 0.45 $ -1.40 0.0% *$ = Stock price is above the sold striking price. Comments: The extreme downward moves this week came as a big surprise to most investors and although they offered some excellent entry points for long-term positions, the activity did little to help the existing plays in the portfolio. Positions that were not closed on Monday endured additional selling pressure near the end of the week and despite Friday's late recovery, the results were less than outstanding. Dana Corporation (NYSE:DCN) moved to the "losers" list Tuesday amid concerns that a fall in auto sales could presage waning demand for auto parts in the months ahead. Alternative fuel company Headwaters (NASDAQ:HDQR) also slumped, however there was no news to explain the sell-off and the company said it knew of no reason for the recent steep drop in its share value. Take-Two Interactive Software (NASDAQ:TTWO) took it on the chin Friday, after the company gave guidance for the current quarter that was below what it said were "too-high" earnings estimates. On Thursday, Take-Two reported earnings for its fiscal second quarter that were in line with expectations, but investors were obviously more concerned about the outlook for the future. There were a number of other portfolio plays that became "early-exit" candidates during the past week and not surprisingly, our current watch-list encompasses almost all the issues in the summary. Rather than listing them individually, we will simply suggest that if you are still in any questionable positions, you may want to adjust your stops as necessary, to lock-in gains or prevent large losses. Positions Closed: Endocare (NASDAQ:ENDO), Plexus (NASDAQ:PLXS), and Headwaters (NASDAQ:HDWR). NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield EBAY 56.67 JUN 50.00 QXB RJ 0.45 5200 49.55 14 5.9% EMLX 29.91 JUN 25.00 UMQ RE 0.40 2264 24.60 14 11.7% INTU 44.03 JUN 40.00 IQU RH 0.35 1888 39.65 14 5.5% JBHT 26.95 JUN 25.00 JHQ RE 0.30 550 24.70 14 7.1% PSFT 20.94 JUN 17.50 PQO RW 0.30 4930 17.20 14 12.4% QCOM 30.87 JUN 25.00 AAW RE 0.25 7927 24.75 14 8.1% SRCL 35.00 JUN 32.50 URL RZ 0.30 296 32.20 14 5.5% Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield PSFT 20.94 JUN 17.50 PQO RW 0.30 4930 17.20 14 12.4% EMLX 29.91 JUN 25.00 UMQ RE 0.40 2264 24.60 14 11.7% QCOM 30.87 JUN 25.00 AAW RE 0.25 7927 24.75 14 8.1% JBHT 26.95 JUN 25.00 JHQ RE 0.30 550 24.70 14 7.1% EBAY 56.67 JUN 50.00 QXB RJ 0.45 5200 49.55 14 5.9% INTU 44.03 JUN 40.00 IQU RH 0.35 1888 39.65 14 5.5% SRCL 35.00 JUN 32.50 URL RZ 0.30 296 32.20 14 5.5% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** EBAY - eBay $56.67 *** Entry Point! *** eBay (NASDAQ:EBAY) is a web-based community in which buyers and sellers are brought together to browse, buy and sell items such as collectibles, automobiles, high-end or premium art items, jewelry, consumer electronics and a host of practical and unique items. The eBay trading platform is a fully automated, topically arranged service that supports an auction format in which sellers list items for sale and buyers bid on items of interest, and a fixed-price format in which sellers and buyers trade items at a fixed price established by sellers. Through its wholly owned and partially owned subsidiaries and affiliates, the company operates online trading platforms directed towards the United States, Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Singapore, South Korea, Spain, Sweden, Switzerland and the United Kingdom. With the recent market decline, previously expensive stocks such as EBAY are almost affordable and traders can establish a discounted cost basis in the issue with this position. JUN 50.00 QXB RJ LB=0.45 OI=5200 CB=49.55 DE=14 TY=5.9% ***** EMLX - Emulex $29.91 *** Own This One! *** Emulex (NASDAQ:EMLX) is a designer, developer and supplier of a broad line of storage networking host bus adapters, application specific computer chips and other software products that provide connectivity solutions for storage area networks (SANs), network attached storage and redundant array of independent disks storage. The company's products are based on internally developed ASIC, firmware and software technology, and offer support for a variety of SAN protocols, configurations, system interfaces and operating systems. The company's architecture offers customers a stable applications program interface that has been preserved across multiple generations of adapters, and to which many OEMs have customized software for mission-critical server and storage system applications. Despite the recent performance of technology issues, Emulex is a leader in the networking group and traders who wouldn't mind owning the stock can speculate conservatively on its share value in the near-term. JUN 25.00 UMQ RE LB=0.40 OI=2264 CB=24.60 DE=14 TY=11.7% ***** INTU - Intuit $44.03 *** Trading Range! *** Intuit (NASDAQ:INTU) is a provider of various small-business, tax preparation and personal finance software products and Web-based services that simplify complex financial tasks for consumers and accounting professionals. The company's principal products and services include Quicken, QuickBooks, Quicken TurboTax, ProSeries, Lacerte and Quicken Loans. Intuit offers products and services in five principal business divisions, which include Small Business, Tax, Personal Finance, Quicken Loans and Global Business. Intuit is one of the few technology stocks that has thrived in the recent hi-tech slump and the current trading range near $44 appears to offer ample support for this conservative bullish position. JUN 40.00 IQU RH LB=0.35 OI=1888 CB=39.65 DE=14 TY=5.5% ***** JBHT - J.B. Hunt $26.95 *** Transport Sector! *** J.B. Hunt Transport Services (NASDAQ:JBHT) along with its wholly owned subsidiaries, is a diversified transportation services company. Through its subsidiaries and associated companies, JBHT provides a wide range of logistics and transportation services to a diverse group of customers. These customers request targeted transportation services or they outsource their transportation function to JBHT, or one of its associated companies. J.B. Hunt also directly transports full-load "containerizable" freight in the continental United States and portions of Canada and Mexico. J.B. Hunt Transport Services recently completed the sale of 5.1 million shares of common stock at $26 per share and the offering should stabilize the issue near that price for the next few weeks. Standard & Poor's also affirmed its ratings on the company, saying the equity offering and debt reduction will modestly improve Hunt's capital structure. Traders who want to own a solid company in the transport sector should consider this position. JUN 25.00 JHQ RE LB=0.30 OI=550 CB=24.70 DE=14 TY=7.1% ***** PSFT - PeopleSoft $20.94 *** Bottom-Fishing! *** PeopleSoft (NASDAQ:PSFT designs, develops, markets and supports a family of enterprise application software products for use in large and medium-sized organizations. The company provides enterprise application software for customer relationship management, human resources management, financial management and also supply chain management, along with a range of industry-specific products. In addition to enterprise application software, PeopleSoft offers a variety of services to its customers, including implementation assistance, project planning, online analytic processing, software product enhancements, consulting, maintenance, customer education, product support and training. Application software companies have been among the worst performers in the technology segment over the past few weeks but it appears the selling pressure is finally on the decline. Traders who like the recovery potential for the group can speculate on that outcome with this conservative position. JUN 17.50 PQO RW LB=0.30 OI=4930 CB=17.20 DE=14 TY=12.4% ***** QCOM - Quallcomm $30.87 *** Favorable Speculation! *** Quallcomm (NASDAQ:QCOM) is a worldwide developer and supplier of code division multiple access (CDMA)-based integrated circuits and system software for wireless voice and data communications, and global positioning system products. The company offers complete system solutions, including software and integrated circuits for wireless handsets and infrastructure equipment. This complete system-solution approach provides customers with advanced wireless technology, enhanced component integration and interoperability, as well as reduced time to market. Quallcomm also provides integrated circuits and system software to wireless handset and infrastructure manufacturers. Last week's sell-off in the wireless group produced some big downward moves in a number of popular companies but QCOM avoided the brunt of the bearish activity. At the same time, the issue's near-term option premiums have increased slightly and the rise in implied volatility has provided a favorable speculation opportunity for technology investors. JUN 25.00 AAW RE LB=0.25 OI=7927 CB=24.75 DE=14 TY=8.1% ***** SRCL - Stericycle $35.00 *** Broad-Market Hedge! *** Stericycle (NASDAQ:SRCL) is a regulated medical waste management company in North America, serving almost 300,000 customers in the United States, Canada, Puerto Rico and Mexico. The company's many services and operations include the collection, transportation, treatment, disposal and recycling of waste, together with related training and education programs, consulting services and product sales. The company has a fully integrated, national medical waste management network. Stericycle's network includes 36 treatment and collection centers and 94 additional transfer and collection sites. The company uses this network to provide medical waste collection, transportation and treatment and related consulting, training and education services and products. Stericycle's unique treatment technologies include its proprietary electro-thermal-deactivation system, as well as traditional methods, such as autoclaving and incineration. Stericycle is an old favorite among investors who are interested in hedging against bearish activity in the broader markets and this position offers reasonable reward at the risk of owning the issue near a recent technical support area. JUN 32.50 URL RZ LB=0.30 OI=296 CB=32.20 DE=14 TY=5.5% ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield HUM 15.39 JUN 15.00 HUM RC 0.30 373 14.70 14 10.7% PETM 17.92 JUN 17.50 QPT RW 0.35 52 17.15 14 10.7% SPOT 25.30 JUN 25.00 OQO RE 0.45 51 24.55 14 9.5% CIMA 27.72 JUN 25.00 UVK RE 0.35 238 24.65 14 8.7% HPLA 13.95 JUL 10.00 QHP SB 0.30 0 9.70 42 7.0% ACDO 51.19 JUN 45.00 DZU RI 0.40 47 44.60 14 5.9% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ It Could Have Been Worse! By Ray Cummins ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, June 7 Stocks recovered from a sharp sell-off in early trading to finish today's session only moderately lower as investors continued to look for some indication that the market is nearing a bottom. The Dow Jones Industrial Average closed 34 points lower at 9,589 after plummeting 152 points on news that chip-sector bellwether Intel (NASDAQ:INTC) lowered its second-quarter revenue target due to sagging European demand. Shares of Intel dropped 20% by the end of the day and among other blue-chip components, AT&T (NYSE:T), American Express (NYSE:AXP), Citigroup (NYSE:C), International Business Machines (NYSE:IBM) and Eastman Kodak (NYSE:EK) saw the heaviest losses. The anxiety among investors quickly spread to the broader groups with technology stocks taking the brunt of the renewed selling pressure. The NASDAQ Composite ended 19 points lower at 1,535 on weakness in semiconductor and hardware shares. The broader marker S&P 500-stock index closed almost unchanged as financial, oil service, drug and chemical issues rebounded while gold, airline and biotechnology stocks continued to sag. Trading volume came in at 1.80 billion on the NYSE and at 2.11 billion on the NASDAQ. Market breadth was slightly negative on the Big Board while decliners matched advancers on the technology exchange. On the fund flow front, Trim Tabs estimated that all equity funds had outflows of $6.8 billion in the week ending June 5, compared with outflows of $700 million in the prior week. Funds that invest primarily in U.S. stocks had outflows of $5.8 billion compared to outflows of $1.1 billion in the prior week. The bond market was no safe haven as treasuries followed stocks lower during the day. The 10-year note shed 20/32 to yield 5.06% while the 30-year bond dropped 23/32 to yield 5.66%. Last week's new plays (positions/opening prices/strategy): Aflac (NYSE:AFL) AUG35C/AUG30P $0.25 credit synthetic Impax (NSDQ:IPXL) AUG10C/AUG7P $0.15 credit synthetic Kraft (NYSE:KFT) SEP45C/SEP40P $0.20 credit synthetic Cigna (NYSE:CI) JUN95P/JU100P $0.55 credit bull-put Smith (NYSE:SII) JUN85C/JUN80C $0.30 credit bear-call Cephalon (NSDQ:CEPH) JUL65C/JUL40P $2.25 credit strangle Mini NDX (CBOE:MNX) JUL120C/J120P $14.00 debit straddle The recent bearish market activity boosted the premiums in our new synthetic positions and also provided a favorable opening credit in the Cigna spread. Unfortunately, the same downward trend prevented an entry at the target price in the Smith Intl. "bear-call" spread. The neutral-outlook position in Cephalon was available at the suggested premium and the Mini-NDX straddle approached a near break-even exit in the bearish portion of the position during Friday's volatile session. Portfolio Activity: Monday's precipitous plunge in share values was a shocking and unwelcome event for most investors and the bearish activity was also a catalyst for closing trades in many of our bullish plays. Stocks in the oil service group were among the worst performers and the downward trend in these issues prompted early-exits in credit spreads on Nabors Industries (NYSE:NBR) and Schlumberger (NYSE:SLB). The Reader's Request synthetic positions in the oil drillers segment also came under pressure and should be closely monitored for further downside movement. Not surprisingly, the broad market slump weighed heavily on the S&P 100-stock index (CBOE:OEX) thus forcing an exit in the bearish portion of our credit-spread strangle. Of course, the sharp decline in stock prices was a boon to the Nvidia (NASDAQ:NVDA) debit straddle and the activity also favored "bear-call" credit spreads in Mercury Interactive (NASDAQ:MERQ), XL Capital (NYSE:XL) and Weatherford (NYSE:WFT), as well as adjusted positions in Qlogic (NASDAQ:QLGC) and Clear Channel Comm. (NYSE:CCU). One play that has performed better than expected, considering the recent volatility, is the credit strangle in Adobe Systems (NASDAQ:ADBE). The position is comfortably inside the profit envelope with the issue near $35 and should expire at maximum gain ($1.25) in two weeks. Questions & comments on spreads/combos to Contact Support ****************************************************************** - READER'S WRITE E-MAIL REPLIES - ****************************************************************** Subject: Position adjustments with credit spreads To: Contact Support Hi Ray, I have a question about adjusting a credit spread by rolling it down, away from the sold strike, and forward to the next month. There have been several times I wanted to use this strategy but I found there were no lower strike prices available for the underlying. This would make sense in a lot of cases since in selling a credit spread -- you would often choose a sold strike which the underlying has not gone through in quite a while due to support. In this situation, could it make sense to allow the underlying to go further through the sold strike until a lower strike opens up or would it be better to just close the trade and reopen a new trade when and if the lower strike does become available? This seems tricky, but I think the question seems to become how the next month's new spread will react compared to this month's current spread if the underlying continues lower. Thank you, DF Hello DF, In my experience, I have found it is rarely (if ever) favorable to allow a position to continue to move against you once it has hit the predetermined (generally above or very near the sold strike in put-credit spread) exit point. In the situation you described, the short option would increase in value at a much higher rate than the long option, thus adding to your losses and creating a larger debit from which you must recover in any potential adjustment strategy. I believe it would be better to simply close the trade and move on to another play, where your capital can be more effectively applied to earn a profit. Your suggestion to "reopen a new trade, when and if the lower strike does become available" sounds like an attempt to repair every position that goes awry but I should caution you, a successful (break-even) result is not always possible and can often lead to greater losses. With regard to spreads that have no lower strike prices for adjustment, you should be aware of that condition prior to entering the trade and decide if favorable alternatives are available. As you know, one popular method is to simply "short" the stock as it crosses the sold strike price or moves through an area of recent support (trend-line/moving average). Another common technique is to roll into a bearish strategy, or try to roll out of the spread for a profit or at least a break-even exit. Each method can provide viable adjustments, depending on the technical outlook for the underlying issue. The key to success in either strategy is to initiate the trade at known support levels, or after obvious reversal signals, otherwise you are simply speculating about the stock's next move. As you know, the great thing about trading spreads is: once you understand them, you can turn many losing plays into winning ones with the effective use of STOPS and by rolling out-of/in-to new positions when the stock moves against you. When you do lose, at least you have reduced your losses by leveraging against another position. Of course, in all cases where an attempt to recover a losing position is initiated, you must be prepared for additional draw-downs and have thorough knowledge of the repair strategy. Hope That Helps! Ray Subject: Request for Combos section To: Contact Support Hello Ray, I am a relatively new subscriber to the newsletter and although I have done fairly well trading stocks, I have yet to make the jump into options. I've been following your sections over the past few weeks and finally decided to take the limited risk approach with an "out-of-the-money" credit spread. Since this will be my first effort with this method, could you please offer some conservative positions using this strategy in your next newsletter? Thanks for a great product! RB Hello RB, Your wish is my command! Good Luck! Ray ****************************************************************** - CREDIT SPREADS - These plays are based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit in these positions may also be higher than other plays in the same strategy based on disparities in option pricing. Current news and market sentiment will have an effect on these issues so review each play individually and make your own decision about the future outcome of the position. ****************************************************************** ABK - Ambac Financial $68.44 *** New High! *** Ambac Financial (NYSE:ABK) is a holding company that, through its many subsidiaries provides financial guarantee products and other financial services to clients in the public and private sectors around the world. The company provides financial guarantees for municipal and structured finance obligations through its primary operating subsidiary, Ambac Assurance Corporation. Through its financial services subsidiaries, the company provides financial and investment products including investment agreements, interest rate swaps, funding conduits, investment advisory and financial management services, principally to its guarantee clients, which include municipalities and their authorities, school districts, healthcare organizations and asset-backed issuers. PLAY (conservative - bullish/credit spread): BUY PUT JUL-60 ABK-SL OI=0 A=$0.30 SELL PUT JUL-65 ABK-SM OI=0 B=$0.85 INITIAL NET CREDIT TARGET=$0.60-$0.65 PROFIT(max)=14% ****************************************************************** AZO - Autozone $82.95 *** In The Zone! *** AutoZone (NYSE:AZO) is a specialty retailer of automotive parts and accessories, primarily focusing on do-it-yourself customers. The company operates over 3,000 auto parts stores in the United States and currently 21 in Mexico. Each auto parts store carries an extensive product line for cars, vans and light-duty trucks, including new and re-manufactured automotive parts, maintenance items and accessories. The company also has a commercial sale program in the United States that provides commercial credit and prompt delivery of parts and other products to local garages, dealers and service stations. AutoZone does not sell tires or perform automotive repair or installation but the company does market automotive diagnostic and repair information software through its ALLDATA subsidiary, as well as diagnostic and repair information through alldatadiy.com. PLAY (conservative - bullish/credit spread): BUY PUT JUL-70 AZO-SN OI=212 A=$0.45 SELL PUT JUL-75 AZO-SO OI=997 B=$0.95 INITIAL NET CREDIT TARGET=$0.55-$0.60 PROFIT(max)=12% ****************************************************************** ERTS - Electronic Arts $63.25 *** Ultra-Gamer! *** Electronic Arts (NYSE:ERTS) operates in two principal business segments globally: EA's Core business segment comprises the creation, marketing and distribution of entertainment software, while the EA.com business segment is composed of the creation, marketing and distribution of entertainment software which can be played or sold online, ongoing management of subscriptions of online games and Website advertising. PLAY (conservative - bullish/credit spread): BUY PUT JUL-50 EZQ-SJ OI=36 A=$0.60 SELL PUT JUL-55 EZQ-SK OI=327 B=$1.05 INITIAL NET CREDIT TARGET=$0.50-$0.55 PROFIT(max)=11% ****************************************************************** HON - Honeywell $36.71 *** Range-bound? *** Honeywell International (NYSE:HON) is a diversified technology and manufacturing company, serving customers worldwide with its aerospace products and services, unique control technologies for buildings, homes and industry, automotive products, power systems, specialty chemicals, fibers, plastics and electronic and advanced materials. The company's operations are conducted by strategic business units, which have been aggregated under four segments: Aerospace Solutions, Automation & Control, Performance Materials and Power & Transportation Products. PLAY (conservative - bearish/credit spread): BUY CALL JUL-42.50 HON-GV OI=846 A=$0.30 SELL CALL JUL-40.00 HON-GH OI=365 B=$0.60 INITIAL NET CREDIT TARGET=$0.35-$0.40 PROFIT(max)=15% ****************************************************************** MMM - 3M Company $124.44 *** Premium Selling! *** 3M Company (NYSE:MMM), formerly known as Minnesota Mining and Manufacturing Company, is an integrated enterprise characterized by substantial inter-company cooperation in research, development, manufacturing and marketing of products. 3M's primary business has developed from its research and technology in coating and bonding for coated abrasives, the company's original product. Coating and bonding is the process of applying one material to another, such as abrasive granules to paper or cloth (coated abrasives), adhesives to a backing (pressure-sensitive tapes), ceramic coating to granular mineral (roofing granules), glass beads to plastic backing (reflective sheeting), and low-tack adhesives to paper (repositionable notes). The company conducts its business through six operating segments: Industrial Markets; Transportation, Graphics and Safety Markets; Health Care Markets; Consumer and Office Markets; Electro and Communications Markets; and Specialty Material Markets. PLAY (conservative - bearish/credit spread): BUY CALL JUL-140 MMM-GH OI=766 A=$0.30 SELL CALL JUL-135 MMM-GG OI=1846 B=$0.75 INITIAL NET CREDIT TARGET=$0.50-$0.60 PROFIT(max)=11% ****************************************************************** OHP - Oxford Health Plans $49.05 *** Hot Sector! *** Oxford Health Plans (NYSE:OHP) is a healthcare company providing health benefit plans in New York, New Jersey and Connecticut. The company's product line includes its point-of-service plans, the Freedom Plan, the Liberty Plan, a range of health maintenance organizations, preferred provider organizations, Medicare+Choice plans and third-party administration of employer-funded benefit plans. The company offers its various products through its HMO subsidiaries, Oxford Health Plans (NY), Inc. (Oxford NY), Oxford Health Plans (NJ), Inc. (Oxford NJ) and Oxford Health Plans (CT), Inc. (Oxford CT) and through Oxford Health Insurance, Inc. (OHI), Oxford's health insurance subsidiary. PLAY (conservative - bullish/credit spread): BUY PUT JUL-42.50 OHP-SV OI=0 A=$0.40 SELL PUT JUL-45.00 OHP-SI OI=115 B=$0.65 INITIAL NET CREDIT TARGET=$0.30-$0.40 PROFIT(max)=14% ****************************************************************** OMC - Omnicom Group $72.69 *** Accounting Issues? *** Omnicom Group (NYSE:OMC) is a unique marketing and corporate communications company. Omnicom has grown its holdings to over 1,500 subsidiary agencies operating in more than 100 countries. The company's wholly and partially owned businesses provide communications services to clients on a global, pan-regional and national basis. The company's agencies provide a wide range of marketing and corporate communications services, advertising, brand consultancy, crisis communications, custom publishing, database management, digital and interactive marketing, direct marketing, directory and business-to-business advertising, employee communications and environmental design. Omnicom also provides field marketing, healthcare communications, marketing research, media planning and buying, multi-cultural marketing, non-profit marketing, promotional marketing, public affairs and relations, recruitment communications, specialty communications and sports and event marketing. PLAY (conservative - bearish/credit spread): BUY CALL JUL-85 OMC-GQ OI=3921 A=$0.35 SELL CALL JUL-80 OMC-GP OI=2119 B=$0.90 INITIAL NET CREDIT TARGET=$0.60-$0.70 PROFIT(max)=14% ****************************************************************** ONE - Bank One $39.91 *** Trading In A Range? *** Bank One Corporation (NYSE:ONE) is a multi-bank holding company that provides domestic retail banking, finance and credit card services, worldwide commercial banking services, and trust and investment management services. Bank One operates offices in Arizona, Colorado, Florida, Illinois, Indiana, Kentucky, Texas, Louisiana, Michigan, Ohio, Oklahoma, Utah, West Virginia, and Wisconsin, and in certain international markets. Bank One also engages in other businesses related to banking and finance, including credit card and merchant processing, consumer and education finance, real estate-secured lending and servicing, insurance, venture capital, investment and merchant banking, trust, brokerage, investment management, leasing, community development and data processing. These activities are conducted through bank subsidiaries and non-bank subsidiaries. PLAY (conservative - bearish/credit spread): BUY CALL JUL-45.00 ONE-GI OI=153 A=$0.15 SELL CALL JUL-42.50 ONE-GV OI=1377 B=$0.40 INITIAL NET CREDIT TARGET=$0.30-$0.35 PROFIT(max)=14% ****************************************************************** UNH - UnitedHealth Group $94.39 *** Low Risk - Low Reward! *** UnitedHealth Group (NYSE:UNH) forms and operates markets for the exchange of health and well being services. Through its family of businesses, the company helps people achieve optimal health and well being through all stages of life. The company's revenues are derived from premium revenues on insured (risk-based) products, fees from management, administrative and consulting services and investment and other income. It conducts its business primarily through operating divisions in the following business segments: Uniprise; Healthcare Services, which includes UnitedHealthcare and Ovations; Specialized Care Services, and Ingenix. PLAY (very conservative - bullish/credit spread): BUY PUT JUL-80 UHB-SP OI=86 A=$0.40 SELL PUT JUL-85 UHB-SQ OI=286 B=$0.75 INITIAL NET CREDIT TARGET=$0.40-$0.50 PROFIT(max)=8% ****************************************************************** ************************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 ************ Bearish watch list candidates have provided solid intraday trades recently. We’re taking a look at two more bearish possibles this weekend. To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/060902.asp ************** MARKET POSTURE ************** Two major support levels were lost in the market averages Friday. Sector movement was found more support levels broken. To Read The Rest of The OptionInvestor.com Market Posture Click Here http://www.OptionInvestor.com/marketposture/060902_1.asp ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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