The Option Investor Newsletter Monday 06-10-2002 Copyright 2001, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 06-10-2002 High Low Volume Advance/Decline DJIA 9645.40 + 55.73 9718.09 9562.54 1.22 bln 1657/1562 NASDAQ 1530.69 - 4.79 1551.80 1526.96 1.51 bln 1573/1885 S&P 100 509.03 + 1.71 513.10 505.63 Totals 3230/3447 S&P 500 1030.74 + 3.21 1038.18 1025.45 RUS 2000 469.29 - 1.22 473.50 468.60 DJ TRANS 2721.12 + 34.46 2735.67 2685.21 VIX 26.15 - 0.50 27.06 25.47 VXN 52.54 + 0.30 53.09 51.46 TRIN 1.00 PUT/CALL 0.77 ****************************************************************** NEWSFLASH! By Buzz Lynn buzz@OptionInvestor.com "Dirty Bomb to be unleashed on U.S. soil! Markets tank!". Furthermore, "We arrested the terrorists responsible. Markets recover and move higher into the day". So how much headline risk can we stand? If we trade for a living, it's classified as "risk" only if we're on the wrong side of the trade. For the nimble, it's called opportunity. And for everybody else? Noise. I could go on for a good filibuster's worth about the current sad state of the markets, the U.S. and world economies. Veteran readers would accuse me of being a broken record though, so I'll spare us all the agony of another tirade. Let me just leave it at this: Instead of thinking it's going to rain, I'm building an ark. But you already knew that However, for those just joining us who doubt the need for an umbrella, let alone an ark, I want to share some truly great research I picked up over the weekend. Maybe I should save this for another column, but I won't. It was a piece of material I received from John Mauldin, another smart and grizzled veteran of Wall Street. I found the content really interesting since this relates to truly smart money at work. Anyway, Mauldin's research is first rate and best of all, it's free. I don't understand why it's free, but I'm not one to look a gift horse in the mouth. Anyway, here's Mauldin weighing in a Warren Buffet move. Mauldin leads in by noting with regard to the false premise that companies know best how to invest earnings. Consequently dividends rate way down in the pecking order of importance to management. How did he reach that conclusion? In his own words: The answer is, "that companies are not very good at investing capital. If a company pays out most of its earning in dividends, it only gets to fund its very best ideas. Evidently, when it can fund its 10 best ideas, or pay rich multiples to purchase other companies (as Cisco, Tyco and WorldCom did), then many of those ideas do not work, and result in losses. It says something about the arrogance of today's CEO's when they think their 10th best idea is better than their shareholders first best idea." ZING! Reminds me of the late 1980's when in the frenzy to break up companies, whose sum of parts were worth more than the whole, one corporate raider (Jacobs, Pickens, Ichan, can't remember now) remarked that, "Isn't it funny that that this company is worth less with management than are it's assets without management?" In other words, management was a detriment to shareholder returns. Hmmm. . .history repeats. Anyway, continuing with Mauldin. . . "Unless you are involved in the arcane trivia of the markets, you may not have noticed that Warren Buffett just sold a remarkable piece of paper. Dennis Gartman (of the exceptionally well-written Gartman Letter) tells us: "It is a convertible debt issue, carrying a 3% coupon, with an attached warrant that will allow the buyer to "call" from Berkshire shares at approximately 12.5$ above the level that Berkshire "A" shares sold at two weeks ago. In order to keep the warrant alive, however, the buyer will pay to Berkshire an annual fee of 3.75%. In other words, Berkshire has sold debt with an annual negative interest rate of .75%...retaining the right to sell shares at a substantive premium to today's price! We can only recall the Swiss government having been able to make such a grand debt issue, doing so back sometime in the late 70's or early 80's to the best of our knowledge, when money was flowing to Switzerland as a safe haven and the Swiss tried to stem that tide by offering a negative coupon." "Think about that. Supposedly sane institutional investors are going to pay Buffett for the right to take their money. Berkshire is such a proxy for the stock market that you have to be a major bull to enter into such a transaction. I for one cannot figure out why anyone in their right mind would do this. There are certain rules in life: you don't play poker with guys called Blackie, you don't shoot pool with fat guys called Slim, and you don't take the opposite bet against Buffett. Berkshire has all the money it needs. Why would Buffet risk serious dilution of his shares by selling these relatively cheap options if he really thought his stock was going to rise? I think he decided to take advantage of a few optimists and add to his bank account. He has got to be chuckling to himself late at night over this one. The obvious implication is that he thinks we are in for a prolonged bear market." Amen. Read more of John Mauldin's stuff free at www.2000wave.com. It would be worth it even if you had pay for it. Anyway, so many newsy items today that had nothing to do with the markets' moves - Imclone insider trading, Tyco's legal counsel ousted (who issued his own press report noting that the company is in complete disarray), Celebrex is no more helpful than Ibuprofen, and the XAU (gold and silver index) fell under its 50-dma. Nothing here suggests a "return to normalcy" - that of a perpetually charging bull - is about to happen. A 55-point gain on the Dow does not make a pivotal day, especially given the fall from resistance intraday. Also true for those indexes that actually went negative today. So forget fundamentals for a minute, which stink. The future is in the charts. Dow Industrial chart - INDU (weekly/daily/60-min) Let's keep this short. Weekly still sliding; daily with shallow stochastic gains, big resistance at the 9887 (200-dma) and 10,069 (50-dma) if it should be so luck as to get there. 60-min is rolling over without even hitting the upper channel. Of course, I guess I could change the line to fit the tops, but the end result would be the same. No case for the bulls here with a very meek 1.2 bln shares trades with advancers fractionally outpacing decliners. The "gain" means little more than a marker of time. NASDAQ chart - COMPX (weekly/daily/60-min) Same story, only worse for the bulls and good for the bears here. Weekly showing some candle support about 100 points down at 1400. Daily chart candles are following the downward slope established in January. Support has become resistance and the oversold stochastic has fallen and can't get up. That doesn't mean it won't succeed in sucking in a few diehard bulls on the next daily stochastic bounce. Trading resistance at 1550 with the 60-min chart suggesting a negative day in store. All that said, once the 60-min stochastic cycles up again, it might be time for the market to suck in the bulls like canal water, as mentioned above. 200 and 50-dma's will keep a lid on the bullish action. A meager 1.5 bln shares traded with decliners outpacing advancers roughly 6:5. S&P 500 chart - SPX (weekly/daily/60-min) Pretty weak here too with the weekly stochastic in decline lending a direction to the big picture. Sub 1000 is a real possibility. The daily too is stochastically weak with resistance coming in today at previous support. Adding insult to injury, the 60-min stochastic is rolling over too at resistance formed by a declining trendline. That isn't a perfect correlation, but it's close and follows a familiar downward pattern. VIX and VXN? Does it matter? Pretty mixed anyway at 26.15. The VXN however has launched upward indicating higher than usual option premiums. Time to sell time premium? Maybe, but still climbing - very unstable indicating that investors are no longer sure of direction. One note to make for the broad market is the close of the Russell 2000 under its 200-dma for the third day in a row. Should the $RUT break under 457, that would be a "lights out" for the broader markets. Watch that for clues. Not looking real strong right now. Dow Transports on the other hand are higher than they were last Monday indicating that the Dow may find some strength in the next few days (but don't bet the farm expecting the take to fund retirement). For tomorrow? No a clear signal except to say that the weak daily, and the rolling 60-min oscillators across the major indexes points to further weakness. This is the kind of market that has me on edge. It keeps faking us into thinking a bullish trading turn is a hand then disappoints. The only word I think of here is erosion and/or rangebound with a bearish bias. Bears have this market by the throat, but are not intent on killing it yet. Only when nobody want to own stock, the last vestiges of speculation have been wrung out, when stocks again represent fractional ownership of a going concern designed to produce a cash on cash return for the owner (as opposed to speculative pieces of paper), and when price to book values fall under 1, that will be the time for the long haul - say 7-10 years (but I hope not). See you at the bell. ******************** INDEX TRADER SUMMARY ******************** WITCHES OF WALL STREET by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - It was fear & loathing hits tech again as former tech sweeties are now the witches of Wall Street and rallies involving these sectors don't go far. Again acting as big wet blanket was the SOX (Semiconductor) Index, with weakness in Intel (INTC) dragging the chip sector (and Nasdaq) lower. The early rally in the Composite failed right at resistance at the low end of the recent trading range before Intel news caused the gap lower opening - speaking of this gap, the rally reversal was right at the top of it. It's going to take awhile to get a tech rally going. The market may be oversold and its possible we've seen the low for a while, but it takes BUYING to pull em higher. And, anyone who thought that news of the capture of a suspected militant who was plotting to plant a so-called "dirty" bomb (to spread radioactive material) was "good news" has not seen "Sum of All Fears", the popular Ben Afflack flick - the plot of this film involves a nuclear bomb that goes off at the SuperBowl. Put the fear of Osama in me, as a stark reminder of how deadly the nuclear wild card is. Keeping the Dow afloat today was strength in Wal-Mart (WMT +3.6%), Merck (MRK +3%), Home Depot (HD +2.9%), Citigroup (C +1.7%) and Microsoft (MSFT +1.6%). Down on the day was Intel (INTC -4.2%), Hewlett Packard (HPQ -2.1%), and IBM (-1.9) were off reflecting the sell technology bear rallying cry of the day. S&P 100 ($OEX.X) Daily/Hourly charts: Continue to suggest buying a good-sized price pullback, such as back to the 504-505 area or even 500 again, if reached. Backing and filling is typical of a bottom in the S&P 100 (OEX). Even the last rally, which didn't have a great run to the upside, had this pattern. I think we will see corrective action on Tuesday and this began today as the index reversed in the 513 area as the very short- term stochastic reached an overbought extreme. I also continue to suggest risking to under the recent low (498.5) for a "position" type trade, going out beyond the June expiration. My best guess is that the OEX can rally, on balance, up into the June 21st. expiration. Dow Index (1/100: $DJX.X) - Daily/Hourly charts: As with the OEX, look for some corrective action tomorrow (Tuesday) as DJX does not look ready to advance beyond the upper end of its downtrend channel. Resistance is at 97.2-97.5 and support is likely to develop again on dips to 95.6 area, down to 95.2-95. We still see the pattern of lower rally highs and lower downswing lows, so there is no end to the bear trend - not yet. Stay tuned. Nasdaq Composite ($COMPX) Index - Weak, weak, weak. Technical action is poor, except to the bears who must have been happy to sell the rally back up to resistance implied by the low end of the hourly price range before the gap lower opening of Friday. Once the gap was "filled in", good bye Charlie, or tech wrecks. The "curving" pattern to the rally on the hourly chart is usually bearish in its outcome - somehow, its more bullish to see some dips on a rally, instead of these little spike up (rally) failures. If they couldn't take em higher today, my guess is that they'll take em lower tomorrow. Support looks to be at 1520; then, in the low 1500 area again. I expect a secondary low at or above Friday's reversal point at 1496, but won't bet the ranch on it. Stay tuned! Stay short if you sold the rally today, but suggest covering around 1500 again on signs of stabilization and if hourly oscillators again get oversold - say by Wednesday. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: Still holding my one long QQQ position, and suggest maintaining a stop at 27.5 (Friday low was 27.52) for a while longer. The 29 area is proving to be tough resistance, but this hourly downtrend channel has been a lay up sell all the way down. Picture perfect. Given the sizable short/put position and the oversold daily stochastic, my expectation is that the Q's have more upside potential into the June 21st. expiration than downside risk. Time will tell. This scenario for a rally would also hammer the greatest number of smaller option holders - as it's perversely called, the max (maximum) pain theory. My watch on MSFT, ORCL, CISCO and QCOM is a bit encouraging - MSFT looks ready to break out to the upside, as is ORCL. CISCO and QCOM are holding OK - with even a minor oversold rebound in INTC, we could get a decent rally in the Q's - maybe one that would create a break out of the relentless downtrend channel. Not tomorrow I would guess, past tomorrow, such as setting up by Thursday. The stocks we love to hate, Nasdaq. Now, we got more ompetition for the Nasdaq exchange with the merger announcement today involving Island. Makes sense, as why have more pathways to continuing to lose in tech for those probing for a bottom or bottomless pit! Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ------------------------------------------------------------ WINNER of Forbes Best of the Web Award • optionsXpress voted Favorite Options Site by Forbes • Easy screens for spreads, collars, or covered calls • Free streaming quotes • Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** TRADERS CORNER ************** Pinpointing Profitable Pivot Points by Mark Phillips mphillips@OptionInvestor.com I must have mulled over that title for over an hour, trying to get the alliteration right. It may be a misnomer for our topic today, but I think you'll see the relevance as we go along. One of the first lessons I learned to consistently apply in the late '90s was to avoid entries into new positions during the first hour of the trading day. There are two reasons for this. The first is that option volatility is frequently higher during the first hour of trade. But the more important point is that frequently the high or low price for the day would be posted during the first hour, leaving us as option traders entering new positions at the most expensive point of the day. This behavior is the most pronounced on days that begin with a gap move, either up or down. Frequently the momentum generated in the opening minutes will run its course and reverse in that first hour, with the stock or index moving contrary to the gap move for the remainder of the day. There are exceptions to this dynamic, but it is consistent enough to keep me watching for this action on a regular basis. In recent months, I have noticed a change, or more correctly a refinement to this action, with the high or low tick of the day (that is on gap moves) occurring within a couple minutes of 10am ET. A perfect example of this phenomenon was the action in the broad market indices last Friday. Let's take a look at the Dow Jones Industrials for this example, using the DJX.X index. I had been playing the downside on the DJX for a couple of weeks, entering puts on the overbought Stochastic alignments on the 60/30-min charts and exiting with the oversold alignments. I had been avoiding the call plays due to the fact that the prevailing trend had been down. So here's the situation as it presented itself last Thursday night. I was looking for a tradable bottom to present itself, meaning that I would want to exit my puts and switch to the call side, even if only for a short trade. As you can see from the chart above, that point had not yet presented itself as of the close on Thursday, as the oscillators were not yet bottomed in oversold, even though the DJX was very close to the 9600 support level. Given the weak picture presented there, I was already expecting the 9600 level to fail even before INTC dropped its bombshell after the closing bell. That virtually guaranteed a sizable gap down open and I was looking to use that event to both close my puts and switch to calls. That brings me to my newest observation on gap moves on the indices. When I've got the longer-term picture lined up for a near-term bottom with oscillators near or in oversold and the market is kind enough to give me a gap-down open, frequently that gap will produce the low of the day within a couple minutes of 10am. While this is within the amateur hour that I have traditionally avoided trading within, this observation has allowed me to fine-tune my rule to take advantage of attractive swing-trade entries when they present themselves. So let's come back to the actual action as it presented itself on Friday. As expected the DJX saw significant selling pressure at the open, driving it not only below 96, but below 95 in the opening minutes. I know from my study of the 60/30 charts the night before that we're close to an oversold extreme and with the VIX spiking to near the 30 level, I knew I wanted to be looking for an entry to the long side to take advantage of the oversold bounce. For our discussion purposes here, I've used a 2-minute chart. The gap represented by the left-most large red candle was the result of the INTC fallout and after the reflexive rebound, the DJX proceeded to drop to $95.63, posting that low at 9:58 am. Day-traders (like me) that had identified the trading pattern I've discussed here would then have looked for price to rebound, with oscillators on the 2/5/10 minute charts to start poking out of oversold territory. That gave the first, albeit aggressive, entry signal to the long side. For my part, I both exited my puts and entered calls by 10:05 am, looking for a short-term swing trade, possibly as high as the 97 level. A more conservative entry point presented itself about an hour later, as the DJX posted a higher low, using the 95 level as support now. So let's look at the subsequent market action and see what developed, shall we? Sure enough, the DJX stutter-stepped its way higher for the next 2 days, clinging to a fairly steep ascending trendline that broke down this afternoon in the final hour of trade. That breakdown was the signal to exit the trade, as price broke the ascending rendline and the Stochastics on both the 30 and 60 minute timeframes fell out of overbought territory. There is no question that this is NOT a homerun trade, but capturing 150+ points on the DOW in 2 days' time is nothing to sneeze at. Normally, buying the low is described as trying to catch a falling knife, a potentially painful experience that as traders we try to avoid at all costs. But when we can line up numerous factors in our favor, it becomes much more practical to enter near a swing low, while keeping our risk manageable. I liken it to still catching a falling knife, but now we are wearing heavy leather gloves to protect ourselves. When I initiated the trade, here are the standard factors that were in my favor: 1. Oversold (or nearly so) Stochastics on daily/60/30-min charts. 2. Spike in the VIX near the 30 level 3. DJX falling just below significant support near 95.5 on a gap down move and then beginning to recover. 4. My observation that gap moves that do reverse find their bottom (top) within a couple minutes of 10 am ET. It isn't a lead-pipe lock and will (I am sure) fail on numerous occasions in the future. But due to the fact that I am entering near what I believe to be an important swing low, I have the ability to significantly limit my risk. In this case, I entered the play when the DJX was trading at $94.85 and set my stop at $94.70. The reason that I can place it so tight is due to my observation of gap moves reversing at a particular point in the day. If the 10 am low were to be violated at any time in the day, I would know that I had read the situation incorrectly and would want to exit post-haste. Put another way, the observation of the post-gap action near significant tops (or bottoms) near the 10am time gave me that secret weapon that improved my odds of success, while at the same time allowing me to dramatically reduce my risk while taking advantage of an expected rebound off the lows. This is at the very core of what successful trading is all about. Recognition of patterns that tend to repeat from time to time and then initiating positions to benefit from that pattern when it repeats in the future. But don't take my word for it. Look at some past gap moves on the major indices and see if you can see some merit to the 10am pattern. While what I've highlighted here is a gap down that reversed into a bullish move, that isn't the only way for the pattern to resolve itself. I have frequently (5/24 was a good example on the DJX) seen a gap down result in an attempted reversal that subsequently fails right at 10 am. I think my favorite part of this observation is the fact that I can set my stop just above (or below) the 10am high (or low), significantly limiting my risk exposure in the play. Do a little bit of research to convince yourself there might be some merit to this pattern and then watch for the next gap move. Don't trade this pattern until you are sure you understand it, but keep an eye on the direction of the markets near the 10am time. I have found it to be uncanny the frequency with which the markets set either their high or low of the day at this time. Happy hunting! Mark ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's • optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's • 8 different online tools for options pricing, strategy, and charting • Access to options specialists via email, phone or live chat online • Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ *********************** INDEX TRADER GAME PLANS *********************** THE SECTOR BEAT - 6/10 by Leigh Stevens Most tech sectors turned lower by day's end, led by the chip and hardware groups. Internet issues lagged throughout the trading day. Intel (INTC) lost a further substantial 4.2% today, adding to 2 days of steep losses following a revenue warning by the company on Thursday - must be hard to shoot yourself in the foot! However, at least one brave soul, First Albany, raised its rating on the chip maker to a "strong buy" from a "buy", the belief that INTC was overly conservative during its midquarter update late last week. The SOX (Philly Semiconductor Index) fell another 0.8%, after a rally of nearly 2% during morning trading. Speculation is now on SOX (Close: 437.4) retesting its low of early-Oct at 350. Time will tell - this sector is now very oversold, but the group seems to be the new whipping boy or girl. The small-cap sector, the leading area of the market since the September lows, have under-performed in the past 5 weeks. This is being noticed now more as the big cap stocks are not exactly taking over market "leadership". In the financials, UBS Warburg lowered 2002 earnings-per- share estimates on Citigroup (C), Bank of New York (BK) and State Street (STT), to reflect as they said "continued uncertainties and soft business conditions in the capital markets arena." Nevertheless, these and other financial stocks rebounded a bit. Brokerage stocks held up in general, although Merrill Lynch (MER) was off 0.7% following a downgrade from J.P. Morgan to a "long- term buy" from a "buy." HIGHER ON THE DAY ON Monday - DOWN ON THE DAY on Monday - SECTOR HIGHLIGHT - Gold & Silver Sector Index ($XAU.X) STOCKS: ABX; AEM; AU; FCX; GOLD; HGMCY; MDG; NEM; PD; PDG; SIL 75.00 is the next key support and represents a 50% retracement. The decisive downside penetration of the March-May up trendline, was the telling reversal event. The broken trendline, now intersecting in the 81 area now looks to be key resistance. XAU needs to climb back above the trendline to suggest that its bullish trend is back on track. Currently am inclined to sell key stocks in the Index on a rebound to this area. LAST UPDATE: 6/10 IShares purchase recommendation on SMALL CAP SECTOR (6/9)- IJS, the iShares of the S&P 600 Value segment, opened at 90.90 - will assume a fill at 90.90; the Growth iShares (IJT) of the S&P 600 small cap opened at 74.85 - will assume fill at open; the iShares of the Russell 2000 (IWM) opened at 93.80 and someone wanting to have full participation in the small to mid cap sector, would have these iShares at that price if they bought the opening. Stops are suggested at: IJS - 87.30; IJT - 72.00; IWM - 89.70 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 ($XBD.X) Stopped going down Friday at low end of its daily downtrend channel (at 423.84) and then closed well above (438.5) key prior technical support 429.10 - this close is suggesting we've seen at least a temporary bottom in the brokers - maybe even mother Merrill will regain its credibility as it scrambles to make changes! Another bullish aspect is the bullish RSI/Price divergence that has set up in this sector, as the move to new lows was unconfirmed by a similar lower relative low in the RSI. LAST UPDATE: 6/9 Computer Technology Index ($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 key support and represents a 50% retracement. The decisive downside penetration of the March-May up trendline, was the telling reversal event. The broken trendline, now intersecting in the 81 area now looks to be key resistance. XAU needs to climb back above the trendline to suggest that its bullish trend is back on track. Currently am inclined to sell key stocks in the Index on a rebound to this area. LAST UPDATE: 6/10 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 the recent top is key resistance. HMO has been in strong uptrend for months, but appears to running into some selling in the group as the momentum has slowed. Moreover, the sector could be setting up a double top here, as suggested both on a price/pattern basis and by the bearish Price/RSI divergence, as RSI is not within a country mile of "confirming" a new high in the Index. Analysis of key stocks in the group also strongly 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: 6/10 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 ($RUT.X) 6/10 UPDATE: The iShares of the Russell 2000 (IWM) opened at 93.80 and someone wanting to have full participation in the small to mid cap sector, purchase IWM at that price if they bought the opening per my 6/9 suggestion. Stop: 89.70 Semiconductor Sector Index ($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 ------------------------------------------------------------ We got trailing stops! • Trade online with trailing stops at optionsXpress, at no extra cost • Trailing stops based on the option price or the stock price • Also place Contingent, Stop Loss, and "One Cancels Other" orders • $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************* 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 Monday 06-10-2002 Copyright 2001, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity • No hidden fees for limit orders or balances • $1.50 /contract (10+ contracts) or $14.95 minimum. • Zero minimum deposit required to open an account • Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ***************** STOP-LOSS UPDATES ***************** DGX - call Adjust from $87 down to $88.50 ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ None ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's • $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees • Easy screens for spreads, collars, or covered calls! • Contingent, Stop Loss, Trailing stop, or OCO • 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********************** PLAY OF THE DAY - CALL ********************** DGX – Quest Diagnostics $91.89 +0.96 (+0.96 this week) Quest Diagnostics was the result of a 1996 Corning spinoff, and currently holds the title of the world's #1 clinical laboratory. DGX performs more than 100 million routine tests annually, including cholesterol, HIV, pregnancy, alcohol, and pap smear tests. Operating laboratories throughout the US and in Brazil, Mexico, and the UK, DGX also performs esoteric testing (complex, low-volume tests) and clinical trials. The company serves doctors, hospitals, HMOs, and other labs as well as corporations, government agencies, and prisons. Most Recent Write-Up 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. Comments Continuing its upward climb on Monday, DGX further distanced itself from the $90 level, trading as high as $93 before succumbing to a bit of profit taking in the afternoon as the broad markets weakened. There just wasn't enough volume to sustain a push through the $92 level, but if buyers continue to push the Health Care Payor's index (HMO.X) towards its all-time highs, that positive action is likely to aid DGX in its move through the $92 level. The next challenge will be $94, followed by $96, the site of the stock's all-time highs. Continue to use the dips to initiate new positions, first at $91 and then $90. A rebound from the $89 level would make for a great entry if we get it, but only if it comes on strong volume. Raise stops to $88.50. *** June contracts expire in less than 2 weeks *** BUY CALL JUN-90 DGX-FR OI= 683 at $3.20 SL=1.25 BUY CALL JUN-95 DGX-FS OI=2144 at $0.70 SL=0.25 BUY CALL JUL-90 DGX-GR OI= 154 at $5.30 SL=3.25 BUY CALL JUL-95 DGX-GS OI= 77 at $2.70 SL=1.25 Average Daily Volume = 911 K ------------------------------------------------------------ WINNER of Forbes Best of the Web Award • optionsXpress voted Favorite Options Site by Forbes • Easy screens for spreads, collars, or covered calls • Free streaming quotes • Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************* 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
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