The Option Investor Newsletter Tuesday 06-11-2002 Copyright 2001, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 06-11-2002 High Low Volume Advance/Decline DJIA 9517.26 –128.10 9758.80 9508.69 1.37 bln 1086/1896 NASDAQ 1497.18 – 33.50 1547.50 1496.66 1.67 bln 1290/2229 S&P 100 500.70 - 8.33 514.22 500.31 Totals 2376/4125 S&P 500 1013.60 – 17.14 1039.04 1012.94 RUS 2000 462.78 - 6.51 471.96 462.46 DJ TRANS 2706.57 – 14.60 2750.33 2703.80 VIX 27.46 + 1.31 27.46 25.07 VXN 53.12 + 0.55 53.13 51.56 TRIN 1.62 PUT/CALL 1.02 ************************************************************ Pick Your Own Support Level Regardless of where it is you will have as good a chance of being correct than any of the talking heads on stock TV. The numbers I have been hearing recently are about as random as throwing darts. The commentary of the day was speculation on the "bottom". When will it form, how will you recognize it, where will it be. Depending on who you listened to the Dow bottom was anywhere from 9600, 9500, 9000 and even as low as 8000. It appears bottom theories are like mouths, everybody has one. However very few will profit from their theory. The morning started off bullish with futures spiking on the news that India and Pakistan could be making up. The opening spike took the Dow up to a triple digit gain and a brush with 9750 again. Bears took the gift and promptly shredded it. The more the day progressed the worse the sentiment became. AMAT, speaking at a Bear Stearns tech conference tried to appear optimistic while being cautious at the same time. They said it could be a stage one bottom, which could lead to more IT spending later. "Later" was the key word. They also said there was still a surplus of capacity on many common chips. Intel reportedly said they were not seeing any IT recovery yet but I could find no hard evidence of that statement. Techs were already in trouble since CSFB cut their global growth estimates for PC equipment to zero from 5% overnight. Even the PC price war is not bringing buyers off the sidelines for corporate gear. Dell maintains they will profit from the increased competition because of their low cost structure. They still dropped on the day. After the bell SEBL said the 2Q was shaping up to be as difficult or even more so than the 1Q. This is bad since they were already on record as saying the 1Q was the most difficult since they had been in business. Makes you almost want to run out and buy software stocks! (grin) This is just another blow to techs and the concept of a stealth rally building in chips. The biotech sector took it on the chin again as more revelations about IDPH were rumored and ABT warned they would miss earnings and take a $140 million charge. Lower sales of its anti-obesity drug and devaluation of the Argentine peso were given as reasons. MRK added to the drug/biotech slide amid news that it would not refile an application for its arthritis drug Arcoxia. New worries over Celebrex and Vioxx safety and generic competition also tanked the sector. In a word the markets today were bearish. The opening bounce on the relaxed war worries rolled over exactly at resistance (9750) and traders stepped back to avoid being hit by the falling knife. The selling was orderly on light to moderate volume but it was steady all afternoon. Everyone seems convinced that lower lows are ahead and they are resigned to wait. Market internals started off great with advancers beating decliners 3:2 but the deck was stacked against a continued rally. With warning season underway and no economic news on the calendar traders were left to focus on negative stock news or no news at all. With the post 9/11 rebound the best of all possible scenarios was priced into the market. When this scenario failed to come to pass every bit of bad news just kicks the market farther back into time and price. Insider trading is accelerating and stocks making new lows are growing. Sounds like a bounce around here somewhere. When things look so negative that pundits are forecasting a 50% haircut from here then the bottom should be in sight. This is what is bringing the bottom forecasters out in force. This is why dip buying is actually being revived to some extent. I would be the first to tell you, I don't think we are there yet. I think the market forces in motion won't rest until the September lows have been retested. This does not mean there is not a bounce in our immediate future. Go back to the spring example. The farther you push down a spring the harder it is to push. In just the last two weeks you have three excellent examples of the "rebounding spring" and each led to lower lows. The internals this morning were pretty good but the fear factor was absent. The VIX dropped back to a neutral 25 at the open and the TRIN was an unbelievable .31 at the open. By days end the TRIN was back up to a moderately bullish 1.78 and the VIX had spiked back up to 27.46. The best indicator of all was the put/call ratio which closed at 1.02 on Tuesday. This is very bullish and a very accurate indicator when it is extreme. This means fear came into the market and investors bought puts at the close. All of this boring statistical mumbo jumbo is relative tonight because the indexes all stopped at meaningful support levels. (depending on who you listen to) Now, the stage is set. Indicators approaching extremes and indexes stopped on support. Is this a recipe for a rally? Don't hold your breath. Go back and look at the three rallies over the last two weeks. Same conditions, same result. Hopeful bulls bought stocks and averaged down, again, and worried shorts covered "in anticipation of a higher entry point." This is why I could see another bounce at the open on Wednesday. However, how many times can this scenario play out before the shorts just decide not to cover, since there is always a lower low. The bulls will eventually decide than they just don't want any more SUNW, LU, GLW, etc, even at these "attractive" levels. (sarcasm) As an investor what are YOU going to do? Buy the dip in anticipation of a lower high or short the bounce in anticipation of a lower low? Let me restate that. Since most investors don't short stocks (buy puts) but understand that many others do, what would you do as a long player only? Buy the dip anyway? You could if you are a day trader and expected to just scalp a couple points and quit. If you are not a day trader you would probably see the handwriting on the wall and stay on the sidelines. That is my point. The odds of the majority of long investors simply staying on the sidelines is extremely high. Until the possibility of a real rally based on real earnings emerges we are doomed to continue the current cycle. Bullish traders can continue to ignore the facts and throw money at the market or they can wait for a real entry point later. Dow 9600, Nasdaq 1500, OEX 500, SPX 1000 may be support levels, real or imagined, but there is nearly a 100% chance that the bottom lies below those numbers. Traders, choose sides before 9:30 tomorrow morning or just turn on your TV and watch the game. The choice is yours. Enter Very Passively, Exit Aggressively! Jim Brown Editor ******************** INDEX TRADER SUMMARY ******************** WILD FIRE by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - Just like the fires raging out of control in Colorado, the bear is on the rampage and can't seem to be put back in his cave. The tech conference today in New York was bad news for tech as the earnings story emerging from it seemed to be that the first quarter had more sales than the current one. This market is being driven by the expectations that earnings will not recover anytime soon and those holding stocks in the meanwhile are going to be holding the bag. The general technical market indicators I have relied on in the past, given the "oversold" extremes in advance-decline figures, the contraction of volume, the extremes in bearish sentiment, along with the oversold oscillator readings (long-term RSI, Stochastic, MACD, etc.), would normally suggest, for example, that the Friday lows would have marked a bottom. WRONG! So, I have to question what makes this market different from the "norm". The answer is fairly simple and relates to a basic principle of market analysis noted by Charles Dow over 100 years ago. That markets tend to act like a pendulum and go from "extreme" to extreme in terms of under and over-valuation. There is a related corollary - when the last extreme was well beyond past historical tendencies in terms of valuations (especially, in terms of price earnings multiples and wild expectation on futures earnings growth) the next extreme tends to reflect a similar degree of extreme. The problem here is technology stocks as a group - we haven't seen an extreme contraction of P/E ratios the equal of the extreme expansion on Nasdaq at +5000. We can call this the tech bubble hangover or residue. Valuations got SO high, that although Nasdaq stock prices are off 50% from the last multiyear run up (semi-log scale), in terms of earnings tech stock prices are still quite high relative to current and trailing earnings. While the NYSE market stocks may otherwise be in a position to rally, tech is going to drag them down as it is still the 800 pound gorilla of the market - you need only look at which market has far and away the higher average daily/weekly volume. Going back to the safety issue, given the still uncertain outlook and the terrorism "wild card", investors know that we have less certainties than usual in such an uncertain "new" world where there are people who want to wage war on civilians and killing themselves in the process. We never quite had the like before. Investors KNOW that the 9/11 destruction and its aftermath took 10's of billions out of the economy. I think the arrest of the suspected terrorist plotting to blow up a bomb with radioactive materials has brought the new global uncertainty back to the forefront of investor's minds. That and the ongoing drama of Palestinians blowing themselves up in Israel along with Israeli civilians makes the same point. We live in such an era of uncertainty, how can we count on projections that still places such a relative premium on FUTURE market earnings. I had the realization today, that in words of the immortal Yogi Berra, or whomever it was, "it ain't over until its OVER". It going to be very hard to judge where this market will ultimately bottom unless we have some clear cut "benchmark" like a successful re-test of the September low - either intraday, closing or both. We have S&P bellwether GE already there - it has already touched its Sept. low. It rebounded a bit, but today looked like it is headed right back to that level. We have the situation of Intel in seeming free fall because of a less than robust earnings picture due to European growth being less than the U.S. At this point, especially given the nearer and nearer approach to the September lows in key market sectors like Semiconductors (SOX) and in that SPX is getting nearer also, I think we have to start to assume that the levels of the September lows could be a downside objective - the only benchmark in terms of a prior bottom - hard to believe we would see the Sept. lows again absent the terror event that put us there, but FEAR is the bear market handmaiden. And, the VIX "fear" index is back above 27. Maybe we will see extremes above 30 or 35, before this market bottoms. Fear rules, just as excessive optimism did in the last extreme market, the mega-bull one. Give me the "normal" bull and bear markets back! - the ones easier to "time". Actually, this one is easy too - short/buy puts on every good-sized rally and reverse only when a prior major high is exceeded to the upside. S&P 100 ($OEX.X) Daily/Hourly charts: My suggestion has been to buy Index calls if OEX got back to the 504-505 area or to 500. The bear market genie has answered my wish - now to decide if I want this wish. If prices stabilize around the prior low, yes. But, judging by the relative position of the longer hourly stochastic, OEX may get driven to the low end of its downtrend channel again. As a move to LOWER trendline has been the more reliable pattern - more reliable than a move even to touch its upper trendline - I have to guess OEX could see new lows down in the 493 area, at the low end of the channel. On the daily chart, I have expanded the envelopes (by 0.5%) to 5.5% to reflect the greater volatility. No doubt we are at an extreme, but the buyers have not mounted the cavalry charge yet and come to the rescue. Of course, if 500 shapes up again as another low, traders would have a likely opportunity here, but we'll have to see first how tomorrow shapes up. The S&P 500 pattern is nearly identical to the 100 - only the levels are different. A retest of the prior low in the 1012 area was nearly at hand with the 1013 close. The low end of its hourly downtrend channel comes in at 998. No doubt the 1000 level is a very key psychological level, so I anticipate that since SPX is this close, the 1000 area will be tested. Even 100 levels are potent areas to look for potential support or resistance - the even 1000 levels much more so. Dow Index (1/100: $DJX.X) - Daily/Hourly charts: The index with the greatest likelihood of a near-term successful test of its prior low at 94.7 is DJX. Below this, implied support at the low end of the downtrend channel is in the 93.5 area. I'd cover shorts and take a walk on the long side if this area is seen. Risk to 93 - relative to a half point risk, reward (upside) potential is probably 1.5 (a rebound back to 95). I correctly identified resistance as coming in at 97.5, but it remains to be seen whether support develops in the 95 area. No change in the pattern of lower rally highs and lower downswing lows, so continue to assume a bear trend and that selling rallies is less risk and bother than the very good and nimble timing needed to find the short-term bottoms. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: I am no longer holding a holding a long QQQ position, as I was out on the suggested stop at 27.5. I thought about removing the stop myself, but went and laid down until the feeling passed :- As said last night, the 29 area has been tough resistance and the hourly downtrend channel upper line - at or near it - has been an "easy" way to gauge when to play the sell side. I figured not to time the market this closely and eventually we would get a more sustained oversold rebound - WRONG - so far! Intel weakness and that fact that any emerging rallies in MSFT, ORCL, CISCO and QCOM have not had follow through, is telling us that there just is no leadership in big cap tech that is going to lift the Q's I doubt that much of a rally will set up until Thursday, as it will take another day of weakness to get the longer (21) hourly oscillator back to a fully oversold area. Since QQQ has already exceeded its prior low, it will likely sink further as the bulls panic further. On balance, bearish positions look still favorable for the near-term. Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** **************** MARKET SENTIMENT **************** What Was That? By Eric Utley I had a pretty good idea what was going on late last week. But today's action was beyond my grasp. My only stab at a guess is that a triple witch is on the horizon, next week to be exact. There may have been some strange goings on in the options and futures market that spurred today's massive reversal. But I can't say for sure. Needless to write, the bullish percent measures got lopped for a few more percent today. The Nasdaq-100 Bullish Percent ($BPNDX) specifically was whacked a little more into oversold territory. Given its reading at 19 percent, I think shorting tech stocks is a dangerous bet. But tell that to the AMEX Biotechnology Index ($BTK.X) that lost another 8 percent today. There are about a dozen stocks that overlap between the BTK and NDX, and those dozen were very easy money to the short side today. In other words, the long side is just as dangerous as the short side in the Nasdaq-100. The bullish trades I tried from late last week resulted in fractional gains and losses so far this week. Far from inspiring. As I was cruising the sector scorecard this evening to find the day's worst and best performing sectors, I noticed a lot of sectors stopped right on key support levels. It's almost as if the sellers, whoever they were today, knew beforehand exactly where they were taking the sectors down to. Many stopped right on double bottoms, or near last fall's lows. I think that sets up for the possibility of a major break below relative lows in the market, but that remains to be seen. Obviously the rebound in the gold stocks, which had been heavily sold going into today's session, doesn't bode well for stocks in conjunction with the buying that we saw taking place in the bond market. The benchmark 10-year yield ($TNX.X) closed back below the 5.000% yield level for the day, but just above its 200-dma. A major breakout in the bond (a breakdown in yield) is shaping up, which may help to confirm any further downside in stocks. Amazingly, the Arms Index short term measures predicted another short term rally late last week when the 5 and 10 day measures went into extreme oversold readings. But just as recent rallies following the extreme readings fizzled, this latest round lasted only through this morning from last Friday's attempt off of the relative lows. The extreme levels of the short term ARMS numbers was worked off in the last two days, setting up more downside. I think we're in for a big move in the next two or three days, either a reversal from today's sell-off or a major breakdown. Investor sentiment will most likely be the determining factor for short term direction of the markets. Psychology is worsening by the day, and it will only take another major negative development to spark a full on fear induced sell-off. We'll see if hope remains, or if fear overcomes during this week. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 9517 Moving Averages: (Simple) 10-dma: 9733 50-dma: 10052 200-dma: 9864 S&P 500 ($SPX) 52-week High: 1316 52-week Low : 945 Current : 1014 Moving Averages: (Simple) 10-dma: 1043 50-dma: 1086 200-dma: 1110 Nasdaq-100 ($NDX) 52-week High: 2071 52-week Low : 1089 Current : 1101 Moving Averages: (Simple) 10-dma: 1172 50-dma: 1278 200-dma: 1427 Gold and Silver ($XAU) The XAU was the day's best performing sector with its 3.51 percent gain. The index edged out the HMOs to earn the day's top spot. The XAU appeared to rebound from a short term oversold condition, as well as a flight to defensive issues on the rollover in the broader market. Leaders to the upside included Harmony Gold (NASDAQ:HGMCY), Gold Fields (NYSE:GFI), Agnico Eagle Mines (NYSE:AEM), Meridian Gold (NYSE:MDG), and Anglogold (NYSE:AU). 52-week High: 89 52-week Low : 49 Current : 78 Moving Averages: (Simple) 10-dma: 82 50-dma: 77 200-dma: 63 Biotech ($BTK) The BTK was hammered again today. Rumors circulated that Amgen (NASDAQ:AMGN) would warn after the bell. And IDEC Pharmaceuticals (NASDAQ:IDPH) issued negative news. The index lost 8 percent for the day, easily earning the worst performing sector spot. Sector leaders to the downside included IDEC, Affymetrix (NASDAQ:AFFX), Protein Design Labs (NASDAQ:PDLI), Millennium (NADAQ:MLNM), and MedImmune (NASDAQ:MEDI). 52-week High: 637 52-week Low : 335 Current : 337 Moving Averages: (Simple) 10-dma: 381 50-dma: 427 200-dma: 502 ----------------------------------------------------------------- Market Volatility The VIX pulled back all the way to the 25 level this morning following its trade just shy of 30 last week. The index fell quite a bit more than its brother the VXN. There's certainly more fear in tech land. The VXN refused to go down in the last two days. We'll see if it cracks 53.50 tomorrow. CBOE Market Volatility Index (VIX) - 27.31 +1.16 Nasdaq-100 Volatility Index (VXN) - 53.10 +0.53 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 1.02 409,992 419,937 Equity Only 0.83 328,180 272,069 OEX 1.05 24,936 26,276 QQQ 1.30 15,750 20,496 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 55 + 0 Bull Correction NASDAQ-100 19 - 1 Bull Correction DOW 47 + 0 Bear Confirmed S&P 500 49 - 1 Bear Confirmed S&P 100 48 - 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 1.44 10-Day Arms Index 1.57 21-Day Arms Index 1.29 55-Day Arms Index 1.37 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 1182 2026 NASDAQ 1267 2205 New Highs New Lows NYSE 88 87 NASDAQ 57 201 Volume (in millions) NYSE 1,397 NASDAQ 1,696 ----------------------------------------------------------------- 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 $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********************** INDEX TRADER GAME PLANS *********************** THE SECTOR BEAT - 6/11 by Leigh Stevens Most every sector was back under pressure today, especially Biotech under a barrage of bad news - it was off a whooping 8%. Drug stocks were being dumped, as were semiconductors and oils. The oil price decline briefly helped the Dow Transportation average and it looked like it would achieve a bullish technical breakout but failed to - see the Sector Highlight section below for more on this. The stand out gainer and breakout to the upside (with a close above a prior major top) occurred in the HMO sector - the very sector that, due to apparent topping action in its key stocks, I suggested taking profits recently in calls held in PHSY, WLP HUM. Oh well, HUM and PHSY are not out of the woods. HUM took a big jump however. It looks like fund managers, hard up for stocks they can buy, are buying the laggards in the group. The stocks themselves, on balance, still look toppy to me. The former, on-fire, small and mid cap sectors were not immune to the selling today - I suggested purchase of the iShares in the S&P 600 small cap value and growth segments recently. Keep stops in place there. Sectors that looked like they could start to rally, like the broker group and software looked suspect with today's selling action as to whether they could provide any sector leadership. On balance, it seems there is no place to "hide" on the call side and only those holding puts are seeing any greening of their accounts. HIGHER ON THE DAY ON Tuesday - Not much "green" on the board today - Health and Gold! Hey, not bad if you have both your health AND gold to spend on the good life! DOWN ON THE DAY on Tuesday - SECTOR HIGHLIGHT - Transportation Average; Dow Jones ($TRAN) Airborne Inc. (ABF); Alexander & Balwin (ALEX); AMR Corp (AMR); Burlington Northern (BNI); CNE Transportation (CNF); CSX Corp (CSX); Delta (DAL); FedEx Corp. (FDX); GATX Corp (GMT); J.B.Hunt Transport Services (JBHT); Norfolk Southern (NSC); Northwest Airlines (NWAC); Roadway Express (ROAD); Ryder System (R); Southwest Airlines (LUV); UAL Corp. (UAL); Union Pacific (UNP); US Airways (U); USFreightways Corp. (USFC); Yellow Corp. (YELL) 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 DJ Transportation average has been rebounding off the key 200-day moving average and is therefore performing better than the Dow Industrials. But its failed the "test" of also getting above its 50-day average - this was also the area of its down trendline. These stocks probably have buying interest due to being perceived as "low risk" and an oil price decline play, which improves their bottom line. They are probably going to need more than this to get them up. Charles Dow's theory on the market said that if goods are being transported, it results in a pick up of the revenues & earnings of the transportation companies - the resulting rebound in these companies' stock prices is sometimes the first tip off that manufacturing is picking up. LAST UPDATE: 6/11 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 - ** MORE REVIEWS ON WEDNESDAY ** 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 ($GSO.X) STOCKS: ERTS; INFA; INKT; INTU; ISSX; ITWO; IWOV; JDEC; MANU; MENT; MSFT; MUSE; NATI; NOVL; NTIQ; ORCL; PMTC; PRGN; PRSF; PSFT; RATL; RETK; REY; RHAT; RNWK; SEBL; SNPS; SY; SYMC; TIBX; VIGN; VRTS; WEBM; WIND; YHOO The Software Index, on a technical basis, has been looking like it is forming a double bottom at 114-115. If there is a break of this area, next potential technical support looks to be well under this, at 100-101. There is also a possible bullish wedge pattern on the daily chart, but this would only be "confirmed" with a move above 123. GSO, at Friday's low at 114.75 has held its prior bottom (114.75) and this sector is looking more like it is forming a double bottom. LAST UPDATE: 6/9 Telecoms Index; No. American ($XTC.X) Transportation Average; Dow Jones ($TRAN) Airborne Inc. (ABF); Alexander & Balwin (ALEX); AMR Corp (AMR); Burlington Northern (BNI); CNE Transportation (CNF); CSX Corp (CSX); Delta (DAL); FedEx Corp. (FDX); GATX Corp (GMT); J.B.Hunt Transport Services (JBHT); Norfolk Southern (NSC); Northwest Airlines (NWAC); Roadway Express (ROAD); Ryder System (R); Southwest Airlines (LUV); UAL Corp. (UAL); Union Pacific (UNP); US Airways (U); USFreightways Corp. (USFC); Yellow Corp. (YELL) ** CHART IN HIGHLIGH SECTION ** The DJ Transportation average has been rebounding off the key 200-day moving average and is therefore performing better than the Dow Industrials. But its failed the "test" of also getting above its 50-day average - this was also the area of its down trendline. These stocks probably have buying interest due to being perceived as "low risk" and an oil price decline play, which improves their bottom line. They are probably going to need more than this to get them up. Charles Dow's theory on the market said that if goods are being transported, it results in a pick up of the revenues & earnings of the transportation companies - the resulting rebound in these companies' stock prices is sometimes the first tip off that manufacturing is picking up. LAST UPDATE: 6/11 Utility Sector Index ($UTY.X) Wireless Telecom Sector Index ($YLS.X) NOTE: RISK to REWARD guidelines - Determining an objective is important, even if it is a moving target, as this is the reward potential. Determining reward potential is critical to establishing whether a stop that makes “sense” (e.g., a sell stop that was placed under a key support level) would, if triggered, result in a dollar loss that is in proportion to profit potential; e.g., 1/3 of it. (On occasion, when the purchase price of call or put is equal to 1/3 or less of the estimated reward potential, there may not be a specific exit suggestion, as the cost of the option is equal to the amount that is being risked.) Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. 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The Option Investor Newsletter Tuesday 06-11-2002 Copyright 2001, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** PSFT $20.67 -0.26 (-0.27) After failing to stage a significant rally with the rest of the NASDAQ, PSFT has actually been holding up fairly well. That isn't the reason we're pulling the plug. The concern here is the fact that the Software index (GSO.X) is back testing its September lows and if today's action is any indication, the $115 level is likely to fail as support this time around. So we're dropping PSFT ahead of that expected event. If the stock had shown more strength (i.e. breaking out over $22 resistance) then we might be inclined to give it another day, but with Tuesday's drop back to $20 support, it looks like rangebound action is the best we can hope for. INTU $43.59 -0.44 (-0.44) INTU is failing to move higher with the weakness in the technology sector. The stock could break in either direction in the coming sessions, but we fear that the move is going to be to the downside. Without help from the Nasdaq, INTU is going to have a difficult time holding on to support. Look for a bounce early tomorrow to exit ahead of a possible breakdown. PUTS: ***** COHU $18.75 -1.15 (-1.77) Congratulations put players! COHU gave us a great opportunity to book gains in today's session as the stock fell towards the $18 support level from Jan. Look to book gains on any further weakness early in tomorrow's session for an end to a solid play! *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue DGX 91.39 0.96 -0.50 Showing strength, higher daily highs INTU 43.59 0.00 -0.44 Dropped, in danger of rolling over BRCD 20.18 0.56 0.13 Leading technology rally attempt AZO 82.27 -0.43 -0.25 Retail holding its ground well PSFT 20.67 -0.01 -0.26 Dropped, software breaking down WLP 83.75 -0.11 5.80 Tuesday's biggest point gainer!!! OHP 50.18 0.45 0.68 Another new yearly high for OHP!!! PUTS GS 72.10 0.79 -2.64 Took out lows, ready to rollover COHU 18.75 -0.62 -1.15 Dropped, time to book gains!!! WHR 67.08 -0.22 -1.45 Finally broke down below 200-dma DUK 29.12 -0.91 0.03 Another inside day opportunity!!! IDPH 32.03 0.13 -6.34 Bad news equals very big profits PMI 78.96 -0.80 -3.04 Excellent rollover from the 10-dma ICOS 18.35 -0.11 -1.14 Biotech behaving beautifully bad MMC 94.81 0.86 -2.39 Watch the support at the $95 level MIL 35.43 -0.37 -1.42 Breakdown into new declining trend OMC 77.56 4.32 0.55 Short covering rebound to resistance HIG 60.80 0.00 -2.20 New, insurers facing many pressures SPW 120.00 -6.86 -3.40 New, conglomerates under scrutiny ENZN 23.24 0.82 -1.86 New, ready to break to the $20 mark ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************** PLAY UPDATES - CALLS ******************** WLP $83.75 +5.80 (+5.69) How about that! WLP raised its 2002 earnings guidance this morning for the second time in two months. The company said strong health insurance growth in key geographic markets continued to fuel strong financial performance. The news caused the stock to breakout above its yearly high, carrying the entire Health Maintenance Organization Index ($HMO.X) to a new high as well above the 650 level. Short term traders can look to book gains on further strength in tomorrow's session, possibly up to the $85 level if the strong buying continues. Those who want to give the play room to work higher can set a stop below today's low at $81.25. The stock's gap higher this morning could have been a breakaway gap that leads to a new rising trend. Keep that in mind when setting a stop. AZO $82.27 -0.25 (-0.68) Despite the bulls' best attempts to push through the $84 resistance level over the past 2 days, they just didn't have enough resolve to get the job done in the face of the broad market weakness. With that being said, it has been encouraging to see how well AZO has held up, limiting its loss on Tuesday to a mere $0.25. This looks like the setup for another entry point, before AZO heads higher. But we'll likely need to see the broad markets regain their footing before AZO can make a sustained push higher. So use the current weakness to initiate new positions near the $81 (the site of the 3-week ascending trendline) or even $80 support levels. Until the bulls can manage a close over the $84 level, be very careful about trying to buy breakouts over resistance. Keep stops in place at $79.50. BRCD $20.18 +0.13 (+0.69) Last Friday's fledgling rally in the Technology sector has stumbled badly, with the NASDAQ Composite closing below 1500 for the first time since early October. The good news is that the COMPX is now back at major support, while the bad news is that if that support is broken, things could get ugly in a hurry. So the fact that we're looking bullish on BRCD may seem unwise. There's no question that this is an aggressive play, but one look at the daily price chart shows the reason for our enthusiasm. While the stock gave up most of its intraday gains on Tuesday, it is encouraging to see it up above the $20 level, which is starting to look like mild support. One issue of concern however is the fact that selling volume increased over the final two hours of the day, leading BRCD to close at its low of the day. Use a rebound from the $19.50-20.00 area to initiate new positions. If the market can reverse its slide and stage a meaningful rebound, look for that change of sentiment to help propel BRCD through its 10-week descending trendline near $22. That could provide the catalyst for some short-covering, which would enable us to consider momentum-based entries on the breakout. For now, keep stops set at $18. DGX $91.39 -0.50 (+0.46) It is hard to miss the fact that Health Care stocks are on a tear again, with the Health Care Payor index (HMO.X) breaking out to a new all-time highs. For its part, DGX made a valiant attempt at a breakout of its own, trading through the $94 level early in the day before the broad market rally fell apart. While it is discouraging that DGX couldn't hold onto its gains, we're not that surprised to see a bit of profit taking given the solid gains that have accrued over the past week. DGX managed to hold its ground fairly well, giving up only 50-cents on the day. With intraday oscillators nearing oversold, we want to look for a fresh entry point on a rebound from the $89-90 level. Momentum traders will need to sit on their hands until DGX can blast through the $96 level and into new high territory. If you're looking to buy that breakout, make sure the price move is accompanied by strong volume. We're raising our stop to $88. OHP $50.18 +0.68 (+1.13) The bulls have been flocking to OHP again over the past week, as the Health Care Payor index (HMO.X) has once again been gaining strength. In fact, the HMO index broke out to new all-time highs on Tuesday and the early strength helped OHP to vault to its own all time highs in the opening hour of trade. But the broad market weakness dragged the stock back to earth throughout the day, with the stock going out on its lows. The big driver in the HMO index was WLP with their increased guidance for 2002 leading to a gap-up move for most stocks in the sector. Looking at an intraday chart for OHP, we can see that there is cause for concern even with the fractional gain for the day. The closing price was below the open, meaning that the stock has now fallen into the gap created at the open. Once into this gap, stock's will normally fill the gap, so our next possible location for a bounce will be at the $49.50 level. Below that we need to look at the $48 support level as a high-odds entry point. Given the skittish nature of the overall market, we need to be very careful buying breakouts due to their inclination to fail. Raise stops to $46.50. ************** NEW CALL PLAYS ************** None ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* PLAY UPDATES - PUTS ******************* GS $72.10 -2.64 (-1.85) Is that another breakdown? It sure looks like it. With the Broker/Dealer index getting hit hard (for a 2.9% loss), GS finally broke under the $74 level again, this time with gusto. The selling didn't end until the stock was resting right on major support at $72, but judging by the condition of the XBD index (below the $430 support level), we haven't seen the bottom yet. Look for an oversold bounce off of the $72 support level tomorrow to provide the next entry point, as the bounce runs out of steam and rolls over again. Likely levels for that rollover are at $73.50 and then $74.50. Of course, if the $72 level fails to hold, we can consider new entries on a breakdown below that level, but only if the XBD index is continuing southward towards its next level of support near $408. Lower stops to $75. IDPH $32.03 -6.34 (-6.21) The Biotechs took a beating again on Tuesday, with shares of IDPH leading the slide. Prompting the selloff was news that the company is experiencing a delay in Medicare reimbursement delays. That led Salomon Smith Barney to lower their earnings estimates for the company for both 2002 and 2003 and the price action from their was not pretty (unless you were already in puts!). After a big gap down, the stock continued sliding, ending near the low of the day near $32. Losing 16.5% in one day is bad enough, but when it happens on volume that more than quadruples the ADV, it is not a good sign. And did you notice the action in the Biotechnology index? After plunging through the $375 support level last week, it is clear that there is little to prop it up from here. Use any sort of oversold rebound in shares of IDPH to initiate new positions, ideally in the area of $33-34. We are lowering our stop to just above the bottom of this morning's gap lower, at $35. Be very careful about entering on continued weakness, as we could be close to a bounce. If entering on a breakdown under the $31.50, make sure that the selling volume is still strong and the BTK index is continuing to hit new yearly lows. OMC $77.56 +0.55 (+4.87) When we initiated coverage of OMC last weekend, we were looking for an oversold rebound to provide entry and we got it in a big way. Following the resignation of the audit committee chairman yesterday, Morgan Stanley upgraded the stock and that set off the short-covering surge that led the stock as high as $79.75 before backing off into the close. The bulls took another run at $80 resistance this morning, but with the broad markets weakening, OMC followed suit, falling back to close at the low of the day. As good as that looks for our put play, we're a bit concerned with the stock's relative strength over the past 2 days. Perhaps all the news has been factored into the price and we're in a bottoming process. Time will tell, but until the bulls can prove their strength by managing to close above the $79 level (the site of our stop), we'll continue to target new entries on failed rallies near that level. Alternatively, a breakdown below the $76.50 level (intraday support over the past 2 days) can be used for initiating new positions. A close above our stop will show the bulls are gaining strength and will spell the end for the play. DUK $29.12 +0.03 (-0.88) DUK did us another huge favor during today's session when it traced yet another inside day. Its range from low to high was within yesterday's trading range, which means that the stock could either breakout to the upside and reverse the recent trend in place, or breakdown and continue along its downward trend. Short term traders have another favorable entry opportunity if the stock breaks down to the downside and takes out its low hit during Monday's session at the $28.50 level. Look for such a decline on heavier volume as an entry point into weakness. Confirm sentiment in the broader energy sector before initiating new plays. Traders with open positions might consider lowering stops to Monday's high at the $29.45 level. ICOS $18.35 -1.14 (-1.25) The woes in the AMEX Biotechnology Sector Index ($BTK.X) continued into today's session, which helped to drag ICOS back down from its rollover from the $20 level during yesterday's session. The stock's feeble rally attempt that began late last week never got any legs to run higher in yesterday's session, and failed with the close back below the $20 level. The follow through to the downside in today's session should result in another breakdown below short term support in the coming sessions, especially if the heavy selling persists in the $BTK.X. Watch for a breakdown below last Friday's low at the $17.80 level, and confirm further weakness in the $BTK.X. MIL $35.43 -1.42 (-1.79) USB Piper Jaffray initiated coverage on MIL this morning with a market outperform rating. But it didn't matter as the stock broke down in a very big way on heavy volume on further weakness in the biotech industry. The stock flirted with a breakdown in yesterday's session, but averted the move lower for one more today. But this morning, we saw the flood gates open with a rush of declining volume that continued into the close of trading. There's not much support below current levels until the $30 mark, which may be tested sometime this week if the rate of selling that we saw take place during today's session continues into the rest of the week. A new downward trend is possible given the breakdown. As for new entry points, traders can look for momentum entries on a break below the $35 level if the biotech sector continues to weaken. Otherwise use rollovers from below the $37 level to take new entries this week. MMC $94.81 -2.39 (-1.53) MMC is on the brink of the major breakdown that we are looking for. The stock bounced back during yesterday's session on relatively lighter volume. Its failed rally attempt reached as high as the $98.40 level, just short of the downward sloping 10-dma. The stock then rolled over into the close of trading yesterday and continued that roll into today's trading when volume picked up to the downside. The stock closed just below the $95 level, which served as support during the stock's sell off earlier this year. A breakdown below that level should open up another big move lower as investors scramble for the exits. Watch for a decline below the $94.40 level and for declining volume to return on a move below that level. Confirm direction in the broader market before entering into a breakdown. PMI $78.96 -3.04 (-3.84) What an entry point! PMI staged a mini rally attempt during yesterday's session. The stock tried to move higher during the early part of the session, but its rally attempt failed just below the 10-dma, offering a great entry point into new put plays. From the rollover, PMI held steady on the $83 level coming into today's session, but that changed in the morning when the stock started heading lower at an increasing pace. The selling didn't stop until the closing bell when PMI closed just off of its daily low, but well below the $80 level. The $79 level that the stock fractionally closed below could act as short term support over the next day or two, but should give way to further selling this week in the broader markets. Look to take new entries into a breakdown below the $79 level. If the stock stages another one or two day relief rally, look for a rollover from the $81 level. WHR $67.08 -1.45 (-1.67) The inside day breakdown that we detected last week finally was realized in today's session, but not before WHR tested our patience. The stock traded in a very tight range during yesterday's session right around its 200-dma. In today's session, the stock reached up in the early market action to touch its 10-dma near the $69.50 level, and from there it was all downhill for the stock. WHR broke down below its short term support to close the day near its low. From today's close, we can look for a decline down to the $65 level in the coming days. If the stock does stage a short term relief rally, look for another rollover from the 200-dma now just below the $69 level. ************* NEW PUT PLAYS ************* HIG - Hartford $60.80 -2.20 (-2.20 this week) Hartford Financial Services Group, Inc. (the Hartford) is a diversified insurance and financial services company. The Hartford is a provider of investment products, individual life, group life and group disability insurance products, as well as property and casualty insurance products in the United States. It writes insurance and reinsurance in the United States and internationally, and is organized into two major operations: Life and Property & Casualty. Within these operations, the Company conducts business principally in 10 operating segments. Major insurers are coming under pressure from several directions. For starters, the growing cloud over the equity markets is increasing pessimism in the insurance industry. Returns on stock investments are obviously falling off the cliff. Plus the growing uncertainty over the economy are adding to those fears. Then there are increased claims coming from everything from asbestos to the wild fires raging in the west. Even one of CNBC's commentators commented on the growing fears of increased claims here in Colorado because of the spreading fires. All of these pressures are leading to big breakdowns and rollovers in the insurance sector, none of which was more obvious today than HIG's big break below its 200-dma. The stock fell from its recent consolidation just above that level, now at the $62.80 mark, on an increase in declining volume. The stock closed on its low for the day, indicating that the selling pressure wasn't done going into the final bell. Bearish traders can look for a new downward trend to develop in HIG this week with follow through below today's closing low. New entries can be taken on a break below the $60.80 level with confirmation in the broader markets. We will also target shoot entry points from rollovers below the now overhead 200-dma. Our stop is initially in place at the $64 level. ***June contracts expire next week*** BUY PUT JUN-60 HIG-RL OI=98 at $0.90 SL=0.25 BUY PUT JUL-60*HIG-SL OI=13 at $1.90 SL=1.00 Average Daily Volume = 891 K SPW - SPX Corp. $120.00 -3.40 (-10.26 this week) SPX Corporation is a global provider of technical products and systems, industrial products and services, flow technology and service solutions. SPX offers networking and switching products, fire detection and building life-safety products, television and radio broadcast antennas and towers, life science products and services, transformers, compaction equipment, high-integrity castings, dock products and systems, cooling towers, air filtration products, valves, back-flow protection and fluid handling devices, and metering and mixing solutions. The Company's products and services also include specialty service tools, diagnostic systems, service equipment and technical information services. Major conglomerates are coming under heavy investor scrutiny following the debacle at Tyco. As a result of the increase pessimism, the major conglomerates are breaking down in a big way. SPW is one such stock that is falling from grace. Its weakness is not only a product of increased pessimism over conglomerates. SPW is also suffering from the growing belief that the U.S. economy is going to take another dip into a recession, and because of SPW's economic sensitivity, the stock is coming under heavy selling pressure. Add to the macro factors a potential change to management. SPW's CEO has been talked about as one of the replacements for Tyco's CEO, which has some SPW investors even more nervous. The combination of events and building negative sentiment pressured SPW down to the $120 level in today's session, and well below the 200-dma for the first time since February. The close back below the 200-dma could signal a new downward trend in the stock, noting the increase selling volume during today's breakdown. Bearish traders can look for further weakness in tomorrow's session as an entry point into new put plays. Watch for SPW to breakdown below the $120 level in tomorrow's session on further weakness in the Dow and S&P. If the market does bounce back, watch for SPW to rollover from its 200-dma now at the $123 level. Our stop is initially in place at the $127 level. ***June contracts expire in two weeks*** BUY PUT JUN-125 SPW-RE OI=320 at $7.50 SL=5.25 BUY PUT JUL-120 SPW-SD OI= 1 at $7.80 SL=5.50 Average Daily Volume = 395 K ENZN – Enzon, Inc. $23.24 -1.86 (-1.04 last week) Enzon is a biopharmaceutical company that develops and commercializes enhanced therapeutics for life-threatening diseases through the application of its two proprietary platform technologies: polyethylene glycol (PEG) and single-chain antibodies. The company applies PEG technology to improve the delivery, safety and efficacy of proteins and small molecules with known therapeutic efficacy. ENZN applies its single-chain antibody technology to discover and produce antibody-like molecules that offer many of the therapeutic benefits of monoclonal antibodies while addressing some of their limitations. If it is true that there is no rest for the wicked, then the Biotechnology sector (BTK.X) has been VERY wicked. After breaking down under multi-year support near $375, the sellers have been abusing the BTK index, particularly over the past 2 days. Tuesday's action amounted to an 8% pummeling and with the BTK closing at the low of the day and the NASDAQ approaching the September lows, it looks like there is more pain in store for the bulls. That brings us to our new play, ENZN. We've been monitoring the stock for awhile now, looking for a bounce to allow us into the play, but it just hasn't come. First support at $28 gave way, then $25 and with the sharp decline on Tuesday, it looks like the $23 level is next. The breakdown from the bearish triangle on the PnF chart in late May put the stock back on a strong sell signal and the late April/early May selloff gives a vertical count of only $7. Looks like there's plenty of room to fall, doesn't it? Add in the fact that the stock just broke down out of a year-long descending wedge, and the bearish picture is looking even stronger. With resistance at $25 and then $26, any oversold rebound is likely to get stopped by the sellers in short order. We want to initiate new positions on a failed rally below $26 or on a breakdown under the $23 support level (so long as it comes on strong volume). Watch the action in the BTK, as it is likely to impact the trading in ENZN. Our stop is initially set at $27 so that we can ride out any short-covering rally over the next couple days. *** June contracts expire in less than 2 weeks *** BUY PUT JUN-25 QYZ-RE OI=164 at $2.60 SL=1.25 BUY PUT JUL-25 QYZ-SE OI=291 at $3.70 SL=2.25 BUY PUT JUL-22*QYZ-SX OI= 5 at $2.30 SL=1.25 Average Daily Volume = 1.40 mln ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Tuesday 06-11-2002 Copyright 2001, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. ********************* PLAY OF THE DAY - PUT ********************* DUK - Duke Energy $29.12 +0.03 (-0.88 this week) Duke Energy Corporation offers physical delivery and management of both electricity and natural gas throughout the United States and abroad. Duke Energy provides these and other services through seven business segments: Franchised Electric, Natural Gas Transmission, Field Services, North American Wholesale Energy (NAWE), International Energy, Other Energy Services and Duke Ventures. Most Recent Update DUK did us another huge favor during today's session when it traced yet another inside day. Its range from low to high was within yesterday's trading range, which means that the stock could either breakout to the upside and reverse the recent trend in place, or breakdown and continue along its downward trend. Short term traders have another favorable entry opportunity if the stock breaks down to the downside and takes out its low hit during Monday's session at the $28.50 level. Look for such a decline on heavier volume as an entry point into weakness. Confirm sentiment in the broader energy sector before initiating new plays. Traders with open positions might consider lowering stops to Monday's high at the $29.45 level. Comments DUK traced another inside day set-up during today's session, similar to the one we saw unfold last week for a successful trade. We're hoping that history repeats itself this week. Look for a breakdown below Monday's low at the $28.50 level for an entry point into new put plays. Those with open positions can set a short term stop at Monday's high at the $29.45 level to protect profits from a possible short covering rally. ***June contracts expire in two weeks*** BUY PUT JUN-32 DUK-RZ OI=7921 at $3.60 SL=2.50 BUY PUT JUL-30*DUK-SF OI=6612 at $2.65 SL=1.50 Average Daily Volume = 4.16 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 ************************************************************** ************ MARKET WATCH ************ Only one play was triggered in the last two days. But others are coiling very close to action points. To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/061102.asp ************** MARKET POSTURE ************** Many markets and sectors closed on support. A big rebound or major washout sell off could be on the horizon. To Read The Rest of The OptionInvestor.com Market Posture Click Here http://www.OptionInvestor.com/marketposture/061102.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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