The Option Investor Newsletter Wednesday 06-12-2002 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) ******************************************************************* 06-12-2002 High Low Volume Advance/Decline DJIA 9617.71 +100.45 9624.77 9449.98 3324 mln 1615/1590 NASDAQ 1519.12 + 21.94 1519.16 1474.56 2055 mln 1559/1922 S&P 100 507.02 + 6.32 507.98 496.57 totals 3174/3512 S&P 500 1020.26 + 6.66 1021.85 1002.58 RUS 2000 462.99 + 0.21 464.03 457.41 DJ TRANS 2706.72 + 0.15 2710.12 2671.58 VIX 27.01 - 0.71 29.34 26.98 VIXN 52.86 - 1.41 54.92 52.86 Put/Call Ratio 0.99 ******************************************************************* Bump, Set, Spike! Given that it's summer time, odds are growing that you'll see sun-loving volleyball players setting up nets across this nation's city parks and beaches. Competitive players tend to play doubles or two-man teams but sometimes when it's crowded you'll see five-man teams. Today looked a lot like a volleyball game. On one side of the net we have companies with plenty of negative news playing hard to score the next point for the bears. Today's roster of players for the bears were SEBL, OMC, IMCL, JNPR and SWY. On the sunny side of the net, playing for the bulls, are PG, MYG, MOT, AMD and MSFT. Now for those of you who aren't volleyball aficionados I promise I won't carry this example too far. Yet given the volatility we saw in today's markets it isn't hard to imagine the bears and bulls volleying the major indices back and forth for dominance. Now let's set the stage. The game has been going in favor of the bears since mid-May. The COMPX and SPX are near the bottom of their downward regression channels and the $INDU is hovering just below the January 02 lows. It looks like game point in favor of the bears (game point is where the winning team only needs to score one more point to end the game and claim victory) as a serious breakdown from here could facilitate a major drop. The last several weeks have seen the bears score a few points before the bulls can get a side out (a "side out" means they have taken control of the ball from the bears). We've seen this as the indices pause at significant support levels. The bulls mount an offensive to put some points on the board but after a couple of volleys they side out (lose control). We've witnessed this as every relief bounce has met with a sell-the-rally attack, especially near previous support that has now become resistance. We pick up the game after yesterday's close. Bears have the ball. Siebel Systems (Nasdaq:SEBL) is serving and plans to score an ace with the news that its Q2 is looking as difficult or worse than Q1. This is bad news as their Q1 numbers were dreadful. Individual bears score on Wednesday as SEBL gaps down and closes with a 14% loss on the session. This puts others in the group under pressure and PeopleSoft (PSFT) and BEA Systems (BEAS) are both down more than 5% on the day. The serve is looking strong and the bears believe they have another winner to drag the markets lower. Fortunately for the bulls, Maytag (NYSE:MYG) had come out last night and issued upside guidance for its not-yet-over 2Q but said earnings will probably come in 10 cents above estimates. The company also raised their 2002 year-end guidance from the Street's estimates of $2.82 to $3.10. MYG's good news bumps the ball back over the net. Suddenly, jumping high into the air is Omnicom Group (NYSE:OMC). Shares suffered last week as the stock sunk on rumors of a negative Wall Street Journal (WSJ) article would be appearing soon. OMC tried to defend itself on Friday by reaffirming guidance and Merrill Lynch upgraded the stock to a near-term strong buy. With that kind of support, shares of OMC rallied Monday-Tuesday this week but this only provided up ticks for those willing to short the bounce. The WSJ article did appear today and raised concerns about the media company's tactics about accounting and acquisitions. Shares gap down this morning by more than $6 to $71.00 and proceed to trade to a low of $51.51 just after 11:00 a.m. The MYG's ball is blocked sharply by OMC and appears to be headed to the floor. Bears are looking at a victory as the $INDU touches the 9450 level by noon. I'd like to say that Procter & Gamble saves the day with a massive dig (that's volleyball slang for saving the ball from touching the floor and preventing the opposing team from scoring) by issuing its positive earnings-guidance press release midday but the news actually came out this morning. It may not amount to much (if you were long OMC) but Merrill also upgraded PG to a "strong buy" as well. While I could continue with the volleyball analogy, you get the idea that investors were buffeted with barrage of good news/bad news throughout the day, which produced more than one triple-digit swing in the $INDU. Some of the bearish highlights were a downgrade of JNPR by Morgan Stanley to an "underweight", which sounds a lot like "sell". The analysts comments mentioned "negative newsflow" and valuation concerns. Not to mention that Juniper recently told reporters that it saw no signs of recovery in the telecom industry. Big surprise there, thank you, Juniper. Also painting Wall Street red was Safeway. The large grocery chain dropped more than 12% after stating that Q2 and full year earnings would miss estimates due to slowdown and tougher competition. In a related note, an active ratings department from Merrill issued a downgrade on fellow grocer Albertsons (NYSE:ABS) and stated that current valuations look too high and Merrill lowered their earnings guidance on the company. ImClone Systems (IMCL) continued to keep the biotech group in the spotlight after Tuesday's beating. The focus today was on the company's ex-CEO, Samuel Waskal, who was arrested on charges of insider-trading. Despite the news, the stock ended the day with a +3.7% gain. This news also hit shares of Martha Stewart Living (NYSE:MSO) for a 12% drop as it was widely known that Martha and Sam were friends. According to some reports Martha was actually a former girlfriend of Sam's. The circumstantial evidence that hit Martha's stock so hard was news that she sold 3900 shares of IMCL prior to the FDA rejection of IMCL's cancer drug. She claims the stock had merely traded below her pain threshold of $60. While the arrest put yet another bruise on the investor confidence issue in the markets and the trustworthiness of corporate executives all of it was overcome by a positive turnaround in the chip sector. Believe it or not, after all the doom and gloom lately, Motorola jumped almost 9% after stating that the company would likely meet or beat its Q2 revenue forecasts. This sparked a small fire under the SOX index, which ended the day up 3.5%. Other standouts included AMD, which received an upgrade from Prudential on valuation concerns and shares of Intel rallied 6.7% after bouncing off the $20 level. Positive comments from Bear Stearns, which just held a technology conference yesterday gave investors hope that the chip sector should be very close to a bottom. This appeared to catch shorts off guard and volume surged higher as many sought to cover positions. The NYSE traded 1.7B and the Nasdaq traded more than 2B shares. The QQQs traded over 150M alone and Jeff Bailey had speculated earlier on a reversal in the Q's if volume reached these levels. The real side-out for the bulls occurred when rumors that Microsoft (MSFT) would pre-announce a positive quarter began to circulate across the trading floors. This really had the bears running for cover in the last hour and shares of MSFT rallied almost $3 or 5.6% by the close. As a major component in both the Nasdaq, the NDX (Nasdaq-100), the Dow Jones Industrials and the S&P 500 it was the positive catalyst that helped refuel the midday reversal and give it some momentum. Chart of MSFT As of yesterday, I remained pretty bearish. This late day reversal on strong volume smells like a real opportunity for a rally. However, I don't think it can last more than two or three days before encountering some serious pressure. The trend is still down. We're still approaching the earnings-warning season and nothing truly fundamental has changed to make investors want to buy stocks. The Fed Beige Book report this morning was positive but the headline came across as uneven growth across the country and sectors. According to the report, retail sales appeared flat from the previous year, commercial real estate was weak while the housing sector chugged ahead at a "robust" pace. Banking was not seeing any improvement in loan activity and automakers reported strong numbers. Semiconductor orders were looking better but no surprise was that telecom remained weak. This didn't tell us or the markets anything we didn't already know. Inflation concerns appear to remain in check and no one expects the FOMC to raise interest rates until the September 24th meeting. Without a doubt, big money has been defensive and the yield on the 10-year Treasury has sunk to early March lows and its 200- dma. Chart of the $TNX.X However, if the bulls can keep the rally alive then traders might have an opportunity to trade the move up to the top of the recent regression channels in some of the major indices. The on going challenge is that the markets need a change in sentiment for investors, not traders, and the investing public is still looking at a long, hot summer vacation to forget about the painful school year they just experienced. Chart of the Dow Jones Chart of the Nasdaq Chart of the S&P 500 Maybe when we retest those September lows that everyone keeps pointing to then we can begin to think about a sizeable rally attempt. Several indices like the $GSO.X, $NWX.X, $MSH.X, IXTCX, $XTC.X, $DRG.X, $BTK.X are all at or below their September lows already and a sharp move up could spark a strong round of short- covering. While this might bode well for any hope of a near-term relief rally in the major indices bullish traders who haven't learned to imitate the bears will need to be extremely careful as we look for the COMPX and SPX to eventually touch 1400 and 950 respectively. Keep your eyes on the Russell 2000. It bounced off its February 2002 support levels intraday today. If it breaks down any further then it will weigh heavily on the entire market. Thursday and Friday will also bring additional economic reports for investors to watch or ignore. Thursday will deliver the PPI and Retails sales numbers while Friday offers business inventories, industrial production, capacity utilization and the Michigan Sentiment report. Trade carefully and keep those stops fresh! James ******************** INDEX TRADER SUMMARY ******************** SIGNS OF CAPITULATION by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - It's always darkest before the dawn and things look the most hopeless for stocks before traders and investors "capitulate" or give up in stocks. As I noted last night, fear gets pretty extreme at a final low, or even just an intermediate bottom in a bear market. There were some indications of a capitulation bottom or other signs of a possible upside reversal today and recently that I'll review. BULLISH DIVERGENCES RE-TESTS OF KEY PRIOR LOWS HIGH VOLUME The Nasdaq 100, the most volatile and beaten up segment of the market has reached the level of its September low and may have made a bottom - there will be further points relating to Head & Shoulder bottoms that have formed on the various hourly index charts. On the daily chart of QQQ, I would just note that we may have successfully "tested" this bottom today based on intraday action AND - The very high volume in QQQ was telling at more than 150 million shares. Capitulation is rightly associated with high volume as the "last" of many remaining bulls give up and sell. It's the "cry uncle" point. AND - Quite typical of the big Nasdaq top were the number of technical divergences that showed up, as volume and other indicators like relative strength (RSI) did not "confirm" new highs. Conversely, as highlighted on the chart above, the continued downtrend was accompanied by an RSI that has not fallen to anywhere near its prior low. RSI will typically ALSO fall to a new relative low - if this is not the case it can be quite indicative of an upside reversal. Such divergences are one of my favorite signs of an upcoming reversal - the thing with divergences however is that they can "warn" for some time BEFORE the (reversal) effect or "result" is seen. I think the result is near or at hand. SENTIMENT GETS TO A BEARISH EXTREME - Traders decide finally that short/bearish plays can't lose and get very convinced that there is very little risk in being short stocks and in puts. This is a contrary indicator of course and can't be used in isolation - but, as "confirming" indicator, such bearish extremes are almost always seen at important lows. Just as extreme bullishness is always apparent at key market tops. My most trusted means to measure extremes in sentiment is by taking the daily CBOE Equities call to put volume ratio and graphing it. I take out the Index options, which are often used more purely as a portfolio hedge - this can distort the study of options used as more of a "pure" speculative play. Today's reading was the most bullish I've seen since February and "matches" the capitulation type high volume seen in the potential double bottom low in QQQ. A HIGH LEVEL OF FEAR IS USUALLY ASSOCIATED WITH MARKET BOTTOMS - As is often discussed, the CBOE Volatility Index for the OEX, the "VIX" ($VIX.X) is a good indicator of nervousness or fear as typical at market bottoms is a high level of price volatility. We have seen high VIX levels lately and the pattern is very similar to February. VIX can get still higher of course. However, I look for relative patterns in market conditions that are similar to the present. This consideration would suggest that the September pattern and VIX extremes is not an apt analogy to our present market circumstances. No one has attacked us. They might, but terrorist networks have shown a definite liking for attacks when our guard and vigilance is DOWN, not up. SECTOR ANALYSIS - I would also note that such a review is not complete without a review of the major sectors or industry groups - a number of key market sectors should at least suggest that an interim low has been reached and that these groups are enough to pull the market higher. I count a number that have demonstrated to me this kind of action - they include: the Brokerage stocks (XBD), Boxmakers (PC makers), the Computer Technology Index (($XCI.X), Bank Index, BioTech, the NYSE Financial Index ($NF.X), the High Tech Index ($MSH.X), Drug stocks, the (Dow) Transportation stocks, the Semiconductors (SOX), and the Software sector ($GSO.X). You'll note that there are a number of tech sectors - even an intermediate bottom can't be predicted unless these groups can at least have a good-sized oversold rebound. You would also tend to see at a decent bottom, sectors that were bucking the downtrend, either start to correct, continue to show weakness or exhibit signs of a top - this would be characteristic of a rotational correction and the shifts in leadership that tend to be seen with a broader market rally. On this theme, the Defense sector, Gold stocks (XAU), what can be called the natural resource stocks - oil/oil services/natural gas, and utilities continue to exhibit bearish action. Potentially, I see topping action in the Healthcare ($HMO.X) and the Health Providers Index (RXH) also. I would anticipate Healthcare stocks to correct while some of the oversold groups rebound. More on specifics in my Sector Trader wrap ups today and tomorrow. S&P 500 ($SPX.X) Daily/Hourly charts: I suggested yesterday the key importance of the 1000 area, which I anticipated would be "tested" - SPX may have passed the test with today's intraday low at 1002, very near the bottom of the hourly downtrend channel. Look for resistance in the 1047-1050 area and a likely short-term selling opportunity but SPX may move higher than this into the June 21 expiration I suspect. While it is not visable due to the scale, the 14-day stochastic is indicator is in an initial bullish position, with the "faster" line having crossed over the slower "smoothed" line. This is the case for all the indices with this indicator today. The 3 blue circles on the hourly chart represent a probable Head & Shoulders (H&S) bottom pattern. The "neckline" (blue dashed line) intersects at 1030 currently. A move above 1030 suggest a "minimum" upside objective to around 1057 at some point (1039 - 1012 added to the "breakout" point or the neckline penetration, which equals 1057), or to higher than the 1048 resistance implied by the upper boundary of the downtrend channel. If wrong in this assessment or if the H&S pattern "fails" in its predictive implications, expect to see prices sink again to the 1000 area. S&P 100 ($OEX.X) Daily/Hourly charts: My suggestion has been to buy Index calls if OEX got back to the low-500 area, although I also indicated that I would like to see signs of support developing in this area to have the conviction to go in. Given the likelihood that the longer of the two hourly stochastic models (Length: 21) was suggesting that there would be further weakness ahead, I thought it likely that the OEX would get driven to the low end of the hourly downtrend channel again which was exactly what happened today. An important note on these S&P moves to new lows, besides the healthy rally that followed support developing at the low end of the hourly channel is the pattern of a "bear trap" reversal here. A so-called bear trap is a move to new low for a move, followed by an upside reversal that follows shortly thereafter, such as within the same trading session. This action is a "trap" for the bears so to speak, hence the name. The other thing to note is the same Head & Shoulders bottom pattern as seen with the SPX hourly chart. Upside penetration of the dashed (neckline) at 508-509, suggests a further "minimum" upside objective to the 523 area. Near term, resistance is apparent at 414, then 518. Downside support is at 500 in my estimation, then in the 495 area. Dow Index (1/100: $DJX.X) - Daily/Hourly charts: As said last night and my "crystal ball" happened to be working: "The index with the greatest likelihood of a near-term successful test of its prior low at 94.7 is DJX." We see in fact the double bottom low that set up today. 96 is near upside resistance, then 97.6-98. The 95 area is anticipated support. I think the Dow Transportation ($TRAN) average, which is acting like it is putting in a bottom, is supportive for the Dow 30/Industrials. I'll include an update of this chart in my Sector wrap. Various measures of upside potential for DJX suggests the potential for DJX to get back up to the 99 to 100 area again to retest resistance at Dow 10,000. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: The bullish breakout in Microsoft (MSFT) was the bullish catalyst for the QQQ rebound and its "bear trap" reversal. I see potential in MSFT to the 59-60 area from today's close at 55.5; also, key Nas 100 stock Qualcomm (QCOM) is acting well and I see some good rebound potential for it also. The technical outlook for these two stocks, plus potential I see for a recovery rally in Intel (INTC) suggests that QQQ can break out above the high end of it's hourly downtrend channel, intersecting in the 28.8-29 area currently. 29.7-30 is probably significant enough as resistance, that it would deflect rallies to this area. Immediate overhead resistance is at 28. Support is apparent now in the 27 area. Only a daily close below this level would set up a different, bearish, outlook for the Q's. The same pattern of the 3-pronged low (blue circles) of a Head & Shoulder's hourly bottom - although the steep "slant" to the pattern does not suggest a "minimum" upside objective to more than to about 30 - supports the ideas that QQQ may have put in a more significant double bottom (as with the Nasdaq 100 index, NDX) relative to the daily low from September; at the dashed level line on the daily chart. 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 ------------------------------------------------------------ *********** OPTIONS 101 *********** Is It A Bottom Yet? By Mark Phillips mphillips@OptionInvestor.com Parents of small children will recognize the slight variation of the popular question "Are we there yet?" If you listen to CNBC, this seems to be the most popular question asked of anyone who can fog a mirror. When will we know it’s a bottom? I'm as eager as the next guy (or gal) to know the answer to that question, but I'm not so na´ve as to believe that anyone (regardless of past track record) can tell me where the bottom lies. That question is only answerable in hindsight, but there are some important clues that we can observe to determine when we are likely getting close to that elusive bottom. Keep in mind that I'm not talking about THE BOTTOM here. Rather, I am referring to the next tradable bottom that leads to the next bear market rally. Each of us have different broad market indicators that we monitor to give us a feel for the health of the overall market and the likelihood that this bounce has the potential to turn into a rally. Of course, the starting point for assessing solid reaction points begins with monitoring price action, with an eye towards support/resistance levels and the price action relative to important moving averages, Fibonacci retracement levels and Bollinger bands/Envelopes. Some traders then focus on the Put/Call ratio and the TRIN for picking market bottoms, while others tend to watch the Advance/Decline ratio and the ratio of New Highs vs. New Lows. All of these are valid and important measures for attempting to assess the odds of the markets stopping their slide and staging a significant rally. The one additional part of the puzzle that I think deserves consideration is the volatility measures that best quantify fear in the marketplace. We're talking about the VIX (for the S&P 100 or OEX) and the VXN (for the NASDAQ-100). As markets decline, the VIX and VXN rise due to the increasing fear by market participants unsure of where the decline will end. These volatility indicators do not measure the ratio of puts and calls, but instead measure the implied volatility of options on the particular index to which it is related. Due to questions in the past, I went into great detail on how the VIX is calculated in an article late last year. For those of you that missed it and have an interest in the underlying formulation, here is the link. VIX Details for the Masochist While we can't necessarily use the action of the VIX to predict a market bottom (due to the fact that it is actually a lagging or at best, coincident indicator), we can use its action relative to its historical range to assess fear in the market and thus the likelihood of a sustained market rebound. Simply put, when the VIX makes a run to (or above) the upper end of its historical range AND THEN REVERSES, it usually presages a significant market bottom. New readers may be wondering why we want to see a high level of fear before feeling the markets are ready to rally. The reason is that the bulls need a wall of worry to scale to sustain a rally. Worried investors will stay on the sidelines as the rally gets started. Then, as the rally makes upward progress, these investors come off the sidelines, providing the buying necessary to push the market a little higher, which in turn provides the motivation for more buyers to appear. This is precisely the reason why it is functionally impractical for a meaningful rally to begin when the VIX is trading near the lower end of its historical range. When the VIX is low, it reflects investor complacency, or put another way, the expectation that the markets will rise. If the bulk of investors believe that the markets will rise, then it goes without saying that they are probably already invested. The problem that creates is that there is not the bulk of cash on the sidelines to propel the markets higher. In the past, I've looked at the historical pattern of the VIX relative to the OEX, and I think I've made a strong case that the VIX deserves our attention near expected market bottoms. For any of you that are still unconvinced, I offer the chart below, which shows the action of the OEX as it relates to the VIX over the past year. Weekly Charts of S&P 100 (OEX) vs. VIX Now let's look at the same set of charts on a daily timeframe so that we can see how the current action is shaping up. Daily Charts of S&P 100 (OEX) vs. VIX Judging from the way the VIX has moved up to the top of its historical range twice in the past week as the OEX has come down to test major support, not far above the September lows, I think the rebound that began this afternoon has a fighting chance of sticking. As I mentioned above the VIX is not very useful in a predictive manner, but when this sentiment indicator is signifying a heightened level of uncertainty, while at the same time the markets are testing major lows, we know to start at least start contemplating the possibility of a trading bottom being put in over the near term. While I would prefer to see a VIX in the 40-60 range like we saw last September, I don't think we are going to get a big, flashing neon sign like that this time around. I haven't gone into any detail on any of the other indicators mentioned at the top of this article, but many of them have been pointing to the likelihood that we could find a tradable bottom soon. Given that the OEX is trading near its September lows, and really seems determined to hold the $500 support level, for the first time in weeks, I am considering trading this market from the long side for more than a day-trade. But here is the one thing that causes me concern. Looking at the intraday pattern of the VIX it has been most eager to fall back from the 30 level over the past week. In other words, the fear disappears exceedingly quickly. In my opinion, that is not the sort of thing that will make for a long-lived bottom. Note that the intraday high on the VIX last Friday was 29.94, but the closing value was significantly lower at 26.65. We saw a similar pattern today, with an intraday high of 29.34 before the VIX collapsed back down to 26.98. Both of those days saw the OEX stage late-day rebounds off the lows to end near their highs of the days. That is positive. But the pullback in the VIX on both occasions was larger than should be expected for such a modest recovery in price. What I'll personally be looking for in the days ahead is a retest of the $500 level on the OEX accompanied by another VIX move up near the 30 level that does not collapse on the slightest hint of a rebound. Should that occur, I will consider it a solid entry for the hoped-for summer rally. My intent here is not to provide you with a trade recommendation; the guys in the Market Monitor do a better job of that than I can. But hopefully my musings here today give you another perspective on what to look for as we pursue that elusive market bottom. Have a great week! Mark ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's • optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's • 8 different online tools for options pricing, strategy, and charting • Access to options specialists via email, phone or live chat online • Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ *********************** INDEX TRADER GAME PLANS *********************** THE SECTOR BEAT - 6/12 by Leigh Stevens Per my Index Trader wrap up, examination of the a number of our key market sectors supports a view that the overall market has reached a potential intermediate low and turning point - this is "supported" by a technical review of the industry groups, where many sectors appear to have made at least interim bottoms. I count a number that have demonstrated to me this kind of action - they include: the Brokerage stocks (XBD), Boxmakers (PC makers), Bank Index, BioTech, the Computer Technology Index ($XCI.X), Cyclicals, the NYSE Financial Index ($NF.X), the High Tech Index ($MSH.X), Drug stocks, the (Dow) Transportation stocks, the Semiconductors (SOX), and the Software sector ($GSO.X). I think we have to assume that even an intermediate market bottom can't develop unless significant participation occurs with several of the important tech sectors/groups. You would also tend to see at a decent bottom, sectors that were bucking the downtrend, either start to correct, continue to show weakness or exhibit signs of a top - this would be characteristic of a rotational correction and the shifts in leadership that tend to be seen with a broader market rally. On this theme, the Defense sector, Gold stocks (XAU), what can be called the natural resource stocks - oil/oil services/natural gas, and utilities continue to exhibit bearish action. Potentially, I see topping action in the Healthcare ($HMO.X) and the Health Providers Index (RXH) also. I would anticipate Healthcare stocks to correct while some of the oversold groups rebound. I will insert updates of these charts - below - and include the related commentary tomorrow. HIGHER ON THE DAY ON Wednesday - 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 Wednesday - SECTOR HIGHLIGHT - 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 At the low end of its downtrend channel and the RSI has not "confirmed" the lower low. Rally potential from the low end of the channel. LAST UPDATE: 6/12 Broker Dealer Index ($XBD.X) Bullish Price/RSI divergence and possible exhaustion gap at low end of downtrend channel. Potential for an oversold rebound. LAST UPDATE: 6/12 Computer Technology Index ($XCI.X) STOCKS: to be listed Possible double bottom and bullish RSI reading, above its prior low. LAST UPDATE: 6/12 Computer Boxmaker Index ($BMX.X) STOCKS: AAPL; CPQ; DELL; GTW; HWP; IBM; SNE; SUNW; UIS; VRTS Likely "bear trap" reversal and potential double bottom low. LAST UPDATE: 6/12 Cyclical Index; Morgan Stanley; ($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 Gap may be "exhaustion" type signaling a bottom at low end trading range - also, bear trap reversal is suggested. LAST UPDATE: 6/12 Defense Index; Amex ($DFI.X) STOCKS: ATK; BA; COL; DRS; EASI; EDO; ERJ; ESL; FLIR; GD; INVN; ITT; LLL; LMT; NOC; OSIS; RTN; SSSS; TDY; TTN; UIC Looks lower still - "bear flag" pattern circled. Continue to have objective to lower levels, perhaps back to 600 area. LAST UPDATE: 6/12 Disk Drive Index ($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. Downside objective to 570 area has been met. Rebound after completion of 75% retracement is bullish for some further upside. Possible "exhaustion" gap, signaling a bottom. LAST UPDATE: 6/12 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 ($RXH.X) Looks toppy - updated chart tomorrow. LAST UPDATE: 6/12 Healthcare Index; Morgan Stanley ($HMO.X) STOCKS: AET; AHG; ATH; CAH; CI; FHCC; HUM; MME; OHP; OPTN; PHSY; TGH; THC; UNH; WLP . Potential for a top ahead as suggested by bearish Price/RSI divergence. LAST UPDATE: 6/12 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 Completed 75% retracement - coupled with today's rebound from this area and low end of current downtrend channel (not shown), SOX could rally further. LAST UPDATE: 6/12 Software Index; Goldman Sachs ($GSO.X) STOCKS: ERTS; INFA; INKT; INTU; ISSX; ITWO; IWOV; JDEC; MANU; MENT; MSFT; MUSE; NATI; NOVL; NTIQ; ORCL; PMTC; PRGN; PRSF; PSFT; RATL; RETK; REY; RHAT; RNWK; SEBL; SNPS; SY; SYMC; TIBX; VIGN; VRTS; WEBM; WIND; YHOO Bullish Price/RSI divergence and possible exhaustion gap signals some further upside. Bullish falling "wedge" pattern is bullish as well. LAST UPDATE: 6/12 Telecoms Index; No. American ($XTC.X) Transportation Average; Dow Jones ($TRAN) Airborne Inc. (ABF); Alexander & Balwin (ALEX); AMR Corp (AMR); Burlington Northern (BNI); CNE Transportation (CNF); CSX Corp (CSX); Delta (DAL); FedEx Corp. (FDX); GATX Corp (GMT); J.B.Hunt Transport Services (JBHT); Norfolk Southern (NSC); Northwest Airlines (NWAC); Roadway Express (ROAD); Ryder System (R); Southwest Airlines (LUV); UAL Corp. (UAL); Union Pacific (UNP); US Airways (U); USFreightways Corp. (USFC); Yellow Corp. (YELL) The DJ Transportation average has been rebounding off the key 200-day moving average and is therefore performing better than the Dow Industrials. But its failed the "test" of also getting above its 50-day average - this was also the area of its down trendline. These stocks probably have buying interest due to being perceived as "low risk" and an oil price decline play, which improves their bottom line. They are probably going to need more than this to get them up. Charles Dow's theory on the market said that if goods are being transported, it results in a pick up of the revenues & earnings of the transportation companies - the resulting rebound in these companies' stock prices is sometimes the first tip off that manufacturing is picking up. LAST UPDATE: 6/11 Utility Sector Index ($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 ------------------------------------------------------------ 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. 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The Option Investor Newsletter Wednesday 06-12-2002 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 ***************** WLP - call Adjust from $74.50 up to $81.25 OHP - call Adjust from $46.50 up to $47 HIG - put Adjust from $64 down to $63.50 MMC - put Adjust from $101 down to $96.50 PMI - put Adjust from $86 down to $83 WHR - put Adjust from $73 down to $70.50 ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ OMC $62.28 -15.28 (-10.41) When it was all said and done, OMC lost -$15 today after a Wall Street Journal article put into question the company's accounting practices and an off balance sheet entity. The stock fell as low as $51 before rebounding after the company's Board issued a reassuring statement. We got more than we were looking for with this play, so we're happy to drop it tonight and book the big profits from today's drop! Congratulations to those who took the play earlier this week. If you didn't book gains today, look to do so tomorrow morning. ------------------------------------------------------------ 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 - PUT ********************* SPW - SPX Corp. $123.20 +3.20 (-7.06 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. Most Recent Update 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. Comments SPW rebounded on relatively light volume during today's session along with the broader market. But not before tracing a new relative low in the morning. The stock is still very weak and could rollover from its 200-dma on another rollover in the broader market tomorrow. Look for a rollover from current levels early tomorrow morning. Confirm direction in the broader market. ***June contracts expire in two weeks*** BUY PUT JUN-125 SPW-RE OI=320 at $5.20 SL=3.25 BUY PUT JUL-120*SPW-SD OI= 15 at $6.30 SL=4.50 Average Daily Volume = 395 K ************************************************ BIG-CAP COVERED CALLS, NAKED PUTS & COMBINATIONS ************************************************ Fasten Your Seatbelt! By Ray Cummins Today's roller-coaster ride was full of surprises as the major equity averages soared to recent heights and plummeted to new lows before ending the session in positive territory. The Dow Jones Industrial Average rallied 100 points to 9,617, boosted by upside activity in Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT), Proctor & Gamble (NYSE:PG), General Electric (NYSE:GE) and Wal-Mart (NYSE:WMT). Cautious remarks from Siebel Systems (NASDAQ:SEBL) and Juniper Networks (NASDAQ:JNPR) kept the heat on technology stocks through most of the day but the NASDAQ Composite managed to close with a gain of 21 points at 1,519 on strength in semiconductor and computer hardware issues. The broader-market Standard & Poor's 500-stock index edged 6 points higher to 1,020 amid bargain-hunting in wide range of industry groups. Trading volume was moderate at 1.74 billion on the NYSE and at 2.04 billion on the NASDAQ. Despite today's gains in the major equity indexes, market breadth was mixed with winners roughly matching losers on the Big Board and decliners outpacing advancers 19 to 15 on the technology exchange. The 10-year government bond added 3/32 to yield 4.96% while the 30-year treasury rose 5/32 to yield 5.54%. *************** Summary of Current Open Positions *************** (As of 06-11-02) Naked Puts Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mo. Yield EMLX JUL 22.5 21.75 29.75 $0.75 7.50% CCMP JUL 35 34.25 41.90 $0.75 5.04% QLGC JUL 35 33.90 43.61 $1.10 7.38% NVDA JUL 25 24.15 30.60 $0.85 7.97% Naked Calls Stock Strike Strike Break Current Gain Potential Symbol Month Price Even Price (Loss) Mo. Yield CYMI JUN 55 55.60 37.13 $0.60 5.98% PHTN JUN 50 50.40 35.16 $0.40 5.20% Put-Credit Spreads Stock Gain Symbol Pick Last Month L/P S/P Credit C/B (Loss) Status UNH 88.39 97.15 JUN 75 80 0.45 79.55 $0.45 Open INTU 42.92 43.59 JUN 35 40 0.55 39.45 $0.55 Open SRCL 35.04 35.55 JUN 30 33 0.30 32.20 $0.30 Open FNF 30.52 28.86 JUL 25 28 0.30 27.20 $0.30 Open ERTS 64.10 62.68 JUL 50 55 0.50 54.50 $0.50 Open ATH 72.00 73.25 JUL 60 65 0.70 64.30 $0.70 Open Call-Debit Spreads Stock Gain Symbol Pick Last Month L/C S/C Debit C/B (Loss) Status NUE 68.85 65.55 JUL 60C 65C 4.15 64.15 0.00 Open Nucor slumped early this week and if the decline carries the issue below the current support area near $64-$65, an exit should be considered. Call-Credit Spreads Stock Gain Symbol Pick Last Month L/C S/C Credit C/B (Loss) Status BHI 35.96 33.48 JUN 43 40 0.35 40.35 $0.35 Open BGEN 42.44 39.79 JUL 60 55 0.25 55.25 $0.25 Open ROOM 55.30 45.42 JUN 70 65 0.55 65.55 $0.55 Open ADBE 35.85 37.07 JUN 45 40 0.55 40.55 $0.55 Open CYMI 40.59 37.13 JUL 55 50 0.60 50.60 $0.60 Open C 42.34 40.71 JUL 50 48 0.30 47.80 $0.30 Open Synthetic Positions: Stock Pick Last Position Credit C/B M/V Status ABT 46.90 45.42 JUN42P/50C 0.20 50.20 4.10 Open DLTR 39.19 39.36 AUG45C/35P 0.25 34.80 0.35 Open UNH 91.77 97.15 JU100C/80P 0.10 79.90 2.00 Open The bearish position in Abbott Labs (NYSE:ABT) provided an incredible gain of over $4.00 as the stock plummeted to a long-term low near $38. Unitedhealth Group (NYSE:UNH) also achieved a favorable "early-exit" credit of $2.00 in only one week, and traders should consider locking-in profits in the bullish position. Credit Strangles: Stock Pick Last Position Credit G/L Yield Status ERTS 63.21 62.68 JUN70C/55P 1.25 1.25 8.9% Open Debit Straddles: Stock Pick Last Position Debit M/V G/L Status DGX 85.72 91.39 AUG85C/85P 10.60 12.50 1.90 Open FLIR 44.75 42.80 JUL45C/45P 7.25 7.00 (0.25) Open The Quest Diagnostics (NYSE:DGX) straddle achieved a favorable "early-exit" profit this week and also hit the upside break-even point with the bullish portion of the play paying for the entire position. New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (I monitor the positions marked with ***). *************** Bullish Plays - Credit Spreads Healthcare and Defense issues have been among the few favorable groups during the recent market slump and the majority of stocks in those sectors moved higher in today's session. Based on the current technical outlook, both segments are poised to continue their upside movement in the coming weeks and traders who agree with that viewpoint can profit from future bullish activity with these positions. *************** AET - Aetna $49.76 *** Multi-Year High! *** Aetna (NYSE:AET) is a health benefits company whose main business operations are conducted in the Health Care, Group Insurance and Large Case Pensions segments. The Health Care segment consists of health and dental benefit products such as health maintenance organization, point-of-service, preferred provider organization and indemnity products, and group insurance products including life, disability and long-term care insurance products. Aetna's Group Life Insurance segment consists principally of renewable term coverage, the amounts of which may be fixed or linked to individual employee wage levels. Large Case Pensions manages a variety of retirement products, including pension and annuity products, offered to qualified defined benefit and contribution plans. AET - Aetna $49.76 PLAY (conservative - bullish/credit spread): BUY PUT JUL-40 AET-SH OI=1046 A=$0.25 SELL PUT JUL-45 AET-SI OI=495 B=$0.70 INITIAL NET CREDIT TARGET=$0.50-$0.60 PROFIT(max)=11% *************** CI - Cigna Corporation $104.46 *** An Old Favorite! *** Cigna Corporation (NYSE:CI) and its subsidiaries are investor- owned employee benefits organizations in the United States. Its subsidiaries are major providers of employee benefits offered through the workplace, including health care products and other services, life, accident and disability insurance, retirement products and services and investment management. CIGNA's main perating divisions include Employee Health Care, Disability and Life Benefits, CIGNA Group Insurance, Employee Retirement, and Investment Services, and International Life, Health and Employee Benefits. The company's Other Operations include the recognition of deferred gains on the sales of individual life insurance and annuity business and reinsurance business, and the results of CIGNA's retained reinsurance business, corporate life insurance business, settlement annuity business, and other non-insurance operations. CI - Cigna Corporation $104.46 PLAY (conservative - bullish/credit spread): BUY PUT JUL-90 CI-SR OI=268 A=$0.40 SELL PUT JUL-95 CI-SS OI=346 B=$0.85 INITIAL NET CREDIT TARGET=$0.50-$0.60 PROFIT(max)=11% *************** HCA - HCA Inc. $50.30 *** Positive Outlook = New High! *** HCA (NYSE:HCA) is a healthcare services company that operates almost 200 hospitals which are comprised of general, acute care and psychiatric hospitals as well as some joint ventures. In addition, the company operates approximately 80 freestanding surgery centers. The company's facilities are located in 23 states, England and Switzerland. HCA's general, acute care hospitals provide a range of services to accommodate such medical specialties as internal medicine, general surgery, cardiology, oncology, neurosurgery, orthopedics and obstetrics, as well as diagnostic and emergency services. Outpatient and ancillary healthcare services are provided by HCA's general, acute care hospitals and through the company's freestanding outpatient surgery and diagnostic centers, and rehabilitation facilities. HCA's psychiatric hospitals provide a full range of mental healthcare services through inpatient, partial hospitalization and outpatient settings. HCA - HCA Inc. $50.30 PLAY (conservative - bullish/credit spread): BUY PUT JUL-45.00 HCA-SI OI=313 A=$0.30 SELL PUT JUL-47.50 HCA-SW OI=116 B=$0.60 INITIAL NET CREDIT TARGET=$0.35-$0.50 PROFIT(max)=16% *************** NOC - Northrop Grumman $121.80 *** Low Risk = Low Reward! *** Northrop Grumman (NYSE:NOC) is a worldwide defense company that provides unique, technologically advanced products, services and solutions in defense and commercial electronics, information technology, systems integration, and nuclear and non-nuclear shipbuilding and systems. Northrop Grumman has operations in 44 states and 25 countries, serving U.S. and international military, government and commercial customers. Northrop Grumman is divided into six major business sectors: Electronic Systems, Information Technology, Integrated Systems, Ship Systems, Newport News and Component Technologies. NOC - Northrop Grumman $121.80 PLAY (very conservative - bullish/credit spread): BUY PUT JUL-105 NOC-SA OI=122 A=$0.50 SELL PUT JUL-110 NOC-SB OI=174 B=$0.85 INITIAL NET CREDIT TARGET=$0.40-$0.50 PROFIT(max)=9% *************** THC - Tenet Health Care $76.10 *** Upbeat Outlook! ** THC is a healthcare services company that owns or operates general hospitals and related healthcare facilities serving urban and rural communities in 17 states. Through its many subsidiaries, Tenet Healthcare corporation owns and operates 116 acute care hospitals with 28,786 beds and numerous related health care services. Its hospitals and subsidiaries employ approximately 113,750 people and Tenet's name reflects its core business philosophy: the importance of shared values among partners -- including employees, physicians, insurers and communities -- in providing a full spectrum of health care. A 3-for-2 split of its common stock will be distributed on June 28 to shareholders of record on June 12. Tenet's quarterly earnings are due on July 11. THC - Tenet Health Care $76.10 PLAY (conservative - bullish/credit spread): BUY PUT JUL-65 THC-SM OI=18 A=$0.25 SELL PUT JUL-70 THC-SN OI=286 B=$0.65 INITIAL NET CREDIT TARGET=$0.45-$0.55 PROFIT(max)=10% *************** BULLISH PLAYS - Synthetic Positions Defense issues have performed very well in recent sessions, due to ongoing tensions in the Middle East and the threat of more terrorism in the United States. Traders who think the potential for future conflicts will lead to further share-price advances in the defense group can attempt to profit from that outcome with these speculative positions. *************** GD - General Dynamics $103.35 *** New High! *** General Dynamics (NYSE:GD) operates businesses that produce information and communications technology, land and amphibious combat systems, and also engage in naval, as well as commercial shipbuilding, and business aviation. These are high technology firms that use design, manufacturing and program management expertise together with advanced technology and the integration of complex systems as part of their everyday operations. The company operates in four primary business groups: Information Systems and Technology, Combat Systems, Marine Systems, and Aerospace. The company also owns other commercial operations. GD - General Dynamics $103.35 PLAY (speculative - bullish/synthetic position): BUY CALL JUL-110 GD-GB OI=54 A=$0.90 SELL PUT JUL-95 GD-SS OI=33 B=$0.75 INITIAL NET CREDIT TARGET=$0.05-$0.15 TARGET PROFIT=$1.25-$1.50 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $3,300 per contract. *************** LMT - Lockheed Martin $65.51 *** Hot Sector! *** Lockheed Martin (NYSE:LMT) is a customer-focused, worldwide enterprise principally engaged in the research, development, manufacture and integration of advanced technology systems, products and services for government and commercial customers. The corporation's core business areas are systems integration, aeronautics, space and technology services. Lockheed's Systems Integration segment engages in the development, integration and production of electronic systems for undersea, shipboard, land and airborne applications. Space Systems is engaged in the design, development, engineering and production of commercial and military space systems. Aeronautics designs, researches and develops, produces, and supports combat and air mobility aircraft, surveillance and command, reconnaissance, platform systems integration and advanced development programs. The Technology Services division provides information management, engineering, scientific and logistic services. LMT - Lockheed Martin $65.51 PLAY (speculative - bullish/synthetic position): BUY CALL JUL-70.00 LMT-GN OI=25 A=$0.75 SELL PUT JUL-60.00 LMT-SL OI=356 B=$0.45 INITIAL NET DEBIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.75-1.00 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $2,125 per contract. *************** Neutral Plays - Straddles & Strangles Here are some good candidates for premium-selling plays, based on each issue's technical background and current outlook. Both stocks have a relatively stable trading range and no (expected) upcoming news or events that will substantially affect their fundamental or technical character prior to the July options' expiration. From a charting viewpoint, their near-term price patterns are well established and the technical indications suggest the current trend will continue. However, news and market sentiment will have an effect on these issues, so review each play thoroughly and make your own decision about its outcome. *************** ACS - Affiliated Computer Services $54.45 *** Trading Range? *** ACS (NYSE:ACS) is a Fortune 1000 company with more than 38,000 people in 35 countries providing unique business process and information technology outsourcing solutions to world-class commercial and government clients. From a single financial industry client, ACS expanded into the energy, financial, government, healthcare, retail, and transportation industries and for the past five years, the company has achieved record growth with revenues climbing 30% on an annual basis. ACS - Affiliated Computer Services $54.45 PLAY (conservative - neutral/credit strangle): SELL CALL JUL-60.00 ACS-GL OI=8266 B=$0.55 SELL PUT JUL-47.50 ACS-SW OI=1858 B=$0.65 INITIAL NET CREDIT TARGET=$1.25-$1.30 PROFIT(max)=10% UPSIDE B/E=$61.25 DOWNSIDE B/E=$46.25 *************** LXK - Lexmark Intl. $59.89 *** Lateral Consolidation! *** Lexmark International (NYSE:LXK) is a developer, manufacturer and supplier of printing solutions, including laser and inkjet printers, multifunction products and associated supplies and services for offices and homes. The company also markets dot matrix printers for printing single and multi-part forms for business users and develops, manufactures and markets a broad line of other office imaging products. LXK - Lexmark Intl. $59.89 PLAY (aggressive - neutral/credit strangle): SELL CALL JUL-65.00 LXK-GM OI=1693 B=$1.35 SELL PUT JUL-55.00 LXK-SK OI=1573 B=$1.60 INITIAL NET CREDIT TARGET=$3.00-$3.10 PROFIT(max)=20% UPSIDE B/E=$68.00 DOWNSIDE B/E=$52.00 *************** BEARISH PLAYS - Naked Calls & Combinations Based on analysis of historical option pricing and the underlying stock's technical background, these issues meet our fundamental criteria for profitable "bear-call" credit spreads. Each issue has robust option premiums, a well defined resistance area and a high probability of remaining below the sold strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. *************** EDS - Electronic Data Systems $49.28 *** Rolling Over? *** Electronic Data Systems (NYSE:EDS) is a professional services firm which offers services within the categories of systems and technology services, business process management, management consulting and electronic business. EDS helps clients manage the business and technology complexities of today's digital economy. They support more than 3.3 million desktops worldwide, enough for every person in the United Arab Emirates. They also manage over 50,000 servers and provide Web hosting for over 900 clients worldwide. EDS brings together the best technologies and processes to help their clients achieve all the critical business imperatives that growing companies must address to be successful in the digital economy. EDS - Electronic Data Systems $49.28 PLAY (conservative - bearish/credit spread): BUY CALL JUL-60 EDS-GL OI=558 A=$0.15 SELL CALL JUL-55 EDS-GK OI=7518 B=$0.70 INITIAL NET CREDIT TARGET=$0.60-$0.65 PROFIT(max)=14% *************** VIA - Viacom $46.59 *** A Big Down Day! *** Viacom (NYSE:VIA) is a leading global media company, with preeminent positions in broadcast and cable television, radio, outdoor advertising, and online. With programming that appeals to audiences in every demographic category across virtually all media, the company is a leader in the creation, promotion, and distribution of entertainment, news, sports, and music. Viacom's well-known brands include CBS, MTV, Nickelodeon, BET, Paramount Pictures, Viacom Outdoor, Infinity, UPN, VH1, TNN: The National Network, CMT: Country Music Television, Showtime, Blockbuster, and Simon & Schuster. VIA - Viacom $46.59 PLAY (moderately aggressive - bearish/credit spread): BUY CALL JUL-55 VIA-GK OI=373 A=$0.25 SELL CALL JUL-50 VIA-GJ OI=109 B=$1.00 INITIAL NET CREDIT TARGET=$0.80-$0.85 PROFIT(max)=19% *************** SUPPLEMENTAL CREDIT-SPREAD CANDIDATES *************** BULLISH PLAYS: Stock Last Short Bid Long Ask Target Monthly Symbol Price Option Price Option Price Credit Gain CHBS 42.81 JUL 40P 1.60 JUL 35P 0.70 0.95 23% KFT 43.80 JUL 42P 0.70 JUL 40P 0.30 0.45 21% MIK 43.10 JUL 40P 0.85 JUL 35P 0.20 0.70 16% INTU 44.30 JUL 40P 0.95 JUL 35P 0.35 0.65 15% AZO 82.04 JUL 75P 1.05 JUL 70P 0.55 0.55 12% UNH 97.04 JUL 90P 1.20 JUL 85P 0.70 0.55 12% UNP 63.52 JUL 60P 0.60 JUL 55P 0.25 0.40 8% BEARISH PLAYS: Stock Last Short Bid Long Ask Target Monthly Symbol Price Option Price Option Price Credit Gain ANPI 39.02 JUL 45C 1.00 JUL 50C 0.40 0.65 15% RJR 67.58 JUL 70C 0.75 JUL 75C 0.20 0.60 14% DIAN 58.84 JUL 65C 1.05 JUL 70C 0.50 0.60 14% GS 72.50 JUL 80C 0.85 JUL 85C 0.30 0.60 14% MMC 93.67 JUL 100C 0.90 JUL 105C 0.35 0.60 14% HON 36.85 JUL 40C 0.50 JUL 42C 0.25 0.30 14% AMGN 38.17 JUL 45C 0.55 JUL 47C 0.30 0.30 14% IBB 48.20 JUL 55C 0.85 JUL 60C 0.35 0.55 12% BAX 46.60 JUL 50C 0.65 JUL 55C 0.15 0.55 12% *************** SEE DISCLAIMER ***************************** ------------------------------------------------------------ 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. 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