The Option Investor Newsletter Thursday 06-13-2002 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) ************************************************************ 06-13-2002 High Low Volume Advance/Decline DJIA 9502.80 -114.90 9625.40 9491.86 1.36 bln 1059/1895 NASDAQ 1496.86 - 22.30 1526.41 1495.64 1.54 bln 1282/2172 S&P 100 501.16 - 4.86 509.26 501.41 Totals 2341/4067 S&P 500 1009.56 - 10.70 1023.47 1008.12 RUS 2000 455.98 - 7.01 463.90 455.78 DJ TRANS 2704.82 - 1.90 2731.44 2702.78 VIX 28.73 + 1.72 28.81 27.08 VXN 54.30 + 1.44 55.81 53.51 TRIN 1.14 PUT/CALL 0.84 ************************************************************* Financials Pointing the Way? Late in the session financial stocks began a fierce drop that could be pointing to our future direction. They have been trending down since the market decline began in mid-May but the rate of descent accelerated as we neared the close. The Dow transports, which had been holding their own on falling oil prices, also were showing weakness at the close. This could be a defining moment in the markets as all the major indicators and corresponding indexes appear to be lining up in the same direction. The day started off strange after futures had been up strongly all night only to crash on the Retail Sales numbers falling -0.9% in May. This was the biggest drop in six months and something Greenspan and analysts had been worried about all year. The consumer has held up the economy in the absence of corporate spending and a boycott now could be disastrous. Despite high unemployment consumers have been buying cars, houses and big ticket items like there was a constant blue light special. If these consumer trends are changing then the "soft spot" Greenspan described last week could turn rotten in a hurry. This concern for a possible shrinking economy overweighed positive news from MCHP and MOT that they could meet or beat expectations. The futures fell to negative territory and the markets opened down. The Dow fell to triple digit losses at 9510 and stopped. Bargain hunters seeing the second pause in the 9500 area in a week started nibbling at stocks and the indexes moved back up to trade in positive territory again. Considering the negative sentiment this was a very positive event. Unfortunately this bargain hunting ran out of steam when the supply of buyers was exhausted. According to TrimTabs.com the week ended on Wednesday showed outflows of cash from equity funds of $5.2 billion. This compares to last weeks outflow of -$6.8 billion. This cash drain is even more depressing when you consider retail investors usually rush in when the market is perceived to be at a bottom. Obviously the perception is still a much lower low ahead. If you thought 9500 was the bottom you would not be taking cash out now. Contrarians would be quick to point out that the herd is usually wrong and the heavy outflow of cash is signaling capitulation. I agree to some extent but I think it has to get worse before it can get better. I talk to many investors every day and for the most part they are still hanging in for the bounce. The various factors for this cash drain is the constant barrage of negative stock news. I am not talking about earnings! The IMCL hearings droned on all day with mind numbing questions and responses. Doesn't congress have any real work to do? Add to that the grandstand play of arresting the ex-CEO in his pajamas this week and investor confidence already shaken by Enronitis is taken to the cleaners again. The recent OMC spanking by the media is another example. On a side note, OMC fired its auditor, Arthur Anderson, today and retained KPMG. Guess they thought the AA name had too many negative connotations. (grin) The AA jury is still deadlocked but questions from the jury room suggest they may decide in the governments favor. Lehman decided to change its rating system today to buy, sell, hold to conform with the SEC inspired changes at Merrill Lynch. Based on the current market there was a discussion to change the ratings to "reduce", "sell" and "get the hell out of the way". Just kidding! Lehman also downgraded the enterprise software sector today saying IT spending was not improving and maintaining earnings estimates could be difficult. On that thought the CFO at ITWO said the slump in IT spending had deepened in the 2Q instead of showing any gains. This echoed the comments from the SEBL CEO Tuesday that this quarter was just as bad or worse than the first. Now, just where is that rebound? Lucent warned yet again today on the revenue side. They said revenue would be -10% to -15% below the estimates from the prior warning. LU closed the day at $2.77. Their main competitor, Nortel, also lost ground and closed at $1.60. At these prices you can buy stock at the price of options. The only concern is whether they will be around several years from now. I can't imagine these companies would go under but stranger things have happened. Microsoft gave back some of its gains from yesterday after the rumor about a pre-announcement of better than expected earnings did not come to pass. Also, comments from the judge in the trial indicated she may be leaning toward the nine states contesting the settlement. This would be very negative and could keep a cap on MSFT stocks for another year or two. Adobe released earnings after the close today and beat the street by two cents but lowered guidance going forward. GNSS warned after the close that revenue could fall -30% below prior estimates due to excess inventory in the pipeline. Sales of LCD monitors have nearly stopped with no corporate IT spending for these high ticket items. SANM warned that earnings would come in at the low end of the prior estimates. Does this sound like an environment for a market rally? The close for the Dow was the lowest since November 5th and has set the stage for a new leg down. The Friday economic reports could push it off the cliff. We get another Consumer Sentiment number in the morning and any decrease could be a disaster after the drop in Retail Sales. We also have Business Inventories, Industrial Production and Capacity Utilization. The market consensus for the sentiment is 97 compared to 96 last time. Give us a 96 or below and we are in serious trouble. Considering that consumer sentiment is tied in some extent to the markets could the cash outflow be our leading indicator? There is no reason to detail all the support/resistance levels of the major indexes tonight. They are all at their last ditch support levels and everything above us is resistance. I know that sound very bearish but every bounce fails at a lower level as the market ceiling continues to drop. There is a chance that positive economic numbers could produce another opening bounce on Friday because the indexes are backed up to the edge and any good news could provide temporary relief. I would view any rebound as just temporary. Use it as a chance to buy puts again. If you have not tried the intraday Market Monitor here is the link to a recap of today's activity. http://www.OptionInvestor.com/itrader/archive/marketmonitor.asp Enter Very Passively, Exit Aggressively! Jim Brown Editor ******************** INDEX TRADER SUMMARY ******************** I CAPITULATE by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - Well if the market hasn’t, I DO - give up that is! A tired but true joke, as this yo-yo market is getting harder to figure. The patterns are so conflicted that I'm seeing either Head & Shoulder's top patterns OR Head & Shoulder's bottom formations. Same charts! Go figure. Tomorrow ought to tell us whether the trend is going to be sideways, consolidating for some further upside next week or if we're going to take out recent lows and start another down leg. I don't recall ever seeing such a drumbeat of simultaneous stories on corporate manipulations, malfeasance and actual criminal wrong doing by senior management of such well-known companies. At past low points in stocks, the concerns were about the economy and earnings - that sure exists in this bear of a market. But in addition there is what is being widely called a crisis of confidence in the corporate world of stocks. Such, that people wonder if the market is a "fair game". Investors used to feel that the market was fair, but that it might be a lousy time to own stocks - not that managers of companies were taking unfair advantage of the investing public by non public double dealings and deceit. How times have changed. Everything is in place for a market bottom - an upturn in the economy, the prospects of better earnings, and perceived value in some sectors -- everything that is but the buyers. They are scarce and don't stick around to long or stick their necks out too long. S&P 100 ($OEX.X) Daily/Hourly charts: First, just to repeat on the S&P 500 (SPX), key support is in the 1000 area (it closed at 1009), just as 500 is in the S&P 100. Have been suggesting OEX Index calls with OEX in the 500 area although the ongoing pattern of lower relative highs and lows is not convincing me that buyers are going to find a magic level in OEX. What looked like a bullish turnaround yesterday, looks like more of the same today, a continued bear trend and limited buying interest. Today's rally failed to even take out minor hourly resistance at the downtrend line intersecting in the 510 area. A close above 510 is needed to get some traction on the upside. Next resistance then is 515, at the top of the channel. OEX looks lower tomorrow - the pattern presented on the hourly charts now looks like the right shoulder of a Head & Shoulders top. If the recent 497 low is exceeded, next stop looks to be around 493, at the low end of the hourly downtrend channel. A close under 500 is bound to increase the bearish sentiment. When this is enough for "final" capitulation is a guess at this point. Dow Index (1/100: $DJX.X) - Daily/Hourly charts: Sell in the 96.5-97 area, if reached. 94.7, which is a recent double bottom looks like it will be cut through like a knife through warm butter - at least judging by the scarcity of buyers for the Dow favorites. Some of the beaten up issues like IBM, Merck, and Telephone (AT&T) got some play today, but otherwise, green ink was scarce today. DJX downside potential now looks to be well under the close at 95, if the DJX continues to sink within the boundaries of the hourly downtrend channel. Downside potential looks to be a couple of points or more, to the 93-92.6 area. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: The bullish breakout in Microsoft (MSFT) had limited follow through today, as did a minor upside break out in Qualcomm (QCOM). Intel (INTC) may have a "dead cat" bounce, but with Cisco (CSCO) languishing, I can't see what is going to lift the Q's, if not the tech biggies. QQQ failed right at resistance implied by the prior lows at 28.2 - support "became" resistance. The longer term hourly stochastic reversed right at the point where it has been of late. What more to say? 27-26.8 is near potential near support, but I'm not confident this area will bring in buyers again with the disappointed mood of would-be bulls today. Look for a possible move to new lows - the 26 area is a possible next objective. The significance of piercing the 27 level is that it also was the September bottom - we're almost there - no bombs, but a far different mood exists. It's not a potential panic low, but a low of major discouragement with current tech prospects and the high prices relative to current earnings. 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 **************** ImCloned By Eric Utley Was it the Congressional hearings Thursday afternoon that tanked the market, or the consumer? Maybe it was a little bit of both. It felt like Enron all over again. The same cast of characters were asking the questions, only a different frightened bunch of suits were in the hot seat. I remember back during the Enron hearings that the market got a little jumpy just seeing those guys on CNBC. Could be a repeat with ImClone. Of course the sales report from the Commerce Department this morning kicked the day off on a sour note, which again brought up a familiar debate: Will the consumer hold on? I'm not smart enough to know, but I do know that the retail sector has shown signs of weakness over the last several weeks. The market seems very on edge right now, and so do the major averages. It feels like we're on the brink of a major washout, but I've been saying that for quite a while now. Most oscillators show an increasingly oversold market, but that doesn't mean it can't grow more so. And earnings are just not what they were expected to be noting tonight's most recent blow ups in Adobe and Genesis. All of this has the making for a throw in the towel sort of session, followed by a sustainable and tradable rally. There are just so very many risks to the bulls right now that no one wants to be the first to try and buy this market. The political events around the world, combined with this probe and that probe into new companies every day, and the lack of earnings or quality earnings all mix for a recipe to avoid stocks. The bond market has been benefiting from these risks to stocks as witnessed by the further upside in Treasuries today. All in all, the market is likely to remain on the defensive as no discernible catalyst for a rally has emerged just yet. At the same time, we haven't had the short term washout to clear the path for a tradable rally. We could get there tomorrow, and there are some things to watch for. For starters, we need to see a decliners swamp advancers during the day. And we need a very heavy volume total on the NYSE and NASDAQ markets, which we haven't gotten yet, not by a long shot. And finally, we need to see the fear gauges of the market rise and close above key levels. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 9503 Moving Averages: (Simple) 10-dma: 9662 50-dma: 10024 200-dma: 9857 S&P 500 ($SPX) 52-week High: 1316 52-week Low : 945 Current : 1010 Moving Averages: (Simple) 10-dma: 1033 50-dma: 1081 200-dma: 1109 Nasdaq-100 ($NDX) 52-week High: 2071 52-week Low : 1089 Current : 1107 Moving Averages: (Simple) 10-dma: 1151 50-dma: 1266 200-dma: 1423 Oil Service ($OSX) The OSX was the day's best performing sector. The index traded higher for the second consecutive session Thursday, finishing the day better by 1.07 percent. Leaders to the upside included Tidewater (NYSE:TDW), Baker Hughes (NYSE:BHI), Transocean (NYSE:RIG), Cooper Cameron (NYSE:CAM), and Nabors (NYSE:NBR). 52-week High: 126 52-week Low : 58 Current : 97 Moving Averages: (Simple) 10-dma: 98 50-dma: 103 200-dma: 88 Disk Drive ($DDX) The DDX, an unfamiliar name to the sector spotlight, was the worst performing sector during Thursday's sell off. The index finished the day lower by 4.70 percent. Leading the way to the downside included Read Rite (NASDA:RDRT), Quantum (NYSE:DSS), M Systems (NASDAQ:FLASH), Sandisk (NASDAQ:SNDK), and Maxtor (NYSE:MXO) 52-week High: 120 52-week Low : 59 Current : 70 Moving Averages: (Simple) 10-dma: 77 50-dma: 90 200-dma: 92 ----------------------------------------------------------------- Market Volatility My good buddy Mark Phillips wrote in an e-mail today that the VIX needs to close above 30 before signaling a capitulation that leads to a tradable short-term rally. I don't need to say anything more. Make that 60 for the VXN. CBOE Market Volatility Index (VIX) - 28.81 +1.80 Nasdaq-100 Volatility Index (VXN) - 54.27 +1.41 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.84 471,438 397,139 Equity Only 0.74 363,520 270,959 OEX 0.91 20,963 19,068 QQQ 0.59 28,694 16,926 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 54 - 1 Bull Correction NASDAQ-100 19 + 1 Bull Correction DOW 47 + 0 Bear Confirmed S&P 500 47 - 2 Bear Confirmed S&P 100 48 + 0 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 1.28 10-Day Arms Index 1.48 21-Day Arms Index 1.35 55-Day Arms Index 1.36 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when the do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals Advancers Decliners NYSE 1229 1960 NASDAQ 1271 2137 New Highs New Lows NYSE 63 101 NASDAQ 42 167 Volume (in millions) NYSE 1,398 NASDAQ 1,572 ----------------------------------------------------------------- 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 $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********************** INDEX TRADER GAME PLANS *********************** THE SECTOR BEAT - 6/13 by Leigh Stevens The financial stocks as a group will tend to lead market advances, or decline. The NYSE Financial Index ($NF.X), composed of all the financial stocks that trade on the exchange, went into "free fall" today, which is not the bullish indication for the market that I thought we might see. After today, NF.X looks headed to a retest of its Feb. double bottom low. This sector along suggests that the broad market may not be poised to rally anytime soon. Continued weakness in the Bank Sector Index ($BKX.X), trading since the end of last week under its 200-day moving average and in the Brokers (Securities Broker Dealer Index - Sym: $XBD.X) are a big part of this weakness. In my mind the strength of the economic recovery is called into question with the performance of these sectors. This view is also suggested by the new closing low in the Morgan Stanley Cyclical Index ($CYC.X) - at 551.3. CYC's 200-day moving average is currently at 534 which may where the cyclicals are headed next. In the Nasdaq market, our key focus is on the Semiconductor Index or SOX ($SOX.X). While the Index has apparently "stabilized" around its recent lows around 426, which represents a 75% retracement of the September-March advance and is at an oversold extreme, it remains a guess as to whether SOX will hold in this area or retreat back to the 345 area of the September bottom. In short, we are at a key juncture - if the market is going to hold around current levels and rally, gains will be built on the ability of some key market sectors going up. Right now, its not apparent where that leadership will come from. Especially with the loss of the sectors that had been in strong uptrends like oils, oil services, cyclicals, small and mid cap stocks, and even healthcare, which may be building a top. The big cap consumer "defensive" stocks like PG, MO, WMT and the like are not enough to carry the broad market higher. UPDATES today - Biotech; Broker-dealer index; Financials; Health Providers; Health Payors (HMO); Russell 2000; Semiconductors; Utilities. HIGHER ON THE DAY ON Thursday - DOWN ON THE DAY on Thursday - SECTOR HIGHLIGHT - IShares purchase recommendation on SMALL CAP SECTOR (6/9)- Continued weakness in the small and mid cap sectors is bringing the iShares closer to the suggested stop points. I would adhere to these exit points, as the anticipated support has not materialized around the recent purchase prices and next lower support looks to be well under the exit points. IJS, iShares of the S&P 600 Value segment - long at 90.90; stop at 87.3 Growth iShares (IJT) of the S&P 600 small cap - long at 74.85; stop at 72.00. Russell 2000 (IWM) iShares - long at 93.80; stop at 89.70 SECTOR REVIEW - Airline Index ($XAL.X) STOCKS: ALK; AMR; AWA; CAL; DAL; FRNT; KLM; LUV; NWAC; U; UAL So far, the Airlines are holding key closing level support in the 76.50 area. A close under 76.00 would suggest the possibility that XAL could go lower still - next potential support looks like 70. This sector is quite oversold - a further sideways move would suggest basing activity. Resistance, on a closing basis is at 82, then 84. A close over 84 would be a bullish positive and at least suggest that some further upside progress would be made. LAST UPDATE: 6/6 Amex Composite Index ($XAX.X) The Amex Composite downside momentum has accelerated as XAZ pierced its up trendline and 50-day moving average. The next downside target area looks like 897; below this area, I don't see potential support before 863. LAST UPDATE: 6/13 Bank Index ($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. Downside target to 830, a 62% retracement of the Feb.-March advance has been exceeded. We could be looking at a retest of the Feb. lows in the 780 area. LAST UPDATE: 6/13 Biotechnology Index ($BTK.X) STOCKS: ABGX; ADRX; AFFX; AMGN; BGEN; CELG; CEPH; CHIR; CRA; DNA; ENZN; GENZ; GILD; HGSI; ICOS; IDPH; IMCL; IMNX; INCY; MEDI; MLNM; MYGN; PDLI; TARO; TEVA; VRTX; XOMA At the low end of its downtrend channel around 340, but action is weak. Only bullish technical is RSI divergence, as it has not "confirmed" the recent low - this is only "potential" - sector continues very weak. Needs close back above 375 to reverse. LAST UPDATE: 6/13 Broker Dealer Index ($XBD.X) If 62% retracement (of Sept.-Feb. rally) can't "hold" in 412 area, next target is 380. Bullish Price/RSI divergence, but this is unrealized potential at this point. XBD needs to get back above 436 to reverse. Hard to imaging much of a rebound in the S&P without some rebound in the brokers. LAST UPDATE: 6/13 Computer Technology Index ($XCI.X) STOCKS: to be listed Possible double bottom in 580 area - if this level is taken out, then next potential support looks to be at the Sept. lows in the 541 area. LAST UPDATE: 6/13 Computer Boxmaker Index ($BMX.X) STOCKS: AAPL; CPQ; DELL; GTW; HWP; IBM; SNE; SUNW; UIS; VRTS Possible double low is setting up in the 83 area. If this gives way, BMX may be headed to 74-75 area, where sector bottomed in Sept. LAST UPDATE: 6/13 Cyclical Index; Morgan Stanley; ($CYC.X) STOCKS: AA; C; CAT; CSX; DCN; DD; DE; DOW; ETN; F; FDX; GP; GT; HON; HWP; IP; IR; JCI; KRI; MAS; MMM; MOT; PBI; PD; PPG; PTV; R; S; UTX; WHR; X New closing low in 551 area, suggest the cyclical index could be headed to a convergence with its 200-day moving average in the 534 area. Needs to stay above 550-551 on closing basis to suggest that we're merely back at low end of a trading range. LAST UPDATE: 6/13 Defense Index; Amex ($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 looks to be forming, which suggests that there will be another downswing ahead. Continue to have objective to lower levels, perhaps back to 600 area. Close above 655 is needed to reverse downtrend. LAST UPDATE: 6/13 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 ($NF.X) STOCKS: This index is composed of all the financial stocks on the NYSE; e.g., banks, insurance, etc. Financial Index as acceleration downside momentum and appears heading toward the 552 area, where NF bottomed in Feb. Close above 580 is needed to reverse the (down) trend. LAST UPDATE: 6/13 Forest & Paper Products Sector Index ($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) This sector represents the hospitals, urgent care facilities and the like - the health care providers that bill for health services. RXH has been "hugging" the 50-day moving average, which has been acting as a sort of curved trendline. Sector looks like upside momentum has slowed considerably and does not appear to have enough strength to pierce its April peaks in the 368 area. If they can't take them higher, the tendency has been to take stock groups lower at some point. Loss of momentum tends to reach a point where prices start to fall due to too few buyers left to keep the stocks going up. If so, fund managers like to book some profits and rotate into the next promising sector. Key support is in the 343 area - a close below this level, suggest a trend reversal, with potential back to 325. LAST UPDATE: 6/13 Healthcare Index; Morgan Stanley ($HMO.X) STOCKS: AET; AHG; ATH; CAH; CI; FHCC; HUM; MME; OHP; OPTN; PHSY; TGH; THC; UNH; WLP . The potential for a top and downside reversal suggested by the bearish Price/RSI was showing up today, as the action today looked like a reversal. A close below 620 would tend to provide initial evidence for a downside reversal, but "confirmation" would be on a close under 600. LAST UPDATE: 6/13 6/6 UPDATE: Suggest exit on PacifiCare Health Systems (PHSY) bought on suggestion at 23.5-24.7. Stock momentum has slowed and is now sideways to lower. Close: 26.07. 6/6 UPDATE: Suggest taking profits on Wellpoint Health Networks (WLP) relative to entry at 70 and 72.00. Stock may be making a double top. Close: 75.66 6/6 UPDATE: Suggest exit on Humana (HUM) on entry suggested at 15.60 & 15.00-15.15. Close: 15.06. Stock is trending sideways and further upside potential looks doubtful. THC good be making a double top; AET is trending sideways and may be building a top; MME shot to new high above a "line" of resistance at 37 - then reversed to close on its lows - in a possible bull trap reversal pattern; OHP may be making a double top here - same pattern on UNH. High Tech Index; Morgan Stanley ($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) The Russell 2000 has had one close under the Feb. double bottom low in the 456 area. A rebound is needed to above this level to suggest that the RUT was going to stop its correction here. Below, 456, a next downside target is projected at 449-450; then, around 432. The RUT iShares (IWM) are, so far, holding above its prior (Feb.) low at 90. A key juncture. Next support (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 ($SOX.X) STOCKS: AMAT; AMD; CMOS; CREE; IDTI; INTC; KLAC; LLTC; LSCC; LSI; MOT; MU; NSM; NVDA; NVLS; PMCS; RMBS; TER; TXN; XLNX Completed 75% retracement - SOX needs to hold 425-426 to suggest that it could rebound further, say back up the 470 area at least. A close under 425-426 suggests potential for a retest of the Sept. bottom around 350. LAST UPDATE: 6/13 Software Index; Goldman Sachs ($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. A move above 120 would be an initial indication that GSO could reverse its downtrend for a time. Software sector index has fallen from the 200 area in Feb. to 114 recently. A close below 1113 would suggest that further weakness was possible as it would exceed both the early-May bottom and the September lows. LAST UPDATE: 6/13 Telecom 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 ($UTY.X) A trading range market like this is what momentum or "overbought/oversold" oscillators are very effective for, as when prices retreat back to such a well-defined "line" of support AND the Stochastic, RSI or MACD indicators are registering oversold, it usually represents a good trading opportunity. Once again, the UTY sector index rebounded from the low end of its range in the 304-305 area. 328-330 is resistance, then 335. Wireless Telecom Sector Index ($YLS.X) NOTE: RISK to REWARD guidelines - Determining an objective is important, even if it is a moving target, as this is the reward potential. Determining reward potential is critical to establishing whether a stop that makes “sense” (e.g., a sell stop that was placed under a key support level) would, if triggered, result in a dollar loss that is in proportion to profit potential; e.g., 1/3 of it. (On occasion, when the purchase price of call or put is equal to 1/3 or less of the estimated reward potential, there may not be a specific exit suggestion, as the cost of the option is equal to the amount that is being risked.) Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. 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The Option Investor Newsletter Thursday 06-13-2002 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: ***** None PUTS: ***** ICOS $18.10 +0.40 (-1.50) The broader Biotechnology sector appears to be finding support judging by the way the group traded during today's session when the broader market took another tumble lower. ICOS finished fractionally higher for the day, but could be in for more upside on short covering if the biotech index continues rebounding. Look to set very tight stops on open positions, or exit into weakness during tomorrow’s session. DUK $31.00 +0.87 (+1.00) The inside day set up that we had been targeting for the second time ended up being a breakout to the upside in yesterday's session. Hopefully you had a protective stop in place to hedge against the breakout, because DUK continued higher again today. Look to exit plays on any weakness tomorrow if you haven't done so already. IDPH $33.00 +1.16 (-5.24) We've been pretty successful playing the recent downward move in the Biotech sector. IDPH has given us better than a $5 drop since we began covering it a couple weeks ago, helped along by some negative news and analyst comments on Tuesday. Since dropping to the $31 level, the stock spent all day today recovering and this has the looks of a move that is over. Rather than look for a new entry point here, we'll book our gains and focus on other plays with greater potential. Use any weakness in the morning to negotiate a more favorable exit from the play. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu DGX 88.27 0.96 -0.50 -2.17 -0.95 Back down to support BRCD 19.42 0.56 0.13 -0.89 0.13 Holding its ground AZO 81.00 -0.43 -0.25 -0.23 -1.04 Held back by market WLP 82.40 -0.11 5.80 0.80 -2.15 Taking a breather OHP 49.70 0.45 0.68 0.06 -0.54 Pulling back to entry PUTS GS 71.30 0.79 -2.64 0.40 -1.20 Working lower again WHR 67.33 -0.22 -1.45 1.78 -1.53 Failed rally on news DUK 31.00 -0.91 0.03 1.01 0.87 Dropped, broke out IDPH 33.00 0.13 -6.34 -0.19 1.16 Dropped, take gains! PMI 76.02 -0.80 -3.04 -0.53 -2.41 Steady trend lower ICOS 18.10 -0.11 -1.14 -0.65 0.40 Dropped, bio bounce MMC 92.05 0.86 -2.39 -1.14 -1.62 Lost $95, come on $90! MIL 33.94 -0.37 -1.42 -1.43 -0.06 One day bounce, break HIG 59.60 0.00 -2.20 0.50 -1.70 Stepping its way down SPW 120.68 -6.86 -3.40 3.20 -2.52 200-dma rollover entry ENZN 23.24 0.82 -1.86 1.01 -0.39 Another failed run IBM 75.60 -1.50 -1.31 -0.86 0.95 New, new warning? RYL 49.18 -2.41 1.03 0.16 -3.22 New, housing bubble IWM 91.00 -0.10 -1.50 0.30 -1.30 New, small cap break LLL 54.70 1.19 -1.00 -1.14 -2.90 New, next leg down CB 69.35 0.02 -2.30 -0.30 -2.00 New, classic break!! ZLC 39.00 -0.43 -0.55 0.08 -1.08 New, retail rollover ************************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 $82.40 -2.15 (+4.34) SG Cowen reiterated its strong buy rating on WLP yesterday morning. The momentum coming off of the company's raising of guidance and the reiteration from SG Cowen was enough to carry WLP up to just below the $85 level. The stock's high in yesterday's session was $84.89. That move may have offered traders who got in ahead of Tuesday's monster move higher a chance to book some very solid profits over three days of trading. In today's session, the stock pulled back to consolidate some of its recent gains. The volume was extremely light during today's session, revealing that the weakness was most likely profit taking related. From here, traders with open positions should have stops in place to protect profits. It remains to be seen if the lower end of the gap gets tested during WLP's current pullback. If it does, we'll look for a rebound from the $81.25 level. AZO $81.00 -1.04 (-1.95) After attempting to break out to new highs earlier in the week, shares of AZO have been struggling under the burden of the broad market weakness, as all the intraday rallies have been rebuffed by the bears. The stock has been obediently creeping lower in a descending channel for the past 3 days, and we'll need to see some bullish action to break this pattern if it is going to remain on the playlist. We are approaching solid support at $80 and this is the most likely level for bulls to make a stand. So we'll look for a bounce near this level (strong volume required) to initiate new positions. Alternatively, wait for a rebound through the top of the channel ($81.50) or better yet, the $82 resistance level before taking a position. We're keeping our stop in place at $79.50. BRCD $19.42 +0.13 (-0.07) Eager bulls in the Technology sector are wondering whether they are on the right track or if they are just going to be the first sent to slaughter. If you're looking to play the long side in this sector of the market, you need to focus on relative strength and BRCD is trying hard to build some. In fact it was encouraging to see the stock trade in positive territory all day on Thursday. But that's where the good news ends. After once again being turned back at the $21 resistance level on Tuesday and $20 today, BRCD is once again approaching solid support at $19. Additionally, each intraday dip over the past 2 weeks has found willing buyers at the $18.25 level. A solid rebound from either of these levels looks like a solid rebound, provided that there is solid volume supporting the rebound. Otherwise, we'll want to wait for a move through the $22 resistance level (also the site of the long-term descending trendline) before taking a position. Our stop remains at $18. DGX $88.27 -0.95 (-2.66) Entry point or lights out? DGX had a pretty nice rally off the $85 level, but the pullback over the last 3 days is really causing the bulls some heartburn. It isn't helping that the Health Care Payors index (HMO.X) hasn't been able to hold altitude. Rather than pulling back on light volume, we've seen the selling volume running slightly ahead of the ADV. But the stock is still above its bullish trendline and caught a bit of a late-day bounce off the 20-dma at $87.97 to end the day just slightly above our $88 stop. We need to see the bulls step in to buy the stock near current levels or else the play will be destined for the drop list this weekend. A volume-backed rebound from the $88 level can be used for new entries, but make sure to keep stops tight. Should this level fail as support, DGX will likely head back to its ascending trendline near $86 before finding stronger support. The HMO index may have to drop back near the $625 level before finding willing buyers again and that could cause further problems for DGX. OHP $49.70 -0.54 (+0.65) So much for that move to new highs in the Health Care Payors index (HMO.X). After pushing through the $655 level earlier in the week, the index has been unable to hold altitude under the drag of the broad market weakness. This lack of bullish conviction is likewise weighing heavily on shares of OHP. The stock has been dropping back over the past 2 days after tagging a new all-time high of $51.94 on Tuesday. Intraday support rests at $49.50 and a rebound from that level can be used for new entries. But if the sector weakness continues (very likely with the HMO index looking like it wants to retest the $625 level), then the better entry will likely be a drop to and rebound from the $47.50-48.00 support level. This was the site of the recent breakout and if there is any life to the bullish move, the bulls should show up to defend that level. Should support fail to hold, then we'll be out of the play in short order, with our stop currently resting at $47. ************** 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 ******************* WHR $67.33 -1.53 (-1.42) Maytag, another major appliance maker, said yesterday morning that an unexpected surge in sales of its washing machines and vacuum cleaners would lead to higher than previously expected earnings. The news resulted in a sharp rise in MYG shares, and spilled over into our WHR put play which saw the stock rally back up to the $70 level. As it turned out, the early rally in WHR yesterday was a good entry point into new put positions as the stock promptly rolled over from the $70 level and continued to slide into today's session on the weakness in blue chip issues. The $68 level that provided support earlier in this play may once again try to hold, but is less likely to given the breakdown we witnessed during Tuesday's session. A retest of the relative low down around the $67 level is likely, especially if the Dow continues to weaken over the coming sessions. Look for intraday rollovers from the $69 level which is now the site of the overhead 10-dma. A breakdown below $67 should lead to a move down to the $65 level. PMI $76.02 -2.41 (-4.78) PMI pushed lower in today's session on further selling in the broader market. The stock's trend is still very much intact after yesterday's brief but failed rally attempt during midday action. PMI reached only as high as the $79.32 level before rolling over once more and heading below the $78 level for the first time in over two months. The stock continued below $78 during today's session on continued relatively active trading volume. We could very well see a decline down to the $75 level in the coming sessions if the broader market continues to trade in a weak fashion. Short term exit points might be taken in the coming sessions if the stock reaches $75. Taking new entries on a breakdown of today's low might be a suitable choice, but we'd like to see the stock rally for one or two days in a relief fashion to remove some of the short term oversold nature. If you're holding open positions, look for a decline down to $75. But if you're still on the sidelines in PMI, wait for a better entry point near resistance overhead around the $79 level. MMC $92.05 -1.62 (-4.29) We made the mistake of referring to MMC as an insurance company when in fact the company is not an insurance play. Sorry for the mistake. The stock's rollover from the 10-dma in Tuesday's session at the $98.25 level proved to be a most favorable entry point into new put plays as MMC continued lower through the last two sessions. The stock traded as low as $91.80 before finding enough support to stage a relief bounce in today's session. MMC looks weak, and is poised to get weaker with further selling in the Dow and S&P. Look for market weakness to pressure the stock below today's low in tomorrow's session for a possible exit point at or near a new relative low in the descending trend. The stock could possibly find support near the $90 level if it hits that level tomorrow or early next week. That may also be a good exit point over the short term for traders who took the entry on the rollover from the 10-dma earlier this week. For new entry points, we'll look for another rollover from the 10-dma in the coming days. MIL $33.94 -0.06 (-3.28) The downside in the biotechnology sector continued to wreak havoc on MIL in the last two days, which was a welcome development. The stock's full fledged breakdown in Tuesday's session was followed by good downside in yesterday's session which saw MIL fall below the $35 level on a huge increase in volume. Nearly 1 million shares exchanged during yesterday's sell off versus the stock's 30 day average trading volume of under 500 K shares. Today's modest bounce was most likely a day of short covering as the Biotech Sector Index ($BTK.X) rebounded as well. From here, traders with solid gains in this play might consider trailing down a tight stop to protect profits. For new entry points, we favor taking rollovers from resistance, possibly somewhere between the $36 and $37 level, with the 10-dma coming down from the $37 level to provide pressure on a rollover. If the right market conditions present themselves, traders could look to enter new positions into a breakdown below the $33.50 level. HIG $59.60 -1.70 (-3.40) HIG spent yesterday's session gyrating around the $61 level following its big breakdown below the 200-dma during the day prior. A small day of consolidation is normal following such a big move, especially a short lived relief rally before a resumption of downward trend. And the stock's trend certainly resumed in today's trading on the return of weakness in the broader market. With little support immediately below current levels, HIG looks to be heading lower. Look for further weakness in the Dow tomorrow to pressure HIG further down along its declining trend. Momentum entries can be taken into weakness below the prior day's low as long as the broader market is weak. If the stock does rebound in the coming sessions, then start looking for rollover entry points into new put positions around the $61.50 mark. Above there, the converged 10-dma and 200-dma just below the $63 level would offer a favorable entry point. SPW $120.68 -2.52 (-9.58) Following yesterday's relief rally in SPW, the stock tried to follow through to the upside in today's session but the rally fell short right near the 200-dma. SPW reached only as high as the $124.44 level before rolling back lower during a quiet day of trading back below the 200-dma. We have the feel that the 200-dma could turn out to be quite the battle ground between the bulls and bears in SPW over the next several sessions if the market doesn't break in one direction or another. The 200-dma now stands overhead at the $123.30 level. Traders can continue looking for rollovers from that level as long as the market remains weak. SPW will have a difficult time trading and closing above its 200-dma without a sharp rally in the broader market. To the downside, a breakdown below the relative low at the $118.76 level can be used as an entry point into momentum. Confirm market direction and an increase in volume before entering on a breakdown. ENZN $23.86 -0.39 (-0.42) There hasn't been much good news to focus on in the Biotechnology sector of late, and the current IMCL hearings certainly aren't helping the bulls' case. But maybe the news from BGEN after the closing bell will inject some life into the sector. Why are we talking about bullish catalysts in a put play? Because we want to see a rebound in the sector to provide us with a better entry point. ENZN gave us a decent entry today as it finally rolled over from the $24.75 level, but the slide wasn't all that we had hoped for. ENZN is currently trapped between recent support ($23) and resistance ($25). Those are our action points, as renewed rally failures near the $25 level will make for solid entries, as will a breakdown below yesterday's intraday low at $22.60. There is further resistance near the $26 level and that would make for an even better entry point on a rollover, but we will need to wait for the rollover before playing. Our stop remains at $27, as a move above that level will represent a break of the 2-month descending trendline. GS $71.30 -1.20 (-2.65) Another day, another new low. Yesterday's early weakness in the broad market drove GS down to the $70 level before buyers appeared to prop the stock up. This action is significant because the bearish price target on the PnF chart is $70 and we can now say that that target has been achieved. That doesn't mean GS can't fall further, but we need to remain cognizant of the achieved price objective. At a minimum, GS is still looking like a favored target of the bears, as evidenced by the stock's most recent rollover at the $73 level. So the pattern of lower highs and lower lows is still intact. Like much of the broad market, GS is on the cusp of either rebounding or breaking down. A failed rally near the $73.00-73.50 level looks good for new entries, but we're lowering our stop to $73.75, just in case the bulls get frisky and manage a solid rebound as we head into the weekend. Traders looking to enter on further weakness will need to very careful, given the proximity of the September lows. A drop below $70 can be used to open new positions (so long as the XBD index is confirming the move), but keep a sharp eye out for an oversold rebound near the $68 level. ************* NEW PUT PLAYS ************* IBM - International Bus. Machines $75.60 +0.95 (-2.70 this week) International Business Machines uses advanced information technology to provide customer solutions. The company provides value to its customers through a variety of solutions including technologies, systems, products, services, software and financing. IBM's three hardware product segments are comprised of Technology, Personal Systems and Enterprise Systems. Other major operations consist of a Global Services segment, a Software segment, a Global Financing segment and an Enterprise Investments segment. Some of the best bearish trades in recent weeks have been the result of negative company-specific news stories, among them WMB, EP, TYC and of course OMC. Well we've got another one for your consideration. Big Blue investors may be about to get a lot bluer. Rumors have been surfacing that IBM will be forced to warn due to approximately $4 billion in services orders to companies that have recently filed for bankruptcy. Putting 2 and 2 together tells us that companies that are now bankrupt are highly unlikely to need the services that IBM provides. Add in this catalyst with the fact that the stock has been trading heavy for the past week, breaking the important $75 support level earlier this week. That was enough to prompt the analysts to come out of the woodwork this morning in defense of the stock. SG Cowen raised estimates and reiterated their price target of $112. Not to be outdone, UBS made positive comments as well, issuing a price target of $120. Those targets may be possible, but we obviously disagree. In fact, the lift that IBM got on the positive comments looks to be providing us with a better entry point into the play. As you know, we like to reference the PnF charts to see where supply and demand levels lie, and IBM is clearly under heavy selling pressure. In fact, the most recent sell signal (from earlier this week) gives us a price objective of $61. It looks like there is plenty of room to fall and if the company does warn, we could be headed there sooner, rather than later. Look for failed rallies below heavy resistance at $79 to provide attractive entry points into the play. Otherwise, wait for IBM to fall of its own weight, entering new positions on a drop below the $73 level. Initial stops are in place at $80. *** June contracts expire next week *** BUY PUT JUN-75 IBM-RO OI=19251 at $1.75 SL=0.75 BUY PUT JUL-75*IBM-SO OI=29623 at $3.70 SL=2.00 BUY PUT JUL-70 IBM-SN OI=11555 at $1.90 SL=1.00 Average Daily Volume = 8.55 mln IWM – Russell 2000 iShares $91.00 -1.30 (-2.60 this week) The iShares Russell 2000 Index Fund seeks investment results that correspond to the performance of publicly traded U.S. small-cap stocks, as represented by the Russell 2000 index. The index represents the 2000 smallest companies in the Russell 3000 index. Get ready for the Russell Shuffle. That's right, at the end of the month, the Russell 2000 will adjust the components of the index, and it is a safe bet that fund managers will be adjusting their holdings accordingly between now and the end of the month. Observant traders will recall that small-cap stocks have been particularly strong since the September lows, with the IWM iShare moving to a new 18-month high in mid-April. Since then conditions in the index have been deteriorating rapidly, with volume on the rise, as the IWM has fallen back to the site of the February lows. This is a critical juncture, as the bulls need to step up to defend support in the $90.50-91.00 area, or else we could be in for a nasty stumble. The next significant support level is $87, followed by $83.50. The PnF chart paints a dire picture as well, with the recent double-bottom breakdown pointing to an eventual price objective of $80. Note also, that a print of $90 break the bullish support trend and will give us a fresh triple-bottom breakdown, underscoring the bearish outlook. We would prefer to get an oversold rebound before initiating new positions, but we don't want to rule out entries taken on a break below the $90 level. If you have the patience to wait for the bounce, look to open new positions on a failed rally near $93 or $94.50. We are initiating the play with our stop set at $95. *** June contracts expire next week *** BUY PUT JUN-95 IWM-RS OI= 482 at $4.40 SL=2.75 BUY PUT JUN-90 IWM-RR OI= 72 at $1.20 SL=0.50 BUY PUT JUL-95*IWM-SS OI=2500 at $5.50 SL=3.50 Average Daily Volume = 1.16 mln LLL - L-3 Communications Holdings $54.70 -2.90 (-3.85 last week) As a leading supplier of sophisticated secure communication systems and specialized communication products, LLL provides critical elements of virtually all major communication, command and control, intelligence gathering and space systems. The company's high data rate communication, avionics, telemetry and instrumentation systems and components are used to connect a variety of airborne, space, ground-based and sea-based communication systems. Remember the good old days when Defense stocks did nothing but go up? Judging by the recent action in the Defense Industry index (DFI.X), the glory days are over for awhile. Since hitting its all time highs near $680 in early May the DFI index has been in a steady downtrend. Even the bounce off of strong support near $625 couldn't get the bulls' interest and it looks like the index is about to roll over once again. Should the $625 support level give way, it could be a quick trip to the $600 level. And that may not be the bottom. LLL was one of the best-performing stocks in the sector after the September lows, rising more than 100%. But it is acting very poorly (unless you are a bear!) and is now testing major support in the $54-55 area. Should this support fail, LLL looks destined to visit $50 on its way to major support in the $44-45 area. The PnF chart seems to agree, as its recent sell signal generated a bearish price target of $43. Looking at the daily chart, the $60 level has shaped up as formidable resistance, although more realistically, the $57-58 area will likely turn back any feeble bullish moves. Ideally we'll look for new entries on a failed rally below the $59 level. Of course, if support gives way, a drop through the $54 level can be used for new entries. Due to the recent volatile market action, we want to give LLL some room to move, so we are initiating coverage with a fairly liberal stop at $60.50. Once LLL breaks down below support, we'll be lowering that stop to the $58 level. *** June contracts expire next week *** BUY PUT JUN-55 LLL-RK OI=781 at $2.25 SL=1.00 BUY PUT JUL-55*LLL-SK OI=648 at $4.00 SL=2.50 BUY PUT JUL-52 LLL-SX OI=578 at $3.10 SL=1.50 Average Daily Volume = 956 K RYL – The Ryland Group $49.18 -3.22 (-4.44 this week) The Ryland Group is a homebuilder and mortgage-finance company that has built more than 175,000 homes. Additionally, the Ryland Mortgage Company (RMC) has provided mortgage financing and related services for more than 155,000 homebuyers. Currently, Ryland homes are available in more than 260 communities in 21 markets across the United States. It seems everyone is wondering whether the housing market is in a bubble similar to what Technology stocks experienced in early 2000. Judging by the recent action in Housing stocks, investors are voting "Yes" with their wallets. Since charging to new all time highs near $400 in early May, the Dow Jones Home Construction index (DJUSHB) has been experiencing steady selling pressure. The DJUSHB has been building a descending wedge with lower highs capped by the descending trendline at $370 and support defined by the $345 level. This type of pattern is usually resolved in favor of the bears and it looks like that will be the case here. Shares of RYL have been trading in a similar pattern, but it looks like it is further along the bearish path than the overall sector and that spells relative weakness. Support had been holding near the $50 level, but the heavy selling on Thursday broke that support level and opened the door for the bears to take a run at lower levels of support, first at $47-48 and then $45. But looking at the PnF chart gives an indication that the stock is headed significantly lower. The double-bottom breakdown in late May gives us a price target of $42, which would correspond to a retest of the lows from late March. We want to use any sort of failed rally to initiate new positions, first at $52 and then up at $53. Of course, a trade below $49 can also be used for new entries as this will create another double-bottom breakdown on the PnF chart and increase the selling pressure. Until we see whether we get a bounce or breakdown first, we are setting a fairly wide stop at $54. *** June contracts expire next week *** BUY PUT JUN-50 RYL-RJ OI=1042 at $2.05 SL=1.00 BUY PUT JUL-50*RYL-SJ OI= 958 at $3.60 SL=1.75 BUY PUT JUL-47 RYL-SW OI= 459 at $2.50 SL=1.25 Average Daily Volume = 700 K CB - Chubb $69.35 -2.00 (-4.58 this week) Chubb Corporation is a holding company with subsidiaries principally engaged in the property and casualty insurance business. The Company's property and casualty insurance subsidiaries provide insurance coverages principally in the United States, Canada, Europe, Australia and parts of Latin America and the Far East. Chubb also operates Chubb Financial Solutions, which is engaged in developing and providing risk financing services through the capital and insurance markets, and a Real Estate Group, composed of Bellemead Development Corporation and its subsidiaries, which are involved in commercial development activities, primarily in New Jersey, and residential development activities, primarily in central Florida. A renewed wave of asbestos fear is sweeping the market. But it's not impacting the manufacturers that were hit earlier such as Haliburton. The insurance companies are the ones coming under fire as the fear of increased claims is mounting. Major insurers are preparing for a large number of claims of personal injury. The problem is expected to top $65 billion in claims, with $3 billion of that total just coming in the last month. The major problem is that the court cases aren't going in the favor of the insurers, which has many simply throwing in the towel and writing a check for the damages. The cloud hanging over the industry is only adding to the weakness coming from the broader market weakness as well as uncertainty over the U.S. economic rebound. Major insurers such as CB are staging major breakdowns due to the pressure from several corners. The stock broke down from its four month consolidation during today's session, signaled by the drop and close below its 200-dma at the $71.50 mark. Volume has been on the rise in the last two sessions, signaling that the sellers may not be finished with this stock. Further pressure in the Dow and the broader market should continue pushing CB lower in its downward trend. Traders looking for entry points can use a breakdown below the $69 level in tomorrow's session after confirming weakness in the broader market averages. Future rollovers from the 200-dma can be taken as new entry points if the stock stages a relief rally on relatively lighter volume. Our stop is in place at $73. ***June contracts expire in two weeks*** BUY PUT JUN-70 CB-RN OI= 282 at $2.00 SL=1.00 BUY PUT JUL-70*CB-SN OI=2664 at $3.30 SL=1.50 Average Daily Volume = 960 K ZLC - Zale $39.00 -1.08 (-1.98 this week) Zale Corporation, and with its wholly owned subsidiaries, is a specialty retailer of fine jewelry. As of July 31, 2001, the Company operated 2,344 specialty retail jewelry stores and kiosks located primarily in shopping malls throughout the United States, Canada and Puerto Rico. The Company principally operates under six brand names including Zales Jewelers, Zales the Diamond Store Outlet, Gordon's Jewelers, Bailey Banks & Biddle Fine Jewelers, Peoples Jewellers and Piercing Pagoda. Zales Jewelers provides jewelry to a broad range of customers. The retail sector was hit today after a government report revealed a drop in sales during the month of May. The report was a surprise to many economists. The Commerce Department said that sales dropped by 0.9 percent, with hard hits to auto sales. The report once again brought into question the strength of the U.S. consumer, and his or her ability to hold the U.S. economy out of a double dip recession. Obviously the report put into question the relative strength of many high end retailers who have been holding up well during the most recent leg lower in the market such as ZLC. The stock reached a relative high earlier in the year and spent most of the following month trading sideways between the $40 support and $44 resistance levels. The high-end retailer could be in for a major spill as the sentiment appears to be shifting in the retail sector, and a breakdown below the support at the $38 level could set up such a scenario. Watch for ZLC to trade lower into tomorrow's session on further weakness in the broader markets. The stock may bounce from the $38 level on the first test of that support, but should continue lower in the week ahead. Look for an entry if the stock does in fact breakdown below $38. A relief rally in the coming days followed by a rollover from the $40 level would offer traders another entry opportunity. Our stop is initially in place at the $41.50 level. ***June contracts expire in two weeks*** BUY PUT JUN-40 ZLC-RH OI=0 at $1.40 SL=0.75 BUY PUT JUL-40*ZLC-SH OI=3 at $2.05 SL=1.00 Average Daily Volume = 253 K ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Thursday 06-13-2002 Copyright 2001, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. ********************* PLAY OF THE DAY - PUT ********************* HIG - Hartford $59.60 -1.70 (-3.40 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. Most Recent Update HIG spent yesterday's session gyrating around the $61 level following its big breakdown below the 200-dma during the day prior. A small day of consolidation is normal following such a big move, especially a short lived relief rally before a resumption of downward trend. And the stock's trend certainly resumed in today's trading on the return of weakness in the broader market. With little support immediately below current levels, HIG looks to be heading lower. Look for further weakness in the Dow tomorrow to pressure HIG further down along its declining trend. Momentum entries can be taken into weakness below the prior day's low as long as the broader market is weak. If the stock does rebound in the coming sessions, then start looking for rollover entry points into new put positions around the $61.50 mark. Above there, the converged 10-dma and 200-dma just below the $63 level would offer a favorable entry point. Comments HIG broke down after its one day consolidation today. The stock is very technically weak and its trend is accelerating to the downside. Look for further downside in tomorrow’s session on selling in the broader market. A momentum based entry point can be taken on a decline below the $59.50 level on heavy intraday trading volume. Confirm weakness in the Dow and S&P before entering on a breakdown. Target the $58 level for a quick day trade scalp, and look into next week for a decline below the $56 level. ***June contracts expire next week*** BUY PUT JUN-60 HIG-RL OI=146 at $1.60 SL=0.75 BUY PUT JUL-60*HIG-SL OI= 54 at $2.65 SL=1.50 Average Daily Volume = 891 K ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** TRADERS CORNER ************** Milking Q-Charts, Part XV, An Owner's Manual Buzz Lynn buzz@OptionInvestor.com Yes! Another Q-Charts episode! I'll bet many loyal readers are biting their nails just waiting to discover yet another really cool thing about the latest version, 4.2
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