The Option Investor Newsletter Sunday 06-16-2002 Copyright 2001, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. Entire newsletter best viewed in COURIER 10 font for alignment Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 6-14 WE 6-07 WE 5-31 WE 5-24 DOW 9474.21 -115.46 9589.67 -335.58 9925.25 -179.01 -248.82 Nasdaq 1504.74 - 30.74 1535.48 - 80.25 1615.73 - 45.76 - 79.90 S&P-100 501.76 - 5.56 507.32 - 21.88 529.20 - 10.72 - 13.38 S&P-500 1007.27 - 20.26 1027.53 - 39.61 1067.14 - 16.68 - 22.77 W5000 9549.72 -202.97 9752.69 -353.80 10106.49 -144.15 -223.54 RUT 459.07 - 11.44 470.51 - 16.96 487.47 - 6.17 - 15.30 TRAN 2673.14 - 13.52 2686.66 - 62.60 2749.26 + 5.59 - 54.69 VIX 29.93 + 3.28 26.65 + 3.75 22.90 + 1.64 + .88 VXN 55.67 + 3.43 52.24 + 6.29 45.95 + 3.09 - .08 TRIN 1.34 1.30 1.11 1.59 Put/Call 1.15 .79 .73 .82 ****************************************************************** Sentiment Implodes, Nobody Seems To Care? by Jim Brown Friday morning was almost an exact copy of last week. Intel did not warn again although others did. There were no bombs in Israel but Karachi Pakistan instead. What did happen other than earnings warnings was a drop in Industrial production to nearly flat and a collapse in Consumer Sentiment to 90.8 from 96. The feared "VV" recession or the second dip appears to be coming to pass. The Industrial Production fell to only a +0.2% growth rate in May. This was continuing the fall from the high of +0.6% in Jan, a drop to 0.4 in Feb/Mar and 0.3 in April. If this drop continues we will be back to negative growth by July/August. After eighteen months of contraction the inventory rebuild cycle bumped the economy back into growth mode in January. It has slipped every month since. This is not the news investors wanted to hear with the market nearing September lows. The Consumer Sentiment drop was even more drastic. Sentiment fell to 90.8 for the first half of June and wiped out all the gains from the last three months. This was a six-point drop. The current conditions component fell from 103.5 to 97.9 and the expectations component fell to 86.2 from 92.7. This was the lowest reading since December and shows that the recovery is slowly slipping away. Reasons for the drops include a lack of recovery in the job market and weak business confidence after the high profile corporate problems of late. Also impacting the numbers were the fears of a nuclear war in India and Pakistan and the "dirty bomb" scare. The stock market decline also sours consumer moods. A rising stock market is a visible "wellness indicator" for the public. What these two reports emphasize in addition to others this week is that the Fed is not going to raise rates anytime soon. The fed funds futures are pointing to a 2.25% interest rate in December. It has almost completely ruled out any summer or fall rate hikes. This is good for the home builders as it extends the low mortgage rates through the typical summer home buying season. It also means businesses will have nearly six more months of ramp time. It is like pitting under a yellow flag during a car race. The longer the yellow is out the more cars can pit for quick repairs. The longer the Fed is dormant the longer the stealth economy can continue to heal and gain speed. Microsoft resumed its rise upward on Friday after dropping back to $53 at the open. The stock closed with a +$1.03 gain at $55.27 as the rumor about better than expected results resurfaced. It seems that MSFT has been managing earnings for so long that it has built up a stash of off book profits that it is now going to be forced to claim. The SEC has been looking at companies that manage earnings and is forcing them to clean up their act. The rumor is that MSFT will flush those profits out of the books this quarter. Microsoft just settled a two year SEC investigation last week where they alledgely hid up to $900 million in past profits to use later. This is prompting the rumor that a "repentant" Microsoft might beat the estimates using real accounting. In other MSFT news oral arguments will be made on Wednesday by the states disputing the proposed settlement. In the software sector all eyes will be on Oracle when they release earnings next Tuesday. Larry Ellison has already said they would meet or beat the $.12 cents analysts expect but he did not say how. Analysts will be looking at revenue numbers for real guidance instead of profits derived from cost cutting, restructuring or tax savings. Many analysts expected Oracle to miss estimates and were shocked last week when Ellison implied they would hit estimates. Since it is common knowledge that Oracle has been having trouble signing those big deals for hundreds of thousands of dollars they are wondering where the earnings will come from. They will be waiting impatiently Tuesday night chanting "show me the money." Other earnings this week will highlight brokers and retailers. Genesis Microchip got taken to the cleaners after their warning on Thursday. The stock lost -25% of its value and closed at $9.05. The selling did not rub off on the rest of the chip stocks with the SOX losing only -.81 for the day. The bad news was taken as company specific even though it was due to a boycott in corporate spending. Investors appear to be in denial. With the Industrial Production and Consumer Sentiment numbers both pointing to another recessionary drop they bought the market dip on Friday. Earnings warnings are flying but they bought the dip anyway. A common sign of a bottom is when bad news is no longer able to push the market down. Could we be nearing that point? Some say yes. Others say short covering by mini-hedge funds were responsible for the Friday bounce. I don't put much faith in the mini-hedge fund scenario. The volume just does not support it. The combined market volume was only 3.4 billion shares on Friday with down volume beating up volume 6:5. Considering the severity of the morning drop that was a pretty good ratio but not serious short covering. I think the more plausible answer is simply investors can count and read charts and they see what they "think" will be a bottom just a few trading days away. (S&P September lows of 944 intraday, 965 close) If your investment time horizon is years then buying the dips this close to a perceived bottom is a good tactic whether you are an individual or a mutual fund. I think this is why the dip bottoms are quickly bought but not with enough volume to produce those rocket rebounds we have seen in the past. They are simply setting out there with limit orders under the market and they are not chasing stocks once they rise above those limits. They are being very patient as we get closer to the September lows. They are letting the market come to them. I think the real buying in volume will come once those lows have been hit and they have held! There are analysts out there calling for 600 on the S&P and 7000-8000 on the Dow. Even with a double dip recession I can't imagine those numbers in our current high tech world. Considering the Dow is now trading at Jan-1999 levels a lot of pain has already been factored in. The Nasdaq has time traveled back to July-1997 levels. Very few investors can vision a significant drop from here. Of course you would have had a hard time finding a group of investors who thought today's numbers were possible two years ago. The bottom line here is I don't think we are done but we are getting very close to at least a temporary bottom. Temporary? Yes, it is entirely possible the first test will produce a bounce that fails and we will have to retest again just to convince those hardcore bears that it is time to hibernate. That second test could include a monster capitulation day. Market makers are getting hammered daily. With no buyers they are forced to continually dump stock only to turn around and get hit with another load on their screens. If the first bounce does not hold they may just step back and let the prices fall until volume buyers appear. Until that day they will always be looking over their shoulder wondering when the next flood of sell orders will appear. All the retail stop orders will be cleared and they will start with a clean slate. Monday morning could be exciting as we enter an expiration week with loaded internals. The VIX closed right at 30 which is historically very bullish. It spiked to just over 33 intraday, a level it has not seen since Nov-2nd-2001. The TRIN was not as positive at the close at 1.34 but it also spiked to 4.68 intraday. A high not seen since September. The put/call ratio closed at 1.15, which is extremely bullish. From my Friday night viewpoint it looks like the open on Monday could be bullish. Expiration weeks recently have seen the market rise the prior week to be flat to down during expiration week itself. Nobody knows what this week will bring but you can bet that it will not be boring. With the wide intraday ranges coming back into the markets it is just one more piece of evidence that the bottom may be near. Could it be next week? Enter Very Passively, Exit Very Aggressively! Jim Brown Editor **************************** Option Investor Fall Seminar **************************** It is with great pleasure that we announce our fall seminar in Denver. It will be October 12th to 15th with an optional boot camp on Friday the 11th for those that would like a better foundation in the basic strategies. We will announce the speaker list in the coming weeks but you know we always have 12-15 well known personalities including your favorite Option Investor writers. What I can tell you is that we will start the event off on Friday night with a casino party with craps, roulette, black jack, etc. This get acquainted event will offer prizes for everyone and provide a relaxed atmosphere to rub shoulders with the speakers and other guests. Ask anybody who has been to one of our seminars. We start at 9:am Saturday morning and run non-stop until the close. We stop only to eat and sleep but we do feed you five times a day! You can save $200 off the registration price if you sign up before July-31st. Don't wait. Click here: http://www.OptionInvestor.com/seminar/fall2002/ ******************** INDEX TRADER SUMMARY ******************** EQUAL TURNS by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - Friday's have established a new pattern of the bears getting their whack at the market, followed by the bulls taking their turn. It's become a very equal opportunity market! Wonder what NEXT Friday will bring, a "triple witching" day with stock, index options and index futures all expiring. Can't wait. The week being over, thank goodness - this tug of war is tiring me out - I thought I would take a look at the longer-term weekly charts. And, while I still have your attention, I wrote a Trader's Corner piece on that fascinating topic of Heads & Shoulders - the "Head and Shoulders" (H&S) chart pattern that is, which was a tip off on the May S&P top and downside reversal; and, by this past Thursday looked like the bottom variety H&S had "set up" - WRONG! However, the H&S pattern "failure" and reversal at its "neckline" was an immediate clue to get bearish on Thursday and get short for Friday. SEE TRADER'S CORNER for that. No fooling, this stuff really works - the names are bit strange, but so is option trading. Anyway, the Thursday rally failure led to one roller coaster straight-line decline on Friday. A touch to the lower hourly channel line then "showed" the level where S&P would bottom next. It looked like the market was going to go all the way to China, but a redrawn channel showed where to cover (shorts); and, go long if you were especially brave and cool under fire. Weekly S&P charts - S&P 500 (SPX) and 100 (OEX): There is not a lot to demonstrate in these besides the unrelenting downtrend. Kind of makes you think there never is going to be a recovery, doesn't it? No wonder (Consumer) confidence is DOWN in the latest survey. The narrower big cap market index OEX has now gotten to within 8 points of its September low when the world was burning, or so it seemed. The market is getting "oversold", but definitely can get lower, if you look at where the Stochastic and RSI indicators read at the September bottom. The broad market as reflected in the SPX has a ways to got to reach its prior low and managed a weekly close ABOVE the key 1000 level. The equivalent watershed level in OEX is 500 and the index recovered this by its Friday close. Speaking of the Head and Shoulder's pattern, the weekly SPX chart is looking less and less like the bottom form of the H&S, as the supposed "right shoulder" gets lower than the left hand low - the one prior to the September bottom. The index would have to start to move back up from last week's low - that, and/or trending sideways for another 1-3 weeks would be dandy in terms of it. Of course re-successfully "re-testing" the SPX prior low at 945 would set up a potent double bottom - assuming there was no decisive downside penetration of THAT level. Weekly Nasdaq charts - Nasdaq Composite (COMP) & Nas 100 (NDX): The only other noteworthy thing to say about the Nasdaq, is that the narrower Nasdaq 100 (NDX) has now achieved a "potential" double bottom. Stay tuned on that!! NDX sure hasn't been able to poke its head above that very steep down trendline. S&P 100 ($OEX.X) Daily/Hourly charts: Well, this time the suggestion that 497-500 was the area to buy OEX calls again was a bit high. However, the "outer" or lower channel line intersecting at 488 WAS the right place to lay in wait and let em come to you. The return rally was not as spectacular as the drop -- they "slide" faster than they "glide" - but it sure covered a lot of lost ground. However, at the Friday close, OEX was nearing the hourly down trendline, drawn through the recent tops - intersecting at 505 currently. If this doesn't stop a further rally, then 509 or 514 WILL. Note the tendency for all recent rallies to fall apart once they register "overbought" on the very short-term hourly stochastic model (length, 5). Well, it's gotten up there again! Given the approach to resistance again, I would trade from the short/put side at expected resistance in the 505-509 zone. And, again at 514 if reached. 488-490 if seen again, looks like a place to take profits, and play the long/call side again. The only other thing to note is the lower envelope line on the daily chart - yes, it's not indicating a place where this market is bottom but it sure signals an area where further declines are resisted. The lower "band" signals the "breaking" function that tends to occur when this index gets that far under its 21-day moving average. Dow Index (1/100: $DJX.X) - Daily/Hourly charts: By expanding the percent envelope to the level where DJX topped at the last big rally (early-March) at 6%, the lower percentage envelope is in the area of recent intraday lows again. As with the OEX, the daily stochastic is again showing upward momentum based on an upside crossover, from an oversold (low) reading. As the stochastic uses the lowest day of the period of time being examined (the "length" setting; i.e., 14) it for sure is going to do this based on the Friday rebound. We have to discount this indicator as a basis for assuming that there will necessarily be a sustained rally in such a bearish climate - however, at the same time, the "oversold" condition is associated with the type of sharp rally tendencies that we have seen twice now in two weeks. Resistance comes in to play first at the hourly down trendline at 95-95.1; then, in the 96-96.2 area - I favor selling in this area if reached. First support is expected to come in around 93.5; then possibly at the Friday low at 92.6 and then in the 92 area, at the low end of the downtrend channel. I favor only buying a substantial drop. A bullish shift occurs if the pattern of successively lower highs is broken by an hourly close over 96.2. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: The dashed level line on the daily QQQ chart intersects its September intraday low. On this basis we have to assume the possibility of a bottom, given the move to a new low and the close well above it -- a classic "bear trap" reversal. Time will tell and probably not much time at that! Resistance, basis the hourly chart, is not much further overhead from the Friday close, at 28=28.2. The longer stochastic model is in the zone where the Q's have been topping recently. Only an hourly close above 28.2 would start to shift the pattern of lower (up) swing highs. 28.8-29 is the next level of resistance if there was a minor breakout move higher. Support is anticipated first at 27, then at 26-26.2. Sell rallies to the 28-28.2 with a tight stop, at 28.5. Re-short if there is a move up to 28.8-29. Buy dips to 26, if reached. MINI "TRADERS CORNER" - Response to a Subscriber Question: "Leigh, I noticed that the deviations on your envelope lines were different for each index, any reason, and why do you use envelope rather than Bollinger Bands? Also, is there a good setting for regression lines, at present mine are set 2, -2. Sometimes I switch to 2.5, -2.5, you apparently draw your own. Do you change the settings for different chart times? " RESPONSE: I set the index envelope lines according to their individual volatility over time -- volatility is not exactly the right term, but as you know the Nasdaq 100 has bigger trading swings than the Dow for example. The lines are set, relative to a simple 21-day moving average, at the percentage value where the particular index tends to make significant bottoms and tops. For the S&P 500, in recent months, this has been averaging 4.5- 5%. When the SPX gets this far above or below its 21-day moving average by this amount, it is a measure that the index is "overbought" or "oversold". As with "oscillators" like stochastics and RSI such readings, the bands suggest (at a minimum) that the probability of an upcoming trend reversal has increased substantially. There may not be a reversal, but the upward or downward momentum will tend to slow. I don’t tend to use Bollinger Bands because, for the indexes, I want a "constant" line (percent value), not a line that fluctuates above and above an average based on current (daily/weekly) volatility. This allows certain discoveries. If the SPX peaked at 5% above the 21-day avg., I look for a low of a similar magnitude the market tends to range from similar "extreme" to similar extreme, like a pendulum. If the market starts peaking or bottoming at a level that is a bit further out from the average, I may expand the percent setting by a half or full percent. Generally, I don't adjust the lines all that often. I am simply looking for an area, where the odds of a substantial further move above/below the envelope is substantially less than a countertrend move. I don't use regression lines - I "hand" draw through my best judgment on the key highs and lows. Sometimes, for example, I cut through (bisect) an extreme high or low (i.e., an "internal" trendline - one drawn through the most number of points) - a regression line may also have this result if a price spike is well above/below the trend progression. The point is, is that I don't construct trendlines mechanically. In fact, my life as an analyst trading adviser would be a lot "easier" if I didn't spend as much time as I do, re-drawing trendlines as the patterns shift. But this is the edge I may have over someone else and is probably mostly a result of experience, although I try to teach best practices in this area in my book. Lastly, on changing envelope settings for different time frames - I only use "simple" moving average envelopes on the indexes and on a daily chart basis. It’s the only time frame and instrument that seems to make envelopes really useful - and, they seem to exhibit consistent behavior - on the dailies (charts) and on the indices. Oh, their very good on the long bond chart. If you trade bond futures they're very useful. Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** Editor's Plays ************** Expiration Week This week is shaping up to be a killer expiration week. We could have serious swings in both directions. The task is to stocks that are either directional or stuck near a strike price. With only a week to go on June options a $2-$3 move in some stocks can produce a 100% return. Everyone should also realize that using current month options in expiration week is the purest form of gambling. You pay your money and take your chances. It is best to make these lottery plays with a limited number of contracts to avoid disaster. In every expiration week there are some plays that expire worthless and others that can be big winners. The trick is to not risk so much that a couple losses can wipe out all your gains. If biotechs have finally found a bottom then several stocks could move quickly on short covering. However, if Friday was a head fake then these options will expire worthless. BGEN $42.42 Jun-$45 call BGQ-FI $.40 AMGN $40.18 Jun-$42 call AMQ-FV $.60 DNA $32.53 Jun-$35 call DNA-FG $.40 CVTX $19.13 Jun-$20 call UXC-FD $.80 IMNX $21.72 Jun-$22 call IUU-FX $.50 ** favorite GENZ $26.75 Jun-$25 put GZQ-RE $.65 MDT $42.91 Jun-$40 put MDT-RH $.30 Semiconductors have not rallied yet despite the positive news from several companies last week. Yet the GNSS news did not crash the sector either. Could be a strong move if we get the right trigger. ESST $17.03 Jun-$17 call SEQ-FW $.80 AMCC $ 5.67 Jun-$5 call AEX-FA $.80 (.67 ITM) ** favorite KLIC $12.43 Jun-$12 call KQS-FV $.65 TSM $14.70 Jun-$15 call TSM-FC $.45 ** good RFMD $ 9.02 Jun-$10 put RFZ-RP $1.35 (.98 ITM) Going to $5? Misc HLIT $4.98 Jun-$5 put LOQ-RA $.40 HPQ $17.35 Jun-$17 put HHY-RW $.55 (earnings warning?) MCAF $14.91 Jun $15 call CFU-FC $.90 ORCL $ 8.57 Jun-$10 put ORQ-RB $1.55 (1.42 ITM) ORCL $ 8.57 Jun-$7.5 put ORQ-RU $.15 (lower guidance?) SEBL $14.86 Jun-$15 put SGQ-RC $.95 (toughest qtr in history?) SEBL $14.86 Jun-$12 put SGQ-RV $.15 (extreme lottery!) T $10.18 Jun-$10 put T-RB $.45 (july-$10 $.85) *********************** Remember, these are all high risk plays and should only be made with 100% risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** Are We There Yet? By Eric Utley If Friday didn't have the making for a capitulation event, I don't know what will. The bomb, the wireless downgrade, and the consumer sentiment reading I thought was the trifecta of capitulation. But it wasn't. The volume certainly wasn't there, although the advance/decline line was pretty ugly in the early going, and the new high/new low list was there too. But I just didn't see the panic selling that is indicative of a trading rally to follow. Fear was certainly on the rise. The CBOE Market Volatility Index (VIX.X) got above that 30 level that Mark Phillips was looking for. In fact the VIX reached as high as 33 on an intraday basis, but it again gave back ground into the close on the rebound in stocks. Still, there was definitely a heightened sense of fear, and tonight's put/call ratio reflects that much. The Nasdaq 100 Market Volatility Index (VXN.X) was also on the rise, but didn't give the parabolic moon shot that I was looking for. We were close, but didn't quite reach it. Going into Friday's session, the AMEX Biotechnology Sector Index (BTK.X) was one of the most beaten up sectors of the market. Yet in Friday's session, the BTK earned the day's best performing sector spot, which I think was a function of shorts finally taking profits in the group. The BTK's rebound may portend further short covering to enter other sectors of the technology segment of the market in the week or two ahead. What Friday's initial move lower did accomplish was a further drop in bullish percent measures across the board. The NYSE Bullish Percent ($BPNYA), the broadest of them all, shed another 2 percent on its way to 52. It's certainly in a bullish position, but it's still above the 50 midway point, meaning that there's more downside than upside. The Nasdaq-100 Bullish Percent ($BPNDX), the most volatile of the group, was off by another 3 stocks to the 16 percent level. Clearly the tech sector is by far the most oversold of the group, which means that it could run the most in any upcoming rally from short covering. The Dow and S&P measures are also getting down there. The COT data delivered a few surprises this weekend and I think we got some good correlation between the bullish percent data in the NASDAQ and the goings on in the futures market. Nasdaq commercial interests reached their most BULLISH reading in over a year this past week, while the small traders reached their most BEARISH reading in over a year. The divergence into extremes is usually what takes place around key turning points in the particular market. This development in light of the bullish percent data gives the upside good probability in the coming weeks for Nasdaq-100 stocks. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 9474 Moving Averages: (Simple) 10-dma: 9617 50-dma: 10009 200-dma: 9853 S&P 500 ($SPX) 52-week High: 1316 52-week Low : 945 Current : 1007 Moving Averages: (Simple) 10-dma: 1029 50-dma: 1079 200-dma: 1108 Nasdaq-100 ($NDX) 52-week High: 2071 52-week Low : 1089 Current : 1110 Moving Averages: (Simple) 10-dma: 1141 50-dma: 1261 200-dma: 1421 Biotech ($BTK) What a reversal of fortune! The BTK returned with bullish flare Friday to earn the day's best performing sector spot. The index finished 4.20 percent higher. Leaders to the upside included ImClone (NASDAQ:IMCL), Biogen (NASDAQ:BGEN), Enzon (NASDAQ:ENZN), Amgen (NASDAQ:AMGN), and IDEC Pharmaceuticals (NASDAQ:IDPH). 52-week High: 637 52-week Low : 327 Current : 355 Moving Averages: (Simple) 10-dma: 361 50-dma: 418 200-dma: 500 Airline ($XAL) Despite the troubles with telecom, the airlines were worse off Friday. The XAL earned the worst performing sector spot for the day with its 4.73 percent decline. Leaders to the downside included Northwest Airlines (NASDAQ:NWAC), Continental (NYSE:CAL), America West (NYSE:AWA), Southwest (NYSE:LUV), and AMR (NYSE:AMR). 52-week High: 146 52-week Low : 59 Current : 72 Moving Averages: (Simple) 10-dma: 76 50-dma: 88 200-dma: 89 ----------------------------------------------------------------- Market Volatility The VIX spiked above 30 Friday, but fell back below that level on the rebound in stocks. Big surprise! The VXN did the same. It reached as high as 57.58 during the day, keeping its trend of higher highs intact. CBOE Market Volatility Index (VIX) - 29.77 +1.04 Nasdaq-100 Volatility Index (VXN) - 55.67 +1.37 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 1.15 533,781 613,504 Equity Only 0.88 416,452 366,885 OEX 1.62 33,003 53,487 QQQ 0.40 57,295 22,650 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 52 - 2 Bull Correction NASDAQ-100 16 - 3 Bull Correction DOW 43 - 3 Bear Confirmed S&P 500 44 - 3 Bear Confirmed S&P 100 46 - 2 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 1.31 10-Day Arms Index 1.52 21-Day Arms Index 1.35 55-Day Arms Index 1.37 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when the do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals Advancers Decliners NYSE 1456 1741 NASDAQ 1711 1706 New Highs New Lows NYSE 39 25 NASDAQ 177 242 Volume (in millions) NYSE 1,537 NASDAQ 1,826 ----------------------------------------------------------------- Commitments Of Traders Report: 06/11/02 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 S&P commercials continued to position less bearish in the last week by adding more longs than shorts. Small traders went in the opposite direction by reducing their net bullish position by about 4,000 contracts. Commercials Long Short Net % Of OI 05/28/02 362,607 442,845 (80,238) (9.9%) 06/04/02 369,298 440,027 (70,729) (8.6%) 06/11/02 388,751 457,018 (68,267) (8.1%) 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 05/28/02 172,313 57,803 114,510 49.8% 06/04/02 167,713 58,885 108,828 48.0% 06/11/02 174,357 69,464 104,893 43.0% 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 reached a second consecutive yearly high in bullishness!!! Small traders reached their most bearish position in over a year!!! Commercials Long Short Net % of OI 05/28/02 49,669 44,900 4,769 5.0% 06/04/02 47,875 39,100 8,775 9.3% 06/11/02 45,946 36,878 9,068 10.9% Most bearish reading of the year: (15,521) - 3/13/01 Most bullish reading of the year: 9,068 - 06/11/01 Small Traders Long Short Net % of OI 05/28/02 12,562 16,969 (4,407) 14.9% 06/04/02 12,162 21,420 (9,258) 27.2% 06/11/02 14,561 25,330 (10,769) 27.0% Most bearish reading of the year: (10,769) - 06/11/01 Most bullish reading of the year: 8,460 - 3/13/01 DOW JONES INDUSTRIAL Dow commercials continued to ease out of their net bullish position last week. The group added a few more shorts, and dropped a few longs. Small traders were flat for the week. Commercials Long Short Net % of OI 05/28/02 20,289 15,513 4,776 13.3% 06/04/02 20,564 16,169 4,395 11.0% 06/11/02 20,369 17,172 3,197 8.5% 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 05/28/02 5,709 9,180 (3,471) (23.3%) 06/04/02 7,114 9,639 (2,525) (14.7%) 06/11/02 7,500 9,925 (2,425) (13.9%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *************** ASK THE ANALYST *************** Poppa Plays By Eric Utley Dads are as cool as it gets. At least mine is. In celebration of Father's Day, I'm going to review three stocks that are near and dear to the old man. Happy Father's Day to all the great dads out there! You, too, grandpa! The point and figure charts that appear in this column were created using www.StockCharts.com. Please send your questions and suggestions to: Contact Support ---------------------------- Polaris Industries (NYSE:PII) At last count, there were five Polaris machines in the household, and a whole lot of clothing and accessories. Of the five machines, three are super fast snowmobiles. Dad rides the Rocky Mountain King 800 model, with two inch paddles of course. Polaris makes all terrain vehicles, snowmobiles, motorcycles and personal watercraft. Its entrance into the motorcycle market put the company in direct competition with Harley Davidson (NYSE:HDI). PII has done incredibly well for the last two years. Its rally really began in early 2000, along with most consumer sensitive stocks. Which brings up a good point. PII is a company that is almost entirely levered to the spending of the consumer. Its products are discretionary, so if the consumer stops spending, PII could be in trouble. But the market doesn't think so, at least not recently. The stock is coming off of an all-time high up around $75, from which it's only off by about eight points. Technically, the stock is trading near a triple bottom at the $67 level. That level is pretty close to the ascending trend line that has been in place since last fall. I think if PII breaks down below its short term support, then it could be in for lower prices. But I wouldn't be bearish on the stock even if it did breakdown until we start seeing more signs that the market is giving up on the consumer. PII has been such a strong stock for over two years, so a little pullback over this summer wouldn't be such a bad thing. PII – Daily ---------------------------- Ford Motor (NYSE:F) Mine is a Ford family. That includes two big trucks, a Land Rover, and from what mom has said, a Jaguar is in the future plans. But I don't know if dad will go for that. He's kind of conservative. Anyway, Land Rover and Jaguar, as well as Aston Martin and Volvo, among others, are brands under the Ford umbrella. The auto industry is doing very well as evidenced by the run in General Motors (NYSE:GM), and stocks like Autozone (NYSE:AZO) and Group 1 Automotive (NYSE:GPI). There's been some give back in the sector over the last month, but all in all, the auto sector has done very well this year based on the strength of the U.S. consumer. Of the auto makers, General Motors is clearly doing much better than Ford. Ford is a turnaround story, noting how the company brought back its own blood into the management position and the weak performance of the stock. Over the last six months, however, F has made some technical improvements. The stock has built a base between the $14 and $18 levels, and is just coming off a new relative high. It's still on a buy signal, but the bigger thing to focus on is that F is still well below its bearish resistance line, meaning that the longer term picture is still a bearish one. The stock is trading around a five year low, which isn't the most bullish of situations. F - Below Bearish Resistance ---------------------------- Gart Sports (NASDAQ:GRTS) Gart's is a Denver based sporting goods retailer. Unless you live in the west, you've probably never heard of the company. It's similar to the Galayan's in other parts of the country. Gart's sells most all things outdoors. And dad loves the great outdoors. Since dad is a consumer, like most dads, it shouldn't come as a surprise that the three stocks are dependent on the spending of the consumer. Gart's, being a retailer, is obviously not an exception. And like PII, GRTS has been in a bull run for the last two years like most retailers. But it's given a little back over the last month. But again like PII, I think it's too early to get bearish on these types of stocks because at this point in the trend, the recent pullback can be viewed as nothing more than a routine profit taking move into what may possibly turn into an extended period of consolidation. Technically, GRTS has its bullish support line coming into play near the $30 level, which is also where the stock has some historical congestion from late April. That level may serve as support going forward. If not, then GRTS may fall back down to the $25 area. GRTS – Daily ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ************* COMING EVENTS ************* ================================================== Market Watch for the week of June 17th ================================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- None ------------------------- TUESDAY ------------------------------ BBY Best Buy Tue, Jun 18 -----N/A----- 0.21 CC Circuit City Stores Tue, Jun 18 -----N/A----- 0.07 SJM J. M. Smucker Company Tue, Jun 18 -----N/A----- 0.37 JBL Jabil Circuit Tue, Jun 18 -----N/A----- 0.11 LEH Lehman Brothers Tue, Jun 18 Before the Bell 1.05 ORCL Oracle Tue, Jun 18 After the Bell 0.12 PIR Pier 1 Imports Tue, Jun 18 Before the Bell 0.23 ----------------------- WEDNESDAY ----------------------------- ATYT ATI Technologies Wed, Jun 19 -----N/A----- 0.08 BSC Bear Stearns Wed, Jun 19 -----N/A----- 1.20 GTK Gtech Holdings Wed, Jun 19 Before the Bell 0.43 GUC Gucci Group NV Wed, Jun 19 -----N/A----- 0.41 LEN Lennar Wed, Jun 19 Before the Bell 1.24 MKC McCormick & Co Wed, Jun 19 Before the Bell 0.22 MWD Morgn Stanley Dn Wttr Wed, Jun 19 Before the Bell 0.72 RGC Regal Ent Grp Wed, Jun 19 Before the Bell 0.27 SCS Steelcase Wed, Jun 19 After the Bell -0.08 WOR Worthington Industries Wed, Jun 19 -----N/A----- 0.21 ------------------------- THURSDAY ----------------------------- BBBY Bed Bath&Beyond Thu, Jun 20 -----N/A----- 0.13 CCL Carnival Thu, Jun 20 Before the Bell 0.30 COGN Cognos Thu, Jun 20 After the Bell 0.09 DRI Darden Restaurants Thu, Jun 20 After the Bell 0.39 GS Goldman Sachs Thu, Jun 20 Before the Bell 0.99 SLR Solectron Thu, Jun 20 After the Bell -0.05 TEK Tektronix Thu, Jun 20 After the Bell 0.12 TIBX TIBCO Software Thu, Jun 20 After the Bell 0.00 ------------------------- FRIDAY ------------------------------- None ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable WTRS Waters Instruments 3:2 06/14 06/17 OZRK Bank of the Ozarks, Inc. 2:1 06/14 06/17 MI Marshall & Ilsley 2:1 06/14 06/17 ALFA Alfa Corp 2:1 06/14 06/17 SGA Saga Communications 5:4 06/15 06/17 HCBK Hudson City Bancorp 2:1 06/17 06/18 WL Wilmington Trust 2:1 06/17 06/18 YUM Tricon Global Restaurants 2:1 06/17 06/18 PMI PMI Group, Inc. 2:1 06/17 06/18 MHO Schottenstein Homes 2:1 06/18 06/19 KSWS K-Swiss Inc. 2:1 06/21 06/24 JNC John Nuveen Co 2:1 06/21 06/24 PNRA Panera Bread 2:1 06/24 06/25 PENN Penn National Gaming, Inc.2:1 06/24 06/25 THC Tenet Healthcare Corp. 3:2 06/27 06/28 GMRK GulfMark Offshore, Inc. 2:1 06/27 06/28 TRBS Texas Regional Bancshares 3:2 06/27 06/28 STJ St. Jude Medical, Inc. 2:1 06/28 07/01 JILL J. Jill Group 3:2 06/28 07/01 MMC Marsh McLennan Companies 2:1 06/28 07/01 CMC Commercial Metals 2:1 06/28 07/01 FPU Florida Public Utilities 4:3 06/28 07/01 -------------------------- Economic Reports This Week -------------------------- Earnings from the big brokerages--the Bear, Morgy, and Goldy--hit the market mid-week, while tech investors will fasten their seat belts--and wear their crash helmets?--for Tuesday evening's earning report from Oracle. This week's major economic reports include Tuesday's CPI and Housing Starts. Then there's Thursday's Leading Economic Indicators and the Philly Fed report. Other than that it will be a very quiet week! ============================================================== -For- Monday, 06/17/02 ---------------- None Tuesday, 06/18/02 ----------------- CPI (BB) May Forecast: 0.1% Previous: 0.5% Core CPI (BB) May Forecast: 0.2% Previous: 0.3% Housing Starts (BB) May Forecast: 1.600M Previous: 1.555M Building Permits (BB) May Forecast: 1.620M Previous: 1.634M Wednesday, 06/19/02 ------------------- None Thursday, 06/20/02 ------------------ Initial Claims (BB) 06/15 Forecast: 385K Previous: 390K Current Account (BB) Q1 Forecast:-$107.5B Previous: -$98.8B Trade Balance (BB) Apr Forecast:-$32.1B Previous: -$31.6B Leading Indicators (DM) May Forecast: 0.2% Previous: -0.4% Philadelphia Fed (DM) Jun Forecast: 10.6 Previous: 9.1 Treasury Budget (DM) May Forecast:-$60.0B Previous: -$27.9B Friday, 06/21/02 ---------------- None Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 06-16-2002 Sunday 2 of 5 ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************** INDEX TRADER GAMEPLANS ********************** THE SECTOR BEAT - 6/16 by Leigh Stevens What a day on Friday and the week - not only for the market, but a lot was going on in the sectors too. Airlines took another hit. The small cap Amex Composite and the Russell 2000 rebounded from support areas - these groups have retraced around 50% of their strong rallies from the Sept. bottom, which is some contrast to the main indices and big cap stocks many of which are at or near their prior bottoms. Biotech bounced from the low end of a long-standing downtrend channel and may finally be ready for an oversold bounce - time will tell if its more than a feeble "dead cat" one. The Broker- dealer index may have hit at least a temporary bottom. The Cyclical index rebounded strongly after approaching its 200- day MA but is under strong resistance yet. The Defense stocks are retreating again from its bear flag formation as predicted. The Forest & Paper Products group is holding important prior lows. The High Tech index is trying to bounce from the low end of its downtrend channel - stay tuned on tech. Healthcare (HMO) may have topped out - stay tuned on this one. The Health Provider sector is continuing to correct but bounced from its 50-day MA. Gold and Silver sector index (XAU) is bounding from its 50% retracement line, but may have lower to go. Oil Services (OIH) is holding prior lows from April - may be a buy again. And, the Oil Sector (OIX) rebounded from important chart and 200-day MA support levels. The Software Index (GSO) is hanging in around its May lows - Microsoft is still making money and so are some others - hardware may be in a funk but replacement/upgraded software is to PCs like razors are to their holders. Telecoms (XTC) look like they will never find support - but may have found a "resting" place around recent lows at the low end of its downtrend channel. The chipmakers or Semiconductors (SOX) index is resisting more than a 75% retracement of its Sept - March uptrend - contrasted to the Nas 100 (NDX) hitting its Sept. bottom already. And, the Transports - the Dow Transportation Average - continues to look like it is bottoming - enough strength in trucking, air transport and in rails to offset the 5 airlines in this 20 stock index. HIGHER ON THE DAY ON Friday - DOWN ON THE DAY on Friday - SECTOR HIGHLIGHT - Healthcare Index; Morgan Stanley ($HMO.X) STOCKS: AET; AHG; ATH; CAH; CI; FHCC; HUM; MME; OHP; OPTN; PHSY; TGH; THC; UNH; WLP PRIOR COMMENTS - Saw potential of top and downside reversal as suggested by the bearish price/RSI divergence. A close below 620 should provide initial evidence for a downside reversal, but "confirmation" would be on a close under 620. Reversal could be in progress based on recent price action and possible double top. However, break of trendline is the "confirming" event. More time is needed to assess this one. HMO needs to regain prior high to suggest that at least interim top is not forming. TRADE RECOMMENDATIONS & REVIEW - NEW TRADES - Buy BBH, Biotech HOLDR's at 80.50 or less; Stop: 76.70 Recent Close: 82.96 - 6/14 Objective: 93 or higher TRADE TYPE: High Risk RATIONALE: Biotech has retreated to low end of downtrend channel and is oversold; play is for a bounce, back up to resistance in mid channel TRADE LIQUIDATIONS - STOPPED OUT ON LONG SMALL CAP iSHARES - Exited IJS iShares, S&P 600 Value, long at 90.9 - sold at 87.00 on 87.3 stop OR - alternatively, one of either: IJT iShares, S&P 600 Growth long at 74.85 - sold at 71.60 on 72.00 stop IWM iShares, Russell 2000 Index, long at 93.80 - at 89.60 on 89.70 stop TRADE NOTE: Caught in extreme volatility of Friday and stopped out on opening. All closed well above opening levels which exceeded support levels slightly, then rebounded. Those still long, use suggested stops on close-only basis; i.e., exit only on closes below stop points. Will consider reentry if the group exhibits bottoming action ahead. OPEN POSITIONS - NONE SECTOR REVIEW - Airline Index ($XAL.X) STOCKS: ALK; AMR; AWA; CAL; DAL; FRNT; KLM; LUV; NWAC; U; UAL PRIOR COMMENTS: Close under 76.00 suggests possibility that XAL could move to next potential support around 70. The weak get weaker! Airlines fell sharply when XAL fell under prior "line" of support at 75.3 and closed near its low at 72, at next support; if 72 is pierced, next lower support looks like 65- 66 area. Resistance is at 74-75. Sector remains under pressure - flying is a drag these days and summer driving is in vogue. Business travelers haven't come back in force either. LAST UPDATE: 6/16 Amex Composite Index ($XAX.X) 863 is major support, but XAX bounced from line of support in 897 area. LAST UPDATE: 6/16 Bank Index ($BKX.X) STOCKS: BAC; BBT; BK; C; CMA; FBF; FITB; GDW; JPM; KEY; KRB; MEL; NCC; NTRS; ONE; PNC; SOTR; STI; STT; USB; WB; WFC; WM; ZION PRIOR COMMENTS: Significant double top in place in 916-918 area; well under its 200-day moving average; downside target to 830 was exceeded; possible that BKX could retest Feb. lows in 780 area. Strong recent rebound, after index exceeded a 75% retracement of Sept - March rally. Bullish action if sector can close back above 845. LAST UPDATE: 6/16 Biotechnology Index ($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 PRIOR COMMENTS - Saw potential of top and downside reversal as suggested by the bearish price/RSI divergence. A close below 620 should provide initial evidence for a downside reversal, but "confirmation" would be on a close under 620. ** SEE CHART ABOVE IN SECTOR HIGHLIGHT SECTION ** Reversal could be in progress based on recent price action and possible double top. However, break of trendline is the "confirming" event. More time is needed to assess this one. HMO needs to regain prior high to suggest that at least interim top is not forming. LAST UPDATE: 6/16 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 ($DRG.X) - STOCKS: AHP; AMGN; AZN; BMY; FRX; GSK; IVX; JNJ; KG; LLY; MRK; PFE; PHA; SGP Retail Index; S&P - CBOE ($RLX.X) STOCKS: ABS; AZO; BBBY; BBY; BLI; CC; COST; CVS; DDS; DG; FD; GPS; HD; JCP; JWN; KM; KR; KSS; LOW; LTD; MAY; ODP; RSH; S; SHW; SPLS; SWY; TGT; TIF; TJX; TOY; WAG; WIN; WMT Russell 2000 Index ($RUT.X) The Russell 2000 has had one close under the Feb. double bottom low in the 456 area. A rebound is needed to above this level to suggest that the RUT was going to stop its correction here. Below, 456, a next downside target is projected at 449-450; then, around 432. The RUT iShares (IWM) are, so far, holding above its prior (Feb.) low at 90. A key juncture. Semiconductor Sector Index ($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 ($GSO.X) STOCKS: ERTS; INFA; INKT; INTU; ISSX; ITWO; IWOV; JDEC; MANU; MENT; MSFT; MUSE; NATI; NOVL; NTIQ; ORCL; PMTC; PRGN; PRSF; PSFT; RATL; RETK; REY; RHAT; RNWK; SEBL; SNPS; SY; SYMC; TIBX; VIGN; VRTS; WEBM; WIND; YHOO Bullish Price/RSI divergence and possible exhaustion gap signals some further upside. Bullish falling "wedge" pattern is bullish as well. A move above 120 would be an initial indication that GSO could reverse its downtrend for a time. Software sector index has fallen from the 200 area in Feb. to 114 recently. A close below 1113 would suggest that further weakness was possible as it would exceed both the early-May bottom and the September lows. LAST UPDATE: 6/13 TelecomS Index; No. American ($XTC.X) STOCKS: AT; BLS; FON; LU; LVLT; MCIT; NT; NXTL; Q; SBC; T; TMX; VZ; WCOM 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 *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu Week DGX 88.24 0.96 -0.50 -2.17 -0.95 -2.69 Good support BRCD 19.77 0.56 0.13 -0.89 0.13 0.22 Dropped AZO 80.59 -0.43 -0.25 -0.23 -1.04 -2.36 Rally ready WLP 80.95 -0.11 5.80 0.80 -2.15 2.89 Dropped OHP 49.33 0.45 0.68 0.06 -0.54 0.28 10-dma entry BGEN 42.42 -0.74 -1.63 -0.60 0.25 0.26 New, support VRTX 17.83 0.26 -1.58 0.12 0.39 0.41 New, rebound PUTS GS 72.85 0.79 -2.64 0.40 -1.20 -1.10 Dropped WHR 66.40 -0.22 -1.45 1.78 -1.53 -2.35 $65 bounce PMI 76.90 -0.80 -3.04 -0.53 -2.41 -5.90 Touched $75 MMC 92.55 0.86 -2.39 -1.14 -1.62 -3.79 Resistance MIL 34.07 -0.37 -1.42 -1.43 -0.06 -3.15 At entry HIG 59.93 0.00 -2.20 0.50 -1.70 -3.07 Short cover SPW 121.21 -6.86 -3.40 3.20 -2.52 -9.05 Broken low ENZN 25.54 0.82 -1.86 1.01 -0.39 1.26 Pulled back IBM 76.20 -1.50 -1.31 -0.86 0.95 -2.10 Entry point RYL 49.10 -2.41 1.03 0.16 -3.22 -4.52 Below $50 IWM 91.50 -0.10 -1.50 0.30 -1.30 -2.10 New lower low LLL 52.05 1.19 -1.00 -1.14 -2.90 -6.50 Exit at 50??? CB 70.30 0.02 -2.30 -0.30 -2.00 -3.63 Rollover next ZLC 39.13 -0.43 -0.55 0.08 -1.08 -1.85 10-dma entry PDX 23.37 -11.91 0.55 -0.77 -1.16 –14.74 New, trend ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* BGEN – Biogen, Inc. $42.42 (+0.26 last week) See details in play list Put Play of the Day: ******************** PDX – Pediatrix $23.37 (-14.74 last week) See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ WLP $80.95 (+2.89) WLP fell further into its gap during today’s session. The stock should’ve held up better given the weakness in the broader market. We’re afraid that it could pullback further down to its gap from Tuesday and erase the gains that we captured. The stock could rebound if it fills its gap, but we don’t want to take the risk of letting our profits slip away. Look for a bounce to exit into. BRCD $19.77 (+0.28) After what turned out to be an exceptionally volatile week in the broad markets, BRCD closed with a fractional gain. Despite its resilience in the face of several negative factors, we are having a hard time justifying keeping the play active. BRCD just hasn't been able to advance and with the broad markets still looking rather weak, the prudent choice is to pull the plug this weekend. The tight range the stock has been trading in works against option buyers as the passage of time decays the option premium. We're removing BRCD from the play list this weekend to make room for better candidates. PUTS ^^^^ GS $72.85 (-1.10) It's been a wild and wooly path for our GS play, but it has been a solid winning play nonetheless. When we initiated coverage, our target was a drop to the $70 level, which GS visited twice last week. With the second bounce off that level on Friday and the strong rebound in the Brokerage sector, it's time to harvest our gains and move on. Use any weakness early next week to close out open plays. *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 06-16-2002 Sunday 3 of 5 ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** NEW CALL PLAYS ************** BGEN – Biogen, Inc. $42.42 (+0.26 last week) Biogen is a biopharmaceutical company primarily engaged in the business of developing, manufacturing and marketing drugs for human healthcare. BGEN currently derives revenues from sales of its Avonex product for the treatment of relapsing forms of multiple sclerosis and from royalties on worldwide sales by the company's licensees of a number of other patented products. Other products include certain forms of alpha interferon, hepatitis B vaccines and hepatitis B diagnostic test kits. In order to maintain its leadership role in the industry, BGEN continues to have an active research and development program. The recent plunge in the Biotech sector (BTK.X) has gotten a lot of play in the media in recent weeks and judging by the strong rebound off the lows on Friday, it may be the bulls' turn in the spotlight. While there is no doubt that the sector is very weak, it is quite possibly due for a sustained oversold rebound in the near-term. Aside from the current circus surrounding the alleged misdeeds at IMCL, few firms in the sector have received more attention lately than BGEN. After shooting higher on May 24th on the heels of its Amevive approval from the FDA advisory committee, that move was reversed on June 7th on the company's downward revision of Avonex Sales. Then Thursday night, the company received a 'Complete Response' letter from the FDA on Amevive, which included a request for further clarification of data previously submitted. The initial response was negative driving the stock down to the $37 in the after-hours session before further analysis revealed that the request was not a negative. BGEN shot higher at the open on Friday, gaining nearly $3 to end at the high of the day on volume that nearly doubled the ADV. Can you say volatility? So can we, and given the strong performance on Friday, BGEN looks like it could lead the BTK index on a decent rally next week. The stock came to rest right at recent resistance near $42.50, and a breakout above $43 could lead to filling the gap up to the $47.50 level. An intraday dip near the $40 level would make for an even better entry, provided it is followed by solid buying volume. We are initiating coverage with our stop set at $38.50, the site of last week's intraday lows. *** June contracts expire this week *** BUY CALL JUN-40 BGQ-FH OI=9572 at $3.00 SL=1.50 BUY CALL JUL-40 BGQ-GH OI=2075 at $4.50 SL=2.75 BUY CALL JUL-45*BGQ-GI OI=6236 at $1.65 SL=0.75 BUY CALL OCT-45 BGQ-JI OI=2814 at $4.00 SL=2.50 Average Daily Volume = 4.64 mln VRTX – Vertex Pharmaceuticals $17.83 (+0.41 last week) Seeking to discover, develop and commercialize novel small-molecule drugs that address significant markets with major unmet medical needs, VRTX is a relatively small, but potent biotechnology company. Targeting the treatment of viral diseases, cancer, auto-immune and inflammatory diseases and neurological disorders, the company's drug design platform integrates advanced biology, chemistry, biophysics and information technology to make the drug discovery process more efficient and productive. BGEN definitely lit the fire for a recovery in the Biotech sector (BTK.X) on Friday following clarification of the 'Complete Approval' letter from the FDA regarding its Amevive drug. That helped the BTK to recover from its multi-year lows near $328 and by the time the dust had cleared at the closing bell, it was the best performing sector with 4.2% gain. This area of the market has been heavily sold over the past several weeks and appears overdue for an oversold rally. Away from BGEN, there are other stocks in the sector that are looking ready for a meaningful rally as well. Foremost among them is VRTX, which has now successfully tested the September lows near $15.50. After hitting that level again last Wednesday, the stock began to see some buying interest, which really picked up speed on Friday on the back of the BGEN-motivated sector strength. Even the early morning weakness on Friday was unable to drive VRTX back under the $16 level, before the bulls showed up with cash in hand to drive the stock higher for a better than 7% gain on the day. Undoubtedly, a portion of the buying was from shorts covering, and there should be more of that action as the stock clears the $18 level and then $19. Due to the significant overhead resistance, the best entries will present themselves on intraday dips to support, first at $17 and then down near $16. When buying the dips, we need to watch for buying in the BTK to confirm any bullish action in VRTX. We can set a tight stop at $15.40, just below its multi-year lows. *** June contracts expire this week *** BUY CALL JUN-17 VQR-FW OI=140 at $0.95 SL=0.50 BUY CALL JUL-17 VQR-GW OI=220 at $1.70 SL=0.75 BUY CALL JUL-20*VQR-GD OI=608 at $0.75 SL=0.25 BUY CALL AUG-20 VQR-JD OI= 5 at $2.05 SL=1.00 Average Daily Volume = 987 K ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ****************** CURRENT CALL PLAYS ****************** AZO – AutoZone, Inc. $80.59 (-2.36 last week) AutoZone is a retailer of automotive parts and accessories, primarily focusing on do-it-yourself customers. Each of its more than 2900 stores in 42 states and Mexico carries an extensive product line for cars, vans and light trucks, including new and re-manufactured automotive hard parts, maintenance items and accessories. Approximately half of its domestic stores also have a commercial sales program, which provides commercial credit and prompt delivery of parts and other products to local repair garages, dealers and service stations. Was that the entry point we've been patiently waiting for? Significant negative developments for the broad market drove all the major indices below major support levels last week, but they clawed their way back at the close on Friday. AZO took a plunge down to the $79 level but then rebounded to close back over the $80 level. The big question is whether this is the beginning of a decent rally or if it is just a short-lived oversold bounce. The sharp dip in Consumer Confidence numbers Friday morning could be an important warning sign for our AZO play, because if consumers are tucking their wallets away, that resultant lack of spending will be felt even by strong stocks like AZO. Despite this bearish influence, AZO continues to behave well relative to the broader markets and until the stock gives up this position of relative strength, we continue to like the stock on intraday dips. Repeated rebounds from the $80 level can still be used for entering new positions, although more conservative traders will want to wait for a move through the $81 intraday resistance before playing. We are leaving our stop at $79.50 and a close below that level will move AZO to the drop list. Keep a sharp eye on the intraday volume and look for strong buying volume before playing. *** June contracts expire this week *** BUY CALL JUN-80 AZO-FP OI=3064 at $1.85 SL=1.00 BUY CALL JUL-80*AZO-GP OI= 698 at $3.90 SL=2.50 BUY CALL JUL-85 AZO-GQ OI= 854 at $1.70 SL=0.75 BUY CALL SEP-85 AZO-IQ OI= 480 at $4.80 SL=3.00 Average Daily Volume = 1.03 mln DGX – Quest Diagnostics $88.24 (-2.69 last week) Quest Diagnostics was the result of a 1996 Corning spinoff, and currently holds the title of the world's #1 clinical laboratory. DGX performs more than 100 million routine tests annually, including cholesterol, HIV, pregnancy, alcohol, and pap smear tests. Operating laboratories throughout the US and in Brazil, Mexico, and the UK, DGX also performs esoteric testing (complex, low-volume tests) and clinical trials. The company serves doctors, hospitals, HMOs, and other labs as well as corporations, government agencies, and prisons. Friday appears to have been a defining moment for our DGX play, with the opening lows falling right to the ascending trendline near $85.50 before staging an impressive rebound to close the day essentially unchanged. That leaves the stock just fractionally above our $88 stop and the big question is whether this was a high odds entry point or a warning of more weakness to come. Given the quick bounce off the trendline, we're leaning towards this being an entry point, but we will likely need to see some follow through early next week to convince existing longs to stay long. Intraday dips as low as $87.50 can be used to establish new positions, but keep in mind that our stop remains at $88. A close below that level will spell an end to our play, so the more conservative approach will be to wait for a move back through the $90 resistance level. While the HMO index closed negative on Friday, its rebound off the lows can be viewed as a successful test of the $625 support level. Look for the HMO index to hold this support level and stronger buying volume to propel DGX higher as confirmation that the bulls have regained the upper hand. *** June contracts expire this week *** BUY CALL JUN-85 DGX-FQ OI=2300 at $3.90 SL=2.50 BUY CALL JUN-90 DGX-FR OI= 618 at $0.75 SL=0.25 BUY CALL JUL-90*DGX-GR OI=1380 at $3.00 SL=1.50 BUY CALL JUL-95 DGX-GS OI= 365 at $1.20 SL=0.50 Average Daily Volume = 936 K OHP – Oxford Health Plans, Inc. $49.33 (+0.28 last week) Oxford Health Plans is a healthcare company providing health benefit plans primarily in New York, New Jersey and Connecticut. The company's product line includes its point-of-service plans, the Freedom Plan and the Liberty Plan, health maintenance organizations, preferred provider organizations, Medicare+Choice and third-party administration of employer-funded benefit plans. Given the wild swings in the broad market last week, the action in our OHP play was downright encouraging. Friday was a perfect example of the stock's relative strength, as it only dipped to the 10-dma ($48.84) before rebounding for most of the day. Unfortunately, the stock wasn't able to hold altitude and fell back to close in the lower half of its intraday range. The action in the Health Care Payor index (HMO.X) is instructive here as well, dropping to the $625 support level before rebounding for much of the day. Just like OHP, the HMO index fell back in the final 90 minutes of trading, making it hard to call victory for either the bulls or the bears. We're looking for the bulls to continue defending both OHP and the HMO index near support next week, so we want to continue pursuing entries on intraday dips. The ideal opportunity would come with another dip near the 10-dma on OHP with the HMO index confirming its own support near $625. Of course, more conservative players will want to wait for a rally through the $51 level before taking a position. We are keeping our stop set at $47. *** June contracts expire this week *** BUY CALL JUN-47 OHP-FT OI=1820 at $2.30 SL=1.25 BUY CALL JUN-50 OHP-FJ OI=1293 at $0.65 SL=0.25 BUY CALL JUL-47 OHP-GT OI= 509 at $3.20 SL=1.50 BUY CALL JUL-50*OHP-GJ OI= 450 at $1.70 SL=0.75 BUY CALL AUG-50 OHP-HJ OI=2082.at $2.50 SL=1.25 Average Daily Volume = 783 K ************* NEW PUT PLAYS ************* PDX – Pediatrix $23.37 (-14.74 last week) Pediatrix Medical Group, Inc. is a provider of physician services at hospital-based neonatal intensive care units (NICUs). NICUs are staffed by neonatologists, who are pediatricians with additional training to care for newborn infants with low birth weight and other medical complications. In addition, the Company is a provider of perinatal physician services. Perinatologists are obstetricians with additional training to care for women with high risk and/or complicated pregnancies and their fetuses. One scandal after another is rocking the market. And it seems no industry is immune. Last week PDX took a tumble after the Federal Trade Commission requested information about the company’s acquisition of its chief rival Magella. The acquisition was a much hyped and highly touted event for PDX which saw its stock sore into the close of the merger, which brought together the two largest managers of neonatologists and perinatologists. Though the details of the FTC’s probe were not released, investors decided to shoot first and ask questions later. The stock tumbled on the announcement and continued to slide as the week wore on without so much as a sign of relief on the horizon. The downward momentum appears to be picking up steam as the stock didn’t even try to rebound during today’s session like the broader market did. With volume continuing to come in at well above the average daily trading and the stock continuing to decline, momentum players can look to enter new put plays early next week on a breakdown below the $23 level. Just make sure to confirm heavy intraday trading activity on such a breakdown. Below the $23, the stock doesn’t have much in the way of support until the $20 mark. And below there, it’s empty to around the $15 level. Our stop Is in place at the $27.50 level. BUY PUT JUL-30 PDX-SF OI=19 at $7.40 SL=4.75 BUY PUT JUL-25*PDX-SE OI=54 at $3.50 SL=1.75 Average Daily Volume = 383 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 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 06-16-2002 Sunday 4 of 5 ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************** CURRENT PUT PLAYS ***************** ENZN – Enzon, Inc. $25.54 (+1.26 last week) Enzon is a biopharmaceutical company that develops and commercializes enhanced therapeutics for life-threatening diseases through the application of its two proprietary platform technologies: polyethylene glycol (PEG) and single-chain antibodies. The company applies PEG technology to improve the delivery, safety and efficacy of proteins and small molecules with known therapeutic efficacy. ENZN applies its single-chain antibody technology to discover and produce antibody-like molecules that offer many of the therapeutic benefits of monoclonal antibodies while addressing some of their limitations. So ENZN had a solid 7% gain on Friday to close just below major resistance. The important question for the bulls to answer is whether they feel lucky. Few sectors in the market have been beaten up as badly as the Biotechs in recent weeks, and there is still plenty of air underneath the Biotechnology index (BTK.X) before it reaches meaningful support ($290) and the bounce that began on Friday could very well be little more than an oversold rebound before the bears re-emerge from their caves. As evidence that the rebound in ENZN was little more than short-covering, it is interesting to note that the rally stopped cold just below the $27 level before dropping sharply at the end of the day. While that reversal right at resistance looked like a solid entry point into the play, we'll need to see how things shake out next week before we'll know for sure. Additional failed rallies below resistance can be used for new entries, while a drop back under the $24.75 intraday support level could also be used to initiate new plays. ENZN's recent lows at $23 are really the line in the sand and we'll need to see that level broken before we'll know for sure that the bears are still in control. Monitor the action in the BTK for signs of additional weakness before playing and keep stops set at $27. *** June contracts expire this week *** BUY PUT JUN-25 QYZ-RE OI=171 at $1.05 SL=0.50 BUY PUT JUL-25*QYZ-SE OI=273 at $2.40 SL=1.25 BUY PUT JUL-22 QYZ-SX OI=376 at $1.25 SL=0.50 Average Daily Volume = 1.42 mln IBM - International Bus. Machines $76.17 (-2.13 last 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. The action in the broad markets on Friday provided a stark reminder of how fragile current investor sentiment is. The negative international news and sharp drop in Consumer Sentiment sent the broad markets plunging to new lows for this cycle before solid buying (short-covering) sent the indices back near the unchanged level at the close. IBM fell right to its lows from earlier in the week ($73.25) before recovering steadily throughout the day to post a fractional gain. While a fractional gain may not sound great, it is important to note that the stock was the second best gainer on the DOW, second only to MSFT. Recall that a primary catalyst for this play is our expectation that the company will have to warn ahead of earnings due to a big shortfall in service orders. Strong rumors have been circulating that the company has on the order of $4 billion in service orders to companies that have recently filed for bankruptcy. If these rumors turn out to be true, IBM will be quickly hitting new multi-year lows. The PnF chart is pointing to the likelihood of more price weakness, as IBM is currently on a sell signal with a price objective of $61. With the broad markets currently so near the September lows, it seems reasonable to expect that they will test those levels before any serious rally erupts and we're looking for IBM to be one of the leaders to the downside. Use intraday rallies near the $78-79 resistance zone to initiate new positions, or else wait for a drop below the $73 level. If entering on a drop to new lows, make sure the selling volume is heavy. While waiting for resolution of the current bull-bear tug-of-war, we are keeping a fairly wide stop at $80. *** June contracts expire this week *** BUY PUT JUN-75 IBM-RO OI=19232 at $1.45 SL=0.75 BUY PUT JUL-75*IBM-SO OI=29685 at $3.50 SL=1.75 BUY PUT JUL-70 IBM-SN OI=17038 at $1.85 SL=1.00 Average Daily Volume = 8.52 mln IWM – Russell 2000 iShares $91.50 (-2.10 last 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. As we mentioned on Thursday, we're looking for the upcoming re-shuffling of the components of the Russell 2000 to have a bearish impact on the index leading up to the end of the month. Despite the relative outperformance of small-cap stocks since the September lows, the Russell 2000 has been experiencing significant weakness since tagging a fresh 18-month high in mid-April. The decline over the past month had dropped the IWM right to the level of its February lows as of Thursday. The early drop on Friday morning created a fresh PnF triple-bottom sell signal and the bearish price objective has now been extended down to $76. Additionally, the drop below $90 violated the bullish support line for the first time since the September lows. With that being said, the rebound off the lows on Friday had the looks of a bear-trap, so we need to be careful. In addition to the bearish developments on the PnF chart, IWM is now solidly below its 200-dma ($93.74) and has been finding resistance below the 10-dma ($92.98) for the past month. The action in the broad market will be critical to our play. So long as the bears remain in control, we can look for the IWM to continue its decline. Look to enter new positions as the current rebound runs out of steam, ideally below the 10-dma, but possibly as high as $94. Our stop remains at $95. *** June contracts expire this week *** BUY PUT JUN-95 IWM-RS OI= 482 at $4.10 SL=2.50 BUY PUT JUN-90 IWM-RR OI= 73 at $1.00 SL=0.50 BUY PUT JUL-95*IWM-SS OI=2500 at $5.10 SL=3.50 Average Daily Volume = 1.16 mln LLL - L-3 Communications Holdings $52.05 (-6.50 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. With Defense stocks apparently falling from the lofty position that they have held since the September lows, it is no surprise that the bears are starting to lean on this sector. 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 on Friday broke major support in the $54-55 area. It isn't often that you get such a perfect entry point, but LLL gave us just what we were looking for on Friday. After the small gap lower with the rest of the broad market, LLL rallied right to the top of that gap (just below $55) before rolling over in the afternoon on heavy volume. After trying to defend the $53 level as support, the bulls gave up at the end of the day, allowing the bears to shave another $1 off the stock's price by the closing bell. The break below $55 created a triple-bottom sell on the PnF chart and LLL is now resting right on its ascending support line at $52. The bearish price target from the PnF chart is $43, which corresponds nicely with major support in the $44-45 area. Before reaching that point however, the bears will have to deal with the 200-dma at $50.40 (a very likely bounce point) and further support at $48 (the site of the October highs). While a drop below Friday's lows can be used for initiating new positions, we would prefer to enter on the next failed rally, either at $53 or up at $55. A really vigorous rebound could even get LLL up to the $56-57 area, but it is very likely the bears would lean heavily on the stock should that come to pass. We are lowering our stop to $57 this weekend. *** June contracts expire this week *** BUY PUT JUN-52 LLL-RX OI= 552 at $2.25 SL=1.00 BUY PUT JUL-52 LLL-SX OI= 598 at $4.20 SL=2.50 BUY PUT JUL-50*LLL-SJ OI=2857 at $3.10 SL=1.50 Average Daily Volume = 985 K RYL – The Ryland Group $49.10 (-4.52 last 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. Like the rest of the market on Friday, the Housing sector got hit hard at the open, but then rebounded sharply as investors stepped forward to gobble up the perceived bargains. After dipping to the $340 level, the DJ US Home Construction index ($DJUSHB) rebounded to actually close in positive territory. Despite that impressive recovery, the index is still resting below significant resistance at the $360 level. The drop in bond rates gave a bit of a bid to the homebuilders, possibly on the thought that mortgage rates might dip a bit further. If that seems like a bit of a stretch to you, we quite agree. The housing sector had quite a run coming out of the September lows and with consumer confidence contracting significantly in the latest reporting period, it is time to pay the piper. Due to its recent loss of relative strength, RYL got our attention last week when it fell under major support at $50. Typical of the action one would expect after such a significant breakdown, the stock attempted to rally with the rebound in the broad markets on Friday, but failed miserably at $50.50, which is likely to provide significant resistance going forward. That isn't to say that RYL can't move a bit higher on an oversold rebound next week, but we would look at any move into the $51-52 area as an attractive entry point. Due to the oversold nature of the broad markets and the possibility of a decent rebound next week, we want to give RYL some room to move, so we are keeping our stop fairly liberal at $54. Of course, a drop under Friday's lows ($47.50) would likely usher in a fresh wave of selling and could also be used for new entries with a drop to the next level of support at $43 as our initial target. *** June contracts expire this week *** BUY PUT JUN-50 RYL-RJ OI=1325 at $1.70 SL=1.00 BUY PUT JUL-50*RYL-SJ OI= 986 at $3.40 SL=1.75 BUY PUT JUL-47 RYL-SW OI= 417 at $2.30 SL=1.25 Average Daily Volume = 700 K WHR - Whirlpool $66.40 (-2.35 last week) Whirlpool Corporation is a worldwide manufacturer and marketer of major home appliances. The Company manufactures in 13 countries under 11 major brand names and markets products to distributors and retailers in more than 170 countries. The Company manufactures and markets a full line of major appliances and related products, primarily for home use. The Company's principal products are home laundry appliances, home refrigerators and freezers, home cooking appliances, home dishwashers, room air-conditioning equipment, and mixers and other small household appliances. The Company also produces hermetic compressors and plastic components, primarily for the home appliance and electronics industries. The Commerce Department’s report of a 0.9 percent drop in Retail sales during the month of May to $297 billion sent a chill through the spine of investors who are counting on the consumer to carry the U.S. economy to the promised land. The news sparked a sell off during Thursday’s session after the report was released. Then more bad news was delivered early Friday morning by the University of Michigan, whose consumer sentiment index took an unexpected plunge lower during the early part of this month. Clearly the writing is on the wall that the consumer is at least losing strength, if not starting to reign in their spending habits. That spells trouble for a lot of stocks in this market that have held up well so far this year thanks to the consumer. But as we’ve seen in many charts over the last month, many of these consumer related stocks are starting to lose significant ground. Obviously WHR falls into this camp, and the stock’s failure to rebound last Friday along with the broader market indicates that even more weakness is likely ahead in the coming weeks. The stock is now firmly below its 200-dma and should start trending lower on further weakness in the broader market. The one potential short term support level was seen last Friday at the $65 level where the stock has some historical trading during the steep sell off in February. The bulls are likely to try to defend that level, but should give in once they see the stock rollover once again next week. Look for intraday rallies up to the congestion zone between the $67 and $69 levels for a rollover entry point. Or use a breakdown below $65 to enter new put plays. ***June contracts expire next week*** BUY PUT JUN-70 WHR-RN OI=601 at $3.90 SL=2.75 BUY PUT JUL-65 WHR-SN OI= 33 at $2.40 SL=1.25 Average Daily Volume = 555 K PMI - PMI Group $76.90 (-5.90 last week) The PMI Group, Inc. is an international provider of credit enhancement products and lender services that promote home ownership and facilitate mortgage transactions in the capital markets. Through its wholly and partially owned subsidiaries, the Company offers residential mortgage insurance and credit enhancement products domestically and internationally, title insurance, financial guaranty reinsurance, mortgage servicing and other residential lender services. Residential mortgage insurance protects lenders and investors against potential losses in the event of borrower default. Last Friday’s daily trading volume was the lightest in four days. It’s no surprise that the stock finished higher on relatively lighter volume. The two combined together revealed that Friday’s rebound was no more than short covering in our view. The stock was due for a bounce, and the reversal in the broader market was simply the catalyst to ignite such a bounce in PMI. But if the stock’s trend is of any indication of future direction, any relief rally should be short lived looking out over the next two weeks. That means we can start looking for failures at resistance and subsequent rollover entry points to gain new put plays in this stock which looks to be headed lower into the summer months. But as traders we need to find favorable execution into new put plays. The stock has traced four consecutive daily relatively lower highs. That pattern could be broken next week if the $78.62 high from Thursday’s trading is exceeded. That should bring on further short covering into the stock and even more if the broader market continues to rebound from its oversold condition as well. Be patient, and pick a good spot for a rollover. That could be as high as the $80 level up around the 10-dma. Of course a reversal lower in the market could lead to a breakdown below the short-term support level that was established during Friday’s session low at the $75 level. A break below there could lead to the next momentum move lower. ***June contracts expire next week*** BUY PUT JUN-80 PMI-RP OI=128 at $3.70 SL=1.50 BUY PUT JUL-80*PMI-SP OI= 15 at $4.90 SL=3.00 Average Daily Volume = 325 K MMC - March Mclennan $92.55 (-3.79 last week) Marsh & McLennan Companies, Inc. is a professional services firm. MMC subsidiaries include Marsh Inc., a risk and insurance services firm; Putnam Investments, LLC, an investment management company in the United States; and Mercer Consulting Group, Inc., a global provider of consulting services. Approximately 58,000 employees worldwide provide analysis, advice and transactional capabilities to clients in over 100 countries. MMC operates in three principal business segments: risk and insurance services, investment management and consulting. We witnessed about a $8 swing in MMC from its rollover from the 10-dma earlier in the week to the low hit early Friday morning at the $90.25 level. We hope that you took advantage of that move lower in the early going to book some very tidy short term profits in the stock. Looking forward, there’s room to the upside for the stock to rebound given its oversold nature that has developed over the last three weeks. The stock was oversold going into Friday’s session, so a little relief rally over the next two or three days wouldn’t be such a bad thing for put players looking to gain new entry points. But it could be a bad thing for players with open positions. Just make sure to have a good solid stop in place going into next weeks trading in order to hard earned profits from last week. As for new entry points, a trade up through the current over head congestion zone between the $93 and $95 levels should be enough upside to remove the stock’s oversold nature over the coming two or three days. We’ll look for another failure from the 10-dma above that congestion zone, which closed Friday at the $96.10 level. Given the trade down to the $90 shorter term target, the level could act as support over the next two weeks. But an eventual break below that level should lead MMC back down to the $80 given enough time. ***June contracts expire next week*** BUY PUT JUL-100*MMC-ST OI= 277 at $6.10 SL=4.75 BUY PUT JUL- 95 MMC-SS OI=1029 at $3.40 SL=1.75 Average Daily Volume = 906 K MIL - Millipore $34.07 (-3.15 last week) Millipore Corporation is a multinational bioscience company that provides technologies, tools and services for the discovery, development and production of new therapeutic drugs. The Company's products serve the worldwide life science research, biotechnology and pharmaceutical industries. Millipore's products are based on a variety of enabling technologies, including the Company's membrane filtration and chromatography technologies. In life science research, Millipore offers products for genomics, proteomics, drug discovery and general laboratory applications. As we’ve been writing since the inception of this play, MIL likes to track the action in the Biotechnology Sector Index (BTK.X). The BTK rebounded during last Friday’s action to the tune of more than 4 percent for the day. The sector was one of the best performing during the day which saw the market finish right around the flat line. But despite the strong rebound in the broader biotech sector, MIL only managed to tack on a fractional gain. Before the stock rebounded, it fell below its short-term support with a low down around the $32.79 level. The stock’s tracing of a new relative low in conjunction with its inability to gain much more upside than its fractional rebound Friday both point to further downside in the coming week, especially if the broader market continues to languish. As traders we do have to be careful of a short covering rally that could spread into MIL if the BTK continues to gain traction. If the stock does pop, we’ll use any such rally as an opportunity to entry new put plays near resistance. A nice rollover from the 10-dma at the $36.55 level offer such a favorable entry point. Conversely, if the stock continues immediately lower, as we suspect it could, then traders can look for a breakdown below Friday’s intraday low at the $32.79 level. Such a breakdown should be confirmed with increased intrady trading activity as well as weakness in the broader market and in the BTK. BUY PUT JUL-35*MIL-SG OI=31 at $2.20 SL=1.00 BUY PUT JUL-30 MIL-SF OI=60 at $0.45 SL=0.00 Average Daily Volume = 401 K HIG - Hartford $59.93 (-3.07 last 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. The breakdown that we detected below the 200-dma last week led to a massive move lower in a short period of time in HIG. The stock opened up Friday’s session at the $57.80 level, well below all of its short term support that had been traced prior to the day’s trading. The open below the $58 level could have offered put players a very quick and sweet exit from plays for a quick swing trade profit. The stock’s rebound into the close of trading actually wasn’t all that discouraging. The trend is still clearly intact and we’ll remain bearish on this play as long as the trend holds. But given the rebound, we’re now once again looking for entry points into new put plays at or close to overhead resistance levels. The first spot to look for such an entry is at the $61 level where HIG formed some short term congestion during Wednesday and Thursday’s action. If the stock does get above that short term congestion level, then there’s more resistance overhead at the $63 level. A rollover from that level is another possibility for an entry point into new put plays. Whether or not the stock reaches that high is going to be dependent on the action in the broader market, which is why it’s very important to monitor the action in the Dow and the S&P 500 going into next week’s trading. Strength in these two major market averages will most likely translate into further upside for HIG. But a return of the sellers into the market will cause HIG to rollover as well. ***June contracts expire next week*** BUY PUT JUN-60 HIG-RL OI=98 at $0.90 SL=0.25 BUY PUT JUL-60*HIG-SL OI=13 at $1.90 SL=1.00 Average Daily Volume = 891 K SPW - SPX Corp. $121.21 (-9.05 last 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. It was a wild and volatile day for SPW Friday, which saw the stock trade back and forth. The stock opened just slightly lower around the $121 mark and proceeded to enter a free fall in the first 30 minutes of trading. The market sell off following the release of the University of Michigan consumer sentiment index pressured SPW to as low as the $114.25 level before the stock rebounded. Breakdown entry points taken in the early hours of the day’s session could have offered a nice quick day trade in this high dollar stock. But the rebound following the intraday low carried the stock all the way back into positive territory, where SPW closed back above the $121 level. The stock actually reached as high as the $122.50 level during its rebound, but pulled back below that level which was just shy of the 200-dma overhead now at the $123.34 level. The 200-dma should be the critical level going forward in this play. As long as it holds as resistance, SPW is going to have a hard time making any upside progress other than the occasional intraday rally attempt. Using those rally attempts as entry points into new put plays just below the 200-dma should allow for a successful trade next week. Tight stops just above the 200-dma can be used to manage upside risk in any plays taken below the moving average. As for the downside, we’ll reference today’s support at $114.25 as a target. ***June contracts expire next week*** BUY PUT JUN-125 SPW-RE OI=320 at $6.70 SL=5.25 BUY PUT JUL-120 SPW-SD OI=112 at $7.50 SL=5.50 Average Daily Volume = 395 K CB - Chubb $70.30 (-3.63 last 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. The bad news for the major insurers just keeps getting worse and worse. If it’s not the threat of further terrorist attacks, it’s the wild fires in the west. Now, the latest doom and gloom talk to surface around the insurers involves the shenanigans played by corporate leaders. Lawsuits against corporate leaders have doubled in the last year and settlements have reached over $100 million. Shareholders from all walks of life are seeking retribution in the form of the legal system, and many of them are getting it. The insures who issue what are known as director and officers insurance are now at risk for the increasingly large amounts of settlements issued to the shareholders of companies that have been accused of wrong doing. Unfortunately for CB, it is one of the bigger insures of corporate officers. Whether or not this growing fear pushes the stock down further over the short term remains to be seen. But one thing is for sure, the insurers are facing problems from every direction. As for Friday’s action, the stock gapped sharply lower on the news of the bombing and traded as low as the $68 level before rebounding along with the broader market into the close of trading. The stock is setting up for another prime entry point into puts near its 200-dma. Look for a rollover from that level, which is now at the $71.50 mark, and confirm weakness in the broader market. ***June contracts expire next week*** BUY PUT JUN-70 CB-RN OI= 282 at $1.40 SL=1.00 BUY PUT JUL-70*CB-SN OI=2664 at $2.80 SL=1.50 Average Daily Volume = 960 K ZLC - Zale $39.13 (-1.85 last 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 Jewelers and Piercing Pagoda. Zales Jewelers provides jewelry to a broad range of customers. The University of Michigan reported this morning that the consumer sentiment index fell to 90.8 during the early part of June from the 96.9 reading registered in the month of May. The reading was the lowest seen since the month of February. The report sent chills through the retail sector and built upon the growing fears that the consumer is growing more and more pessimistic about the state of the market and the economy. The growing belief could eventually lead to a slowdown in consumer spending, which is the last thing that the market, economy, and high end retailers need right now. For its part, ZLC traded right down to the $38 support level that we had mentioned in the initial write up of this put play. The stock rebounded from that level on its first test, and was helped higher by the rebound in the broader market and retail sector. What we’re expecting now is one or two more days of a relief rally in ZLC followed by a rollover from resistance starting with the $40 level overhead. The stock’s 10-dma now at the $40.26 level should provide further proof of resistance at the $40 level early next week should ZLC make it back up that far. Look for a rollover to transpire around that level and confirm direction in the retail sector. If you’re a breakdown trader, wait for the stock to break below the $38 support level on heavy volume. ***June contracts expire next week*** BUY PUT JUN-40 ZLC-RH OI=0 at $1.30 SL=0.75 BUY PUT JUL-40*ZLC-SH OI=3 at $1.95 SL=1.00 Average Daily Volume = 253 K ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***** LEAPS ***** Capitulation? I Think Not! By Mark Phillips mphillips@OptionInvestor.com Anybody notice that this week's tagline is unchanged from last week? The date (and prices) have changed, but the theme remains the same. There just hasn't been enough fear engendered in this market to call it a solid bottom. Oh sure, Friday's rebound off the lows was encouraging, but from where I sit, the rebound was primarily shorts covering when the bottom failed to fall out of the market. With fund outflows over the past two weeks showing clearly that there are a lot of investors that just want out of equities, it is no wonder that the broad indices keep lowing ground. While it was encouraging to see the VIX poke well above the 30 level on Friday (actually hitting a high of 33.13), we once again saw the pattern of falling back sharply with the oversold rebound. Fear just isn't sticking around long. On the other side of the coin, the VIX has steadily moved higher on a closing basis over the past 3 weeks, reflecting that investor fear IS on the rise. I just don't think we have reached that point of capitulation yet. While the NASDAQ has reached (and exceeded) the level of its September lows, the DOW and S&Ps are not there yet. An argument could be made that the DOW could avoid that fate, but as close as the S&Ps have come to their lows, I expect that they will drop down for a real test those lows. So while I don't think we have quite reached the end of the current decline, this is precisely when LEAPS investors start looking for attractive entry points. With the VIX rising near the top of its historical range and the broad markets trading near major lows, it is a fairly safe bet that we are near an important, tradable bottom. You can see the beginnings of life starting to emerge in our MSFT and PG plays, as they are both bucking the broad market trend. Each of these stocks have the potential to help lead the next solid bear-market rally. Let's see what else is shaking with our list of plays. Portfolio: MSFT - You want relative strength? MSFT has it. Rumors that the company would preannounce to the upside gave the stock a boost earlier in the week and we saw some impressive buying interest on Friday, with Mr. Softee one of the first Technology issues to edge into positive territory. We're still caught in limbo though, as what we really need to see is MSFT clear its descending trendline (currently $55.50) and the May highs at $56.44 before we'll believe the bulls are serious. Once MSFT clears this resistance level then we'll raise our stop to preserve those gains. XOM - Boring! XOM has gone absolutely nowhere since we initiated our position. That's a good news, bad news story. The good news is that the stock hasn't tanked (actually had a nice rebound on Friday off its intraday lows) despite the broad market weakness. The bad news is that XOM hasn't seen any significant buying interest as we head into the summer months. I think we can place a portion of the blame on the price of Crude Oil, which continues to languish between $24-27. We're going to continue to keep this one on a short leash for now with stops set at $38.50. PG - A little bit of good news early in the week gave our play a nice pop, with PG bucking the broad market trend and actually tagging the $93 level on Wednesday. Unfortunately, the increased profit growth estimates from the company and the subsequent upgrade from Merrill Lynch ran out of steam fairly quickly in a weak broad market environment. Still, PG finished the week with a solid gain and managed to find some solid buying support on Friday near the $90 level. With the movement of the ascending channel, we are raising our stop to $88 this weekend. Watch List: WMT - Despite its continued strong same-store sales, the price action of WMT doesn't inspire confidence, at least not yet. The Consumer Confidence numbers from Friday as well as the recent Retail Sales report is likely to keep this area of the market under pressure over the near term. But we don't want to miss the bottom now that we've gotten a nice pullback. Note that the price pattern on the daily chart is hinting at a Head and Shoulders bottom, and the next cycle of the daily Stochastics (currently pulling back from overbought) should give us the answer. We're raising our entry target this weekend to $53-54, as a successful completion of the H&S pattern should give us a solid bounce from that level. BRCM - The further the SOX drops, the better I like the BRCM play. it looks very close to putting in a solid bottom and should perform nicely once the SOX puts in its own bottom. Friday's weakness dropped the stock below the $19 level briefly, bringing it close to our entry target at $18. But I think we'll get at least one more dip near that level before the bulls show any serious interest. Patience is the key here as we don't even want to think about buying a bounce that can't clear the $20 level on solid volume. BBY - I love it when a plan comes together. That's right, BBY came right down to our entry target and then reversed higher, making it into the Portfolio this week. See below for details. QQQ - That was exciting wasn't it? At the low of the day on Friday, the QQQ was trading just above the $26 level. Eager bulls might have been tempted to nibble on new positions at that level, but I'm still deferring to the PnF chart, which tells me we ought to see the $25 level before a solid bottom will be in place. The afternoon rebound leaves me unconvinced, despite the fact that the NASDAQ managed to recover into positive territory. Patience is the key. BBH - Despite the overdone coverage of the IMCL hearings in the news, BGEN looks like it might be trying to breathe new life into the Biotechs. That's just what we're looking for, as a decent rebound in the sector will set us up to enter new positions when the rally runs out of steam. While aggressive traders might try to enter the play on a rollover from the $90 level, we're going to hold out for higher price levels before taking a position. Given the carnage that has been done over recent weeks, there is a lot of overhead resistance now. We've lowered our target to $96-98, as that level will likely see a wealth of investors eager to get out at par. So where do we go from here? Expect volatility to still figure prominently in next week's trading action. The bears will continue to go on the offensive until they see the bulls show some sort of conviction. That means sharp drops, followed by bouts of short-covering will continue to dominate until there is some positive news to rouse (not arouse, as that would be frightening!) the bulls. We are starting down the barrel of earnings warning season and that is likely to give the bears more ammunition in the near-term. But the actual results that come out of the July earnings season (especially the forward guidance) may be enough to fuel the next rally. Hey, I can hope, can't I? Have a great week! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: MSFT 05/13/02 '03 $ 55 MSQ-AK $ 5.90 $ 7.60 +28.81% $48 '04 $ 55 LMF-AK $10.20 $12.70 +24.51% $48 XOM 05/22/02 '03 $ 40 XOM-AH $ 3.00 $ 2.75 - 8.33% $38.50 '04 $ 40 LXO-AH $ 5.10 $ 4.70 - 9.80% $38.50 PG 05/30/02 '03 $ 95 PG -AS $ 3.70 $ 5.30 +43.24% $86 '04 $ 95 KBJ-AS $ 9.00 $11.50 +27.77% $86 BBY 06/14/02 '03 $ 45 VBY-AI $ 4.80 $ 4.80 0.00% $37 '04 $ 45 LBS-AI $ 9.20 $ 9.20 0.00% $37 Puts: None LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: BRCM 10/28/01 $18-20 JAN-2003 $ 25 OGJ-AE CC JAN-2003 $ 20 ORD-AD JAN-2004 $ 25 LGJ-AE CC JAN-2004 $ 20 LGJ-AD WMT 03/31/02 $50-51 JAN-2003 $ 55 VWT-AK CC JAN-2003 $ 50 VWT-AJ JAN-2004 $ 55 LWT-AK CC JAN-2004 $ 50 LWT-AJ QQQ 06/09/02 $25 JAN-2003 $ 28 OZC-AB CC JAN-2003 $ 25 OZC-AY JAN-2004 $ 28 LRI-AY CC JAN-2004 $ 25 LRI-AJ INTC 06/16/02 $25 JAN-2003 $ 22 NQ -AX CC JAN-2003 $ 20 NQ -AD JAN-2004 $ 22 LNL-AE CC JAN-2004 $ 20 LNL-AD PUTS: BBH 06/09/02 $96-98 JAN-2003 $90 GBZ-MR JAN-2004 $90 KOV-MR JAN-2005 $90 XBB-MR New Portfolio Plays BBY - Best Buy $41.57 ** Call Play ** Is anyone else thinking that was just a little too perfect? To be honest, I actually had some doubts as to whether BBY was going to come all the way back to the $40 level, but the dismal Consumer Confidence numbers on Friday did the trick, driving the stock down to the $39.50 level our entry target before beginning its long recovery on Friday. Despite the fact that BBY managed to stage such an impressive recovery, it still closed a dime under Thursday's close, so it isn't out of the woods yet. I would be surprised if BBY doesn't drop back to retest the $39-40 level over the next week or so. That should provide a second chance for any late-comers to enter the play. Recall that BBY was one of the stronger Retailers coming out of the September lows and we are looking for it to continue to show its relative strength again once it becomes clear that the consumer is not going into hibernation. As a quick aside, something that seems to have been overlooked in the Consumer Confidence numbers on Friday is that stock market performance factors into the numbers. With the poor market performance over the past month, it was a foregone conclusion that the report was not going to be pretty last week. The knee-jerk negative reaction by investors just gives us that entry point we were shooting for. The first major obstacle for BBY to clear is the $46 level on its way to re-challenging major resistance near $50. Until that first hurdle is cleared, we'll place our stop at $37. BUY LEAP JAN-2003 $45 VBY-AI $4.80 BUY LEAP JAN-2004 $45 LBS-AI $9.20 New Watchlist Plays INTC - Intel Corp. $21.28 **Put Play** Widely recognized as the king of chip companies and best known for its cutting-edge Pentium line of Processors, INTC has been busy diversifying its business into the Communications arena and along with other select niche markets. But at its core, the company is tied to the growth of the PC industry. Much has been made of the fact that the PC industry is stable and unlikely to see a sharp upturn any time soon, but I think the pessimism may be getting a bit out of hand. The last major PC upgrade cycle was 3 years ago and as a point of reference, I just recently replaced my 1999-vintage computer with a new Pentium-4 running Windows XP. The reason was that my old machine just couldn't cut the mustard anymore, between frequent system crashes, sluggish response and the constant balancing act of deciding which applications to close, so that I could open a new application. Very unproductive. I have to believe that corporate America is facing the same problem, but on a much larger scale. The spending party to upgrade existing computers hasn't started yet, and may not for several more months. But when it does, INTC is going to be the company to deliver the goods, as it continues to distance itself from competitor Advanced Micro Devices in the performance of its top-end processors. INTC has been severely abused over the past several weeks (along with the rest of the Semiconductor sector), falling back to within a dollar of its September lows last week. To be fair, a large part of the INTC's recent pain has been self-inflicted after the company warned for the 2Q. The good news is that it looks like the bulls are stepping up to defend the stock near major support. With the weekly Stochastics still diving back to earth, I expect to see a bit more weakness before we know for certain that a bottom is in place. The September lows near $19 will be an obvious level of support, although I wouldn't be surprised to see that level briefly broken, possibly with a trade as low as $18. We'll look to initiate new positions on these dips as price rebounds. After entry, we'll set a fairly liberal stop at $16, just below major support which held throughout the 1997-1998 time period. BUY LEAP JAN-2003 $22 NQ -AX BUY LEAP JAN-2003 $20 NQ -AD For Covered Call BUY LEAP JAN-2004 $25 LNL-AE BUY LEAP JAN-2004 $20 LNL-AD For Covered Call Drops MDT - MDT just couldn't buck the broad market trend this week, with the bulk of the heavy selling coming on Friday. Of course, the fact that the company lost its patent dispute with Boston Scientific on Tuesday and then had its price target cut by UBS on Wedensday. The selling pressure was too much for the bulls to stand on Friday, as MDT dropped back through the $44 level. Needless to say, MDT is a drop this weekend. Recall our policy of setting our stop on the option price after it exceeded a gain of 40%. So we'll book this one as a par result, taking our exit from the play as the listed options fell through our entry price on Wednesday. ************** TRADERS CORNER ************** The "Head and Shoulders" Chart Pattern By Leigh Stevens lstevens@OptionInvestor.com The Head and Shoulders pattern is not seen a lot, but neither is it uncommon - its seen enough and is distinctive enough so that you begin to notice it. The Head & Shoulders (H&S) is a price formation that is of the category called "reversal" patterns in technical analysis, as these signal a trend reversal most often. In that sense they are very valuable for the trader as they have a high reliability for signaling a top or bottom ahead of the occurrence, giving you time to prepare for it with a trading strategy. This pattern can develop over days or weeks in individual stocks or in the stock indexes, in any time frame; e.g., hourly, daily, weekly. The head and shoulders top formation is composed of 3 tops prior to a downside trend reversal -- the middle peak (the Head) stands above the first and last tops (the Left and Right “Shoulders”), both of which form in approximately the same price area. The head and shoulders bottom formation or inverse head and shoulders is a mirror image of the head and shoulders top. It is also similar to a triple bottom in that there are 3 lows. However, the second or middle low (the head) is below the price level of the first and last lows – these lows form in approximately the same price area and are also described as the left and right “shoulders”. In the H&S bottom pattern, it is if the outline of the head and shoulders was that of an upside down person. Drawing a line through the points formed opposite the rounding left and right “shoulders” is considered to be the “neckline” as in the examples in the figures cited below. Head and shoulders patterns, as is true of other top and bottom patterns such as double and triple tops or bottoms, are more likely to occur after a trend has been underway for some time. An H&S top or bottom can be found visually by using either a bar (or candlestick) or line chart. THE HEAD & SHOULDER'S TOP - DAILY LINE (CLOSE-ONLY) CHART - GM HEAD AND SHOULDER'S BOTTOM - DAILY CHART - AMAT The measuring "formula is the same, only the measurement is to the upside. Sometimes, after piercing the neckline the stock or index will come back to the neckline, before reversing. Just as with any trendline, such a return to a neckline is not uncommon. In the same way that a prior support level or area in an advancing trend, once broken, can “become” resistance on a subsequent rebound, this too can occur in the case of the previously broken neckline. This particular example was of the S&P 500 Index (SPX), but when it was at a much higher level. I will use show some very recent examples of the H&S pattern in recent S&P 100 (OEX) trading. RETURN TO THE NECKLINE - DAILY CHART - SPX In a Head and Shoulder's Bottom, take the price that represents the bottom point of the (upside down) head (the lowest low) and measure the price on a vertical line where it intersects the neckline - this results in a value. Add this value to the point where prices achieve an upside penetration of the neckline after the formation of the third cluster of lows which represents the right shoulder. This then provides a minimum objective on the upside. Sometimes we may see prices rally back above or below the neckline and made a secondary top/bottom above or below the right shoulder – this does not invalidate the formation because a complex head and shoulders will sometimes have 2 left “shoulders” that form in the same area and/or two right shoulders in the same area on the right side – this was the case in the figure below. COMPLEX HEAD & SHOULDERS PATTERN - DAILY CHART - QCOM The important thing to look for is symmetry – left shoulders that form in the same approximate area - the same with right shoulders. Relative to this, the head is a single top that is above the left and right outline of the shoulders – no formation with TWO heads is valid. Nor should the Head be enormous, relative to two tiny shoulders, as such a pattern will not result in a minimum objective above/below the neckline that is valid. WEEKLY CHART - S&P 500 (SPX) There is a technical analyst with a market advisory service who was suggesting that the above chart of the weekly S&P 500 is a huge Head & Shoulder's pattern. And, that if the neckline at 941 is broken, a potential downside price target measurement could take the S&P ultimately to the mid-300 area. The pattern on the SPX weekly chart above has some left/right symmetry (it may be a rounding top, which is another pattern), but is not the right proportions for an H&S top. It is like putting an elephant's head on a human body! Moreover, Head & Shoulder's patterns are not considered to be ones that form over years. I consider this (pattern) interpretation to be not only wrong, but making grand predictions for an ultimate bottom this low, (assuming a break of the "neckline") based on a "normal" Head & Shoulders measurement, is grandstanding! MEASURING IMPLICATIONS - The measuring convention for a head and shoulders objective should not be taken as an absolute. This measuring rule implies a "minimum" objective only and once a trend develops the overriding principle is to stay with the trend as long as it continues. However, a significant value is provided by this measuring technique in that an initial price objective can be established. This helps determine where to set a protective stop so that a potential loss is a fraction of the “reward”, or minimum profit, potential; e.g., 1/3. The second point regarding price objectives is that the actual upside or downside potential of these top or bottom formations may not be as much as is measured by use of the technique described. Thomas Bulkowski in his “Encyclopedia of Chart Patterns” found that the most likely rise for head and shoulder bottoms, once the neckline was penetrated, was between 20 and 30%. For the head and shoulders top, the most likely decline for the cases studied, was just over 20%. This information leads to a suggestion that when a head and shoulders pattern develops as expected and if the resulting gain exceeds 20%, it may be appropriate to protect any such gain with a liquidating stop that attempts to “lock in” ¾ of the gain (a 15% profit), in the event of a reversal. HIGH PREDICIBILITY - Another aspect to the head and shoulders pattern is that it has been found to have one of the more predictable outcomes as patterns go. For example, Bulkowski found that 93% of the head and shoulders top formations he studied broke out to the downside (penetrated the neckline) once they had formed. This suggests as a trading strategy, that when the formation of the right shoulder is apparent, going long in the case of the H&S bottom and short in an instance of the H&S top pattern – and to not necessarily wait for a penetration of the neckline. The liquidating exit (stop) point then is right where it most opportune to have it – where the liquidating price represents a small risk – because the obvious place to set a stop is just beyond the top of the head and that point that would not be far away from an entry point if the buy or sell was initiated after the right shoulder formed. If the top of the head is exceeded, once the right shoulder is formed, this constitutes a pattern failure. If the pattern “fails” it’s not a good strategy to remain in an investment or trade that was entered into based on the expectations of a trend reversal implied by an initially valid head and shoulders formation. RECENT H&S HOURLY CHART EXAMPLES, RECENTLY PROFITABLE - The pattern below formed on an hourly basis in the S&P 100 ($OEX.X) Index in May 2002. At this point you may have rightly wondered if the OEX would return all the back to its low around 520. How about 520 and quite a bit more! Recently on the same hourly chart, after a prolonged decline, I thought we were seeing a Head & Shoulder's BOTTOM forming. The downtrend has been going on for some time, the market was quite oversold and it was reasonable to expect that an upside reversal (and a bottom) could be setting up as seen in the chart below - WRONG!! -- PATTERN "FAILURE" - THERE IS A GOOD REASON WHY A PENETRATION OF A SUPPOSED NECKLINE SHOULD BE USED AS "CONFIRMATION" OF A HEAD & SHOULDER PATTERN! THE "DEFLECTION" (REVERSAL LOWER) AT THE NECKLINE SUGGESTED TO COVER LONG/CALL POSITIONS IF HELD BASED ON AN EARLY BUY BASED ON AN "ASSUMED" H&S BOTTOM. RESULTS - Note how construction of a line parallel to the upper (down) trendline, through the lowest low (only 1 point), resulted in "finding" the big reaction low of Friday, June 14 (2002). H&S TOPS/BOTTOMS RELATED TO THE "REAL WORLD" OF MARKETS - There is the question of WHY price patterns or chart formations have predictive outcomes. It is always for the reason that the patterns describe a set of circumstances that relate to a cycle of attitudes and behavior on the part of market participants – such aspects of market behavior repeat again and again. In the case of a head and shoulders top, we can take a hypothetical example for XYZ stock. There is always a group of investors that comprise the most knowledgeable group that follows and invests in this company – I’ll call this group part of the “smart money” crowd. The stock has generally been in an up trend but the value of the stock is getting a bit rich relative to earnings. However, fundamentals regarding the company still are positive overall and the smart money people decide to do some buying, perhaps after a period where the stock price has leveled off or declined a bit. This buying and perhaps some favorable news regarding the XYZ company, causes the stock to advance. Some other followers of the stock notice the increased activity and advancing prices and also become buyers. As the stock rises there is a point where the smart money believes the stock to be overvalued and decides to take profits. This selling causes the stock to retreat some from the highs and makes the first peak comprising the left shoulder. Other followers of XYZ stock are interested in buying declines or in period of weakness and the stock begins to rise again. The smart money is a still a seller on strength or into any new high ground, as volume increases. The stock indeed gets higher than it did on the last rally but the aforementioned selling “caps” the price and a second higher peak forms. The continued selling eventually drives the stock down again. Believing that the price is again relatively cheap the "less than smart money" crowd drives the stock up a third time, forming the right shoulder. This time however, the stock has gone up on less volume with fewer willing buyers and some still determined sellers who come in at the prior peak (the left shoulder) made before the most recent top (the head). A next downswing takes prices back to the prior support. If this level gives way, more holders of the stock decide to cash in. There is a snowball effect as prices adjust downward by an amount equal to the prior rise – this happens to be equal to the distance from the low point after the first rally (the neckline) to the top of the biggest advance (the head). Now, some facet of the company’s business that is creating a drag on company profits -- what caused the smart money to sell rallies -- may become more widely known and the stock remains under pressure. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 06-16-2002 Sunday 5 of 5 ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************* COVERED CALLS ************* Covered-Calls: A Conservative Approach By Mark Wnetrzak With the Covered-Calls editor away on a much-needed Father's Day vacation, it's a great time to review the fundamentals of one of the most popular stock-option strategies for new investors. Investors usually write covered-calls to generate monthly income, collecting the premium for the sale of an option against a stock position in his or her portfolio. This conservative strategy can be used effectively on all type of stocks as long as the outlook (fundamental or technical) for the issue is favorable. One of the advantages to this approach is that it allows new investors to learn successful trend-trading techniques with a small margin of safety while managing the combined position for upside profit and downside risk. This underlying basis for this strategy is a high probability of limited profit. The primary advantage to a novice trader is the technique is easy to use and the resultant position is more conservative than outright stock ownership. In writing an option on the stock, the investor has insured the issue against a future drop in value. Of course, the downside risk in ownership is not eliminated, only reduced. In addition, the actual cost of opportunity loss or potential upside movement can be substantial. There are other, more subtle benefits and disadvantages but these are the most common reasons that investors choose (or avoid) this strategy. Each week we receive a number of questions regarding the various approaches to the investment strategy of selling covered-calls. In our personal portfolios, we utilize the "in-the-money" covered write as a primary technique for consistent profits. This method is easy to master and works in harmony with a low maintenance, low risk investing style. The theory behind this approach is to be "aggressively conservative." This tactic is in contrast to the a popular "conservatively aggressive" outlook used by many traders, where the underlying position is bullish, (based on OTM calls) and requires an upward movement from the stock for profit. In general we are traditional, long-term investors with contempt for excessive risk and the potential for large losses. Studies suggest (and our results confirm) that the average investor will make substantially greater returns through the consistent profits from "in-the-money" covered writing than he/she would using the high risk, high reward approach of more aggressive positions. You may think that this technique is far too conservative to yield favorable returns, however the "magic" ingredient of the strategy is the power of compound interest. Covered-call writing allows investors to potentially compound their returns on stock ownership each month of the year. Unfortunately, while most investors begin writing covered calls with the goal of compounding their money on a monthly basis, many lose focus of the fundamental outlook of the technique (consistent, low risk profits) and begin to concentrate on higher, single transaction returns. This is a common mistake and it can substantially increase risk and the probability of loss. The market historically offers a 2-4% monthly (annualized) return for this strategy but with diligent research and analysis, and proper money management, the margin of profit can be increased. In our personal portfolios, we attempt to establish positions that offer on average, a 4-6% (8-12% on margin) monthly return on investment. Even with this meager profit, the long-term portfolio growth is excellent, due to the unique mathematics of compounding. Earning 3% per month in a personal portfolio, without compounding or margin trading, equates to a 36% yearly return. We have yet to find a bank or CD that matches that rate. Obviously, most retail option traders regard a 3% monthly return as far too low. In fact, why would anyone want such a paltry reward when the market offers such great potential for wealth. There is answer is quite simple: RISK. Any strategy that yields 10% will be riskier (on a purely theoretical basis) than one offering a 3% return. The old adage, "the greater the risk, the greater the reward" is quite accurate. Regardless, some of you will learn the hard way, just as we did. After getting hammered on the majority of aggressive positions, we made the transition to ITM covered-writes with lower returns. Now our portfolio value grows (most of the time) on a consistent basis. The goal of the covered-call writer is to have a good selection of favorable positions with adequate downside protection. With this approach, an investor reduces risk by entering several stock and option plays with a predetermined conservative profit target for each one. We strive for a 5-8% monthly return in the newsletter but again with a lower profit target, the higher the probability of a favorable outcome and the lower the risk. To further reduce the potential for catastrophic loss, a trader should diversify his market exposure through a wide variety of covered-call positions. The stocks you purchase should generally represent companies of different types in a variety of favorable industries. Most novice investors ignore this principle and consequently, their portfolio losses are substantial when a heavily weighted sector falls "out of favor." Many experts suggest you should limit each investment to no more than 10% of your overall portfolio value. This is very important to the success of the covered call strategy as you don't want one issue to have a significant impact on your overall gains or losses. The fact is, no one really knows what a specific stock is going to do in the future. History suggests that even the most prolific traders are correct in only slightly more than one-half of their directional forecasts and that statistic reinforces our basis for choosing to hedge poor selections with "in-the-money" covered writes. Before you open any position, it is important to understand the strategy that you are using and identify the specific goals for that particular trade. You can't make good decisions without knowing the mechanics of a specific technique. In addition, don't use complex or advanced methods simply because they are intriguing. The best strategy is usually the simplest one that accomplishes your goals. Prior to executing a transaction, you should know exactly what the break-even (cost basis) point is, and be prepared to take action if the underlying issue reaches that price range. Once you have a candidate in mind, do your homework! Study the company and the calendar; upcoming events, earnings dates and any other scheduled reports. When you have a superior knowledge of a stock and its industry, you are way ahead of the investor that trades simply on intuition or outside advice. Portfolio management is critical to the success of any portfolio. After you take a position in a particular issue, stay informed by monitoring all the news and announcements affecting that issue. Observe the daily progress of the your stocks and realize that you have the ability and control to adjust or close the position at any time. Obviously you do not need to check the prices on an hourly basis, but we do recommend that you review each session's closing quotes. News and public opinion can have a significant impact on a stock's price and unfortunately, it is impossible to research "future" events before you buy an issue. The key is to be fully prepared for any outcome because the most difficult lesson comes when you close a losing trade. Indeed, it is very hard to learn to exit unsuccessful plays in a timely manner but the simple fact is, there is no reason to hang on to a losing position when there are so many other profitable plays that deserve your time and money. Accept your losses, learn from your mistakes (evaluate each one critically) and move on! With any strategy losses are inevitable and instead of being surprised, you must anticipate them. History has proven that a percentage of the covered write positions selected will be unprofitable thus, when the situation arises, it is not regarded as a failure but rather an integral part of the trading system. Your personal portfolio should be evaluated based on the sum of its positions, rather than each transaction. In this manner, success is gauged by growth in portfolio value and the losses become less significant. That is one of the principal reasons for entering several positions; it becomes much easier to identify and act on a potentially negative play when it doesn't have a substantial effect on your overall success. The concepts of most exit and adjustment strategies are relatively simple but there is no way to develop a specific guide for proper position management. With stock and option combinations, the key is to evaluate the risk-reward outlook of each possible scenario and construct a position that fits your trading plan and technical outlook for the underlying issue. Success with this strategy lies in one objective; a consistent flow of monthly income with limited portfolio risk. The focus of play selection and management should be to continually generate an acceptable level of option premium while protecting against the potential for downside losses. Any positions that become unfavorable due to changes in the fundamental or technical characteristics of the underlying issue should be removed from the portfolio before they can generate significant deficits. Catastrophic failures are not unavoidable but they can be sufficiently managed to reduce the effects of the shortfall. Obviously, each situation will require a different solution but in general, a trader should try to limit individual position losses to 20%. Unfortunately, there are some occasions when issues fail without warning, leaving no opportunity for exit or adjustment. Unexpected events simply occur; earnings warnings, shareholder lawsuits, negative news in the industry or sector and changes in public sentiment. All of these activities can affect the success of an individual position but with a diversified portfolio, the long-term effects are minimal. Our approach to "in-the-money" covered calls is designed to lock in profits whenever possible and reduce the inevitable losses to a minimum. A rise in share value is the ultimate goal of stock ownership and with this strategy, a significant short-term move can provide additional opportunities for profit. When the share value rises substantially after the initial position has been established, you have several choices. You can do nothing, get "called-out" and accept the original return that was established when the play was opened. If the option is priced near parity, you can close the play early or, you may also choose to adjust the position to match the new outlook for the underlying issue, "rolling" the call up and forward to a higher strike price. When you roll up (repurchase the current sold call and sell a higher strike call), the profit potential of the position is increased. Unfortunately, the downside break-even point is also increased by the amount of debit required to complete the transaction. That is the main reason most traders transition to a future expiration date; it reduces the debit required for the new position. While it is not always compatible with our weekly candidates, there are a number of benefits and advantages to long-term stock ownership. If that is your intention, additional measures are necessary when utilizing "in the money" covered-writes. As expiration nears and the time-value premium disappears from the written option, you should consider rolling forward to reduce the likelihood of early assignment. The overall profit potential of the position will be increased and the risk versus reward outlook for the combination can be adjusted, consistent with your forecast for the movement of the underlying issue. With deep "in-the-money" calls, most of the time premium vanishes long before expiration. However, as long as time value remains in the call option, there is little risk of early assignment. When the option price (bid) falls to parity or a discount, there is a considerable probability of exercise by arbitrageurs; specialists and floor traders who do not pay commissions for trading. When this situation occurs, you should endeavor to roll-forward or adjust the position in some manner that prevents a monetary loss through unexpected assignment of the short option. HAPPY FATHERS DAY!!! ***************** SUPPLEMENTAL COVERED-CALL CANDIDATES ***************** The Covered-Calls editor is away on a much-needed Father's Day vacation so today's list will be limited to "supplemental" plays. The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield VISG 5.15 JUL 5.00 TUM GA 0.70 605 4.45 35 10.7% CLHB 10.89 JUL 7.50 QPB GU 4.20 150 6.69 35 10.5% ZIXI 5.20 JUL 5.00 HQU GA 0.65 738 4.55 35 8.6% MCDT 8.38 JUL 7.50 DXZ GU 1.50 4050 6.88 35 7.8% ENDP 10.89 JUL 10.00 IUK GB 1.70 10 9.19 35 7.7% CRXA 5.70 JUL 5.00 CVQ GA 1.00 30 4.70 35 5.5% OPWV 5.61 JUL 5.00 UGE GA 0.90 1878 4.71 35 5.4% WEBX 14.05 JUL 12.50 UWB GV 2.25 3 11.80 35 5.2% PHSY 26.92 JUL 25.00 HYQ GE 3.30 3 23.62 35 5.1% CANI 11.07 JUL 10.00 CDU GB 1.60 73 9.47 35 4.9% RHAT 5.44 JUL 5.00 RCV GA 0.70 163 4.74 35 4.8% ORCL 8.57 JUL 7.50 ORQ GU 1.45 7879 7.12 35 4.6% ADIC 8.20 JUL 7.50 QXG GU 1.05 35 7.15 35 4.3% ***************** NAKED-PUT SECTION ***************** Option Trading Basics: Market-Makers and Floor Brokers - Part II By Ray Cummins Our recent discussion about the techniques used by floor brokers and market-makers generated some questions from the readers, so today we are going to examine those strategies in greater depth. In the U.S. equity markets, specialists are required to make a market in a stock when public orders to buy or sell the issue are absent. They will buy and sell from their own inventory to keep a position liquid. They also maintain the public book of orders (conditional orders to buy and sell at specific prices). When options began trading in 1973, the Chicago Board Options Exchange (CBOE) introduced a similar method of trading for stock and index derivatives: the market-maker and board-broker system. Market-makers are floor traders who either are exchange members or rent their seats from exchange members. Their goal is to trade for profit without risk due to unfavorable price movement in the underlying issue. At the CBOE, for example, there are several market-makers for each optionable stock. They provide bids and offers in the absence of public orders. These traders do not participate in any retail trading; they buy and sell for their own accounts only. A separate specialist, the board broker, maintains the book of "limit" orders. The board broker cannot do any trading, but he manages the book so other floor traders can see how many orders to buy and sell are near the current market (the highest bid and lowest offer). The CBOE system is efficient because several market-makers compete to create the market in a single security and the "open book" method of public orders also provides an orderly trading forum for everyone involved. While the Pacific Options Exchange (PCX) and the CBOE utilize a competitive market-maker system, the American Exchange (AMEX) and the Philadelphia (PHLX) Exchange are "specialist" markets. These specialists are intended to have an exclusive franchise in the maintenance of a market, subject to the specialists' capital and inventory. In addition, the AMEX uses specialists for option trading, but it also has floor traders who function similarly to market-makers. Most of the regional option exchanges use various combinations of the two systems and in many cases, there are also traders referred to as "locals" that are funded by individuals or institutions. They buy and sell options for private accounts and are not allowed to execute orders on behalf of public customers. Since there must always be a buyer for each option sold (option purchases and sales must match at the end of each day), these locals help maintain liquidity and fair prices for retail traders. Option markets that use competitive systems are consensual, where the liquidity and capital is spread around to those in the crowd. The PCX and the CBOE place certain market-makers (The Lead Market Maker at PCX and the Designated Primary Market Makers at CBOE) in a quasi-specialist role. In exchange for assuming more marketing and customer service responsibilities, these market-makers enjoy a guaranteed order flow participation. The result is increased accountability with greatly enhanced customer convenience and the traditional benefits of the competitive system are maintained. Floor-Trading Strategies Last month, we learned that most strategies employed by floor brokers to profit from trading in options are based on pricing theory and statistical probability. The concept of put-call parity helps the specialist identify mis-priced relationships between call options, put options, and the stock. If the call is overpriced relative to the put, the put is purchased and a synthetic put, made up of a short call and long stock, is sold. This technique is called a conversion. If the call option is under-priced relative to the put, then the call is bought and a short synthetic call, made up of a short put and short stock, is sold. The opposite of a conversion and is often called a reverse conversion or reversal. Specialists also favor box spreads; two call options with different strike prices and two put options with strike prices equivalent to the calls. Once again, box spreads are only initiated when the options are mis-priced on a relative basis. The most profitable transactions for specialists are generally deep-in-the-money calls and puts, since these options often have large bid/ask spreads (generally due to a combination of higher option prices and a lack of liquidity). An example of this type of trade is as follows: If an individual places an order to sell a deep-in-the-money call, then the floor broker uses a reversal, or reverse conversion with a short synthetic call (short stock and short put) to offset the purchased call. If the bid-ask spread is $1 and the specialist pays the retail trader bid price only, the position should yield a profit. Recall that the basis for this transaction is the market-maker can buy the call at a discount and, at the same time, sell the synthetic call at fair value to generate a risk-free position. Obviously, this assumes the put option is fairly priced and the stock can be shorted (sold) for the current bid. Any delay in the execution of the remaining components will put the trade at risk. If the share price changes or the up-tick rule (in most cases, stocks can be shorted only on an upward move) prevents the specialist from shorting the stock in a timely manner, the profit will quickly disappear. There are no up-front funds needed for this method, but because of the difficulty in shorting stock, specialists generally do not receive all of the profit from the initial transaction. However, specialists do have a method of offsetting any potential losses. In the case of a reversal, the funds received from the sale of the stock are placed in a risk-free, short-term investment. Thus interest rates, the difference between the market prices and the fair value of the options, and the amount of funds received in the short sale all have some effect on the eventual profitability of the position. Fortunately, all option trades do not result in a conversion or reversal. Since the majority of retail traders buy options, and since a large portion of purchased derivatives are redeemed at a lower value (or expire worthless), market-makers will often take a short position in these options. Then they simply wait until the option falls in value, to purchase an offsetting position. In the case of a short call option, they may eventually construct a long synthetic call (a much easier transaction - no shorting of stock) to offset the sold position. Regardless of the situation or type of arbitrage, their fundamental goal is to profit from disparities in option pricing and by trading inside the bid/ask spread. Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule: Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a "buy-to-close" STOP at a price that is no more than twice the original premium from the sold option. EDITOR'S NOTE ********* The Covered-Calls editor (who is also the data processing "guru" for this section) is away on a much-needed Father's Day vacation, so today's Naked-Puts section will consist of new candidates and supplemental plays only. NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield ATTC 31.25 JUL 30.00 MFU SF 0.80 2801 29.20 35 5.8% CANI 11.07 JUL 10.00 CDU SB 0.50 5 9.50 35 11.3% FBR 10.65 JUL 10.00 FBR SB 0.35 0 9.65 35 7.7% SCIO 28.94 JUL 25.00 UIO SE 0.55 53 24.45 35 5.8% SIE 19.20 JUL 17.50 SIE SW 0.65 0 16.85 35 8.5% SKX 22.10 JUL 17.50 PUC SB 0.30 93 17.20 35 5.5% SWFT 21.50 JUL 20.00 SDU SD 0.55 355 19.45 35 6.2% TALX 18.42 JUL 15.00 TUB SC 0.30 10 14.70 35 6.1% YCC 26.74 JUL 25.00 YCC SE 0.55 23 24.45 35 5.0% Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield CANI 11.07 JUL 10.00 CDU SB 0.50 5 9.50 35 11.3% SIE 19.20 JUL 17.50 SIE SW 0.65 0 16.85 35 8.5% FBR 10.65 JUL 10.00 FBR SB 0.35 0 9.65 35 7.7% SWFT 21.50 JUL 20.00 SDU SD 0.55 355 19.45 35 6.2% TALX 18.42 JUL 15.00 TUB SC 0.30 10 14.70 35 6.1% ATTC 31.25 JUL 30.00 MFU SF 0.80 2801 29.20 35 5.8% SCIO 28.94 JUL 25.00 UIO SE 0.55 53 24.45 35 5.8% SKX 22.10 JUL 17.50 PUC SB 0.30 93 17.20 35 5.5% YCC 26.74 JUL 25.00 YCC SE 0.55 23 24.45 35 5.0% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** ATTC - AT&T Canada $31.25 *** AT&T Buy-out! *** AT&T Canada (NASDAQ:ATTC) is Canada's largest broadband business services provider and the leader in competitive local exchange and Internet and E-Business Solutions services. With over 18,500 route kilometers of local and long haul broadband fiber-optic network, world class data, Internet, Web hosting and e-business enabling capabilities, ATTC provides a full range of integrated communications products and services to help Canadian businesses communicate locally, nationally and globally. AT&T Canada offers customers across Canada a full suite of local and long distance voice, data and Internet services with sales and service offices from coast-to-coast. ATTC competes with incumbent provincial telecom companies and alternative long distance providers. AT&T (NYSE:T) is preparing a $2.25 billion stock offering next week to buy out the public stake in AT&T Canada and if the acquisition is completed, the stock price of ATTC should remain comfortably near the current price range. Traders can speculate on the outcome of the transaction with this position. JUL 30.00 MFU SF LB=0.80 OI=2801 CB=29.20 DE=35 TY=5.8% ***** CANI - Carreker $11.07 *** Testing 52-Week Highs! *** Carreker (NASDAQ:CANI) is a provider of integrated consulting and software solutions that enable banks to identify and implement e-finance solutions, increase their revenues, reduce their costs and enhance their delivery of customer services. The company's offerings fall into four groups: Revenue Enhancement, which enable banks to improve workflows, internal operational processes and customer pricing structures; PaymentSolutions, which address the needs of a critical function of banks, the processing of payments made by one party to another; Enterprise Solutions, which provides conversion, consolidation and integration consulting services and products on a bank-wide basis; and CashSolutions, which optimizes the inventory management of a bank's cash on hand. CANI rallied in early June after reporting revenues for the 1st quarter of $37 million, a 33% increase from a year ago, along with an 87% rise in operating income. The bullish "break-out" on heavy volume is very favorable and this position offers conservative traders a great entry point in the issue. JUL 10.00 CDU SB LB=0.50 OI=5 CB=9.50 DE=35 TY=11.3% ***** FBR - Friedman, Billings, Ramsey $10.65 *** Two-Year High! *** Friedman, Billings, Ramsey Group (NYSE:FBR) is a financial holding company for businesses that provide various products and services. The company serves the investment banking and brokerage industry primarily through Friedman, Billings, Ramsey & Co., its principal registered broker-dealer subsidiary, and, in the United Kingdom, through Friedman, Billings, Ramsey International, its European subsidiary. Online brokerage and securities distribution services are conducted through FBR Investment Services, a registered broker subsidiary. The company serves the specialized asset management sector through four registered investment adviser subsidiaries, and FBR National Bank & Trust provides transfer agency, custody, shareholder services and mutual fund accounting for mutual funds. Shares of FBR are trading at a new 2-year high and investors who want to own the stock can establish a discounted position in the issue with this position. JUL 10.00 FBR SB LB=0.35 OI=0 CB=9.65 DE=35 TY=7.7% ***** SCIO - Scios $28.94 *** On The Rebound! *** Scios (NASDAQ:SCIO) is a biopharmaceutical company developing novel treatments for cardiovascular and inflammatory diseases. The company's disease-based technology platform integrates new protein biology with computational and medicinal chemistry to identify novel targets and rationally design molecule compounds for large markets with unmet medical needs. Scios is focused on the development of three primary product candidates: Natrecor, for the treatment of acute congestive heart failure, SCIO-469, an oral small-molecule inhibitor of p38 kinase for the treatment of rheumatoid arthritis, and small molecule inhibitors of the receptor for TGF-beta, a cytokine that has been implicated in diseases characterized by chronic scar formation, or fibrosis. Shares of Scios rallied Friday on speculation the company will will raise the 2002 annual sales projections at its quarterly announcement in July and the move above a recent trading range bottom (and the 30-dma) suggests further bullish activity is forthcoming. JUL 25.00 UIO SE LB=0.55 OI=53 CB=24.45 DE=35 TY=5.8% ***** SIE - Sierra Health Services $19.20 *** Hot Sector! *** Sierra Health Services (NYSE:SIE) is a health care organization that provides and administers the delivery of comprehensive health care and workers' compensation programs with an emphasis on quality care and cost management. The company's primary types of health care coverage are HMO plans, HMO Point of Service (POS) plans, and indemnity plans, which include a preferred provider organization option. The POS products allow members to choose one of the many coverage options when medical services are required instead of one plan for the entire year. Shares of Sierra Health Services rallied in late April after the company posted first-quarter results that were well ahead of Wall Street's expectations and the stock recenty traded at a new, all-time high. The health care services provider has raised its guidance for the rest of the year and investors can establish a conservative cost basis in a popular issue in a "hot" sector with this position. JUL 17.50 SIE SW LB=0.65 OI=0 CB=16.85 DE=35 TY=8.5% ***** SKX - Schechers $22.10 *** First Licensing Partnership *** Skechers U.S.A. (NYSE:SKX) designs and markets a collection of contemporary footwear for men, women and children under the Skechers brand. The company's shoes are sold through a range of department stores and specialty stores, a network of retail stores and the Skechers e-commerce Website. The company's product line consists of over 1,500 active styles that are organized in distinct collections; Skechers USA, Skechers Sport, Skechers Collection, Skechers Kids, Somethin' Else from Skechers, Skechers by Michelle and 4 Wheelers by Skechers. The company also offers sandalized footwear, which features open-toe and open-side constructions consistent with its offerings in the Skechers USA, Skechers Sport and Skechers Collection categories of footwear. Skechers recently announced that Renfro Corporation has been named the licensee for SKECHERS hosiery for adults. Renfro will create quality socks using SKECHERS' logos and the new products will soon be available in leading department stores, specialty stores and sporting goods retailers. Investors appear pleased with the news and traders who wouldn't mind owning the stock at a cost basis near $17 should consider this position. JUL 17.50 PUC SB LB=0.30 OI=93 CB=17.20 DE=35 TY=5.5% ***** SWFT - Swift Transportation $21.50 *** Transport Sector *** Swift Transportation (NASDAQ:SWFT) is a truckload carrier in North America. The company operates primarily throughout the continental United States, combining regional operations with transcontinental van operations. The company transports retail and department store merchandise, manufactured goods, paper products, non-perishable food, beverages and beverage containers and building materials for such companies as Kmart, Target, Costco, Sears and Wal-Mart. The company owns M.S. Carriers, a truckload carrier that operates in the continental United States and the Canadian provinces of Quebec and Ontario, and Mexico. M.S. Carriers also transports truckload shipments of general commodities, such as packages, retail goods, non-perishable food, paper and paper products, household appliances, furniture and packaged petroleum products. Its customers include Sears, Federal Express, Family Dollar and Home Depot. Investors who want to diversify their stock portfolios with a solid company in the transport sector should consider this position. JUL 20.00 SDU SD LB=0.55 OI=355 CB=19.45 DE=35 TY=6.2% ***** TALX - TALX Corporation $18.42 *** On The Rebound! *** TALX Corporation (NASDAQ:TALX) is a provider of automated work and income verification services and a provider of outsourced employee self-service applications. The company use interactive Internet and interactive voice response software and other technologies to enable mortgage lenders, pre-employment screeners, employees and authorized users to obtain employee human resources and payroll information, and to allow other employees to review and modify information in human resources, benefits and payroll management information systems without requiring employer assistance. Their services and products fall within three general categories: The Work Number services; human resources and benefits application services; and customer premises systems, including maintenance and support. TALX was recently added to the S&P Small-Cap 600 Index but that doesn't explain the near-term rebound in its share value. The basing pattern near $15 and the recent buying pressure make this a favorable position for speculative traders. JUL 15.00 TUB SC LB=0.30 OI=10 CB=14.70 DE=35 TY=6.1% ***** YCC - Yankee Candle Company $26.74 *** Big Mover! *** The Yankee Candle Company (NYSE:YCC) is a designer, manufacturer and branded marketer of scented candles for the giftware industry. The company sells a variety of products as affordable luxuries and consumable gifts. Yankee Candle's candle products are available in approximately 170 fragrances, and include a wide variety of jar candles, Samplers votive candles, Tarts Wax Potpouri, pillars and other candle products, all marketed under the Yankee Candle brand. The company also sells a range of coordinated candle accessories and branded fragranced non-candle products, including Yankee Candle Car Jars air fresheners, Yankee Candle Bath personal care products and Yankee Candle sachets. The company sells its candles through an extensive and growing wholesale network of stores. Shares of Yankee Candle hit a 2-year high on Friday, after the leading U.S. specialty candle maker doubled its quarterly earnings forecast on "red-hot" wholesale sales. Investors who believe the rally will continue can profit from that outcome with this position. JUL 25.00 YCC SE LB=0.55 OI=23 CB=24.45 DE=35 TY=5.0% ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield CTLM 8.31 JUL 7.50 UUM SU 0.45 262 7.05 35 13.2% PSUN 21.53 JUL 20.00 PVQ SD 0.65 10 19.35 35 7.3% MOVI 20.22 JUL 17.50 QLV SW 0.45 30 17.05 35 6.7% KROL 23.95 JUL 22.50 KRQ SX 0.65 8 21.85 35 6.4% PCLE 11.45 JUL 10.00 PUC SB 0.25 15 9.75 35 6.4% CHTT 33.60 JUL 30.00 HQT SF 0.75 40 29.25 35 6.2% CCE 22.95 JUL 22.50 CCE SX 0.60 5 21.90 35 5.6% FDP 26.00 JUL 25.00 FDP SE 0.45 0 24.55 35 4.0% JBHT 28.76 JUL 25.00 JHQ SE 0.35 0 24.65 35 3.8% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Was That A Capitulation? By Ray Cummins ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, June 14 Stocks rebounded today after precipitous early losses stemming from renewed concerns over terrorism and a decline in consumer confidence. The Dow Jones Industrial Average ended with a deficit of only 28 points at 9,474, after being down 242 points during the morning session. The worst performances were seen in Alcoa (NYSE:AA), AT&T (NYSE:T), Home Depot (NYSE:HD), McDonald's (NYSE:MCD), and DuPont (NYSE:DD). Merck (NYSE:MRK), Microsoft (NASDAQ:MSFT), J.P. Morgan (NYSE:JPM), Wal-Mart (NYSE:WMT), and International Business Machines (NYSE:IBM) opposed the bearish trend, allowing the blue-chip average to recover the brunt of its early losses. The NASDAQ Composite was even more surprising, closing with a 7 point gain at 1,504 after sliding as much as 51 points in early trading. Telecom issues were punished after Sprint (NYSE:FON) said full-year revenues would decline further than previously expected. A negative forecast from Adobe Systems (NYSE-ADBE) affected software stocks but hardware shares returned to the plus column after a series of recent declines. In the broad market, buying pressure in the biotechnology sector emerged to limit the downdraft near midday and oil service, financial and gold stocks also moved higher. Trading volume was average with 1.54 billion shares traded on the NYSE and 1.82 billion shares exchanged on the NASDAQ. Market breadth was mixed, with losers pacing winners 17 to 14 on the Big Board while winners roughly matched losers on the technology exchange. In the bond market, yields on a 10-year note fell to their lowest level in months. The 10-year Treasury note jumped 25/32 to yield 4.80% while the 30-year government bond soared 1 1/8 to yield 5.41%. Last week's new plays (positions/opening prices/strategy): Ambak (NYSE:ABK) JUL60P/JUL65P $0.60 credit bull-put Autozone (NYSE:AZO) JUL70P/JUL75P $0.55 credit bull-put Elec. Arts (NSDQ:ERTS) JUL50P/JUL55P $0.50 credit bull-put Oxford (NYSE:OHP) JUL42P/JUL45P $0.30 credit bull-put Un. Health (NYSE:UNH) JUL80P/JUL85P $0.40 credit bull-put Honeywell (NYSE:HON) JUL42C/JUL40C $0.35 credit bear-call 3M Co. (NYSE:MMM) JUL140C/J135C $0.50 credit bear-call Omnicom (NYSE:OMC) JUL85C/JUL80C $0.65 credit bear-call Bank One (NYSE:ONE) JUL45C/JUL42C $0.30 credit bear-call The volatile market movement continued this week and the activity provide some excellent entry opportunities in our new "Reader's Request" positions. Although most of the issues were relatively stable, considering the large swings in equity values, Omnicom surprised everyone when it plunged almost 30% during Wednesday's session. The company has been under pressure since it announced in May that Robert Callander, a long-standing board member and chairman of Omnicom's audit committee, quit in protest against the company's accounting policies. The news eventually led to more questions about Omnicom's unique accounting methods and an off-balance-sheet partnership formed to house several struggling online properties. As expected, investors chose to forego the answers and simply dump the stock to avoid additional losses, thus creating a precipitous drop in OMC's share price. While we are thankful the issue moved in the forecast direction, there is no joy in watching a company's stock lose so much of its value amid sheer speculation about accounting procedures. Portfolio Activity: Friday's volatile activity was not completely unexpected but the severity of the sell-off had floor traders jumping during the first hour of the session. One of the reasons for the slide was a pre-market announcement from Adobe Systems (NASDAQ:ADBE), in which the company said third-quarter revenue would fall short of Wall Street forecasts. Adobe also lowered its full-year revenue guidance to a range of $1.2 billion to $1.25 billion from $1.3 billion previously and several analysts cut their ratings on the company, based on the downwardly revised outlook. Our position in the issue has a neutral outlook, however any further bearish movement in the stock will jeopardize the sold (short) put so we are going to monitor ADBE's activity very closely in the coming sessions. Cigna (NYSE:CI) is another issue that endured a large decline during the day and speculation among analysts is that investors are becoming very concerned about recent class-action lawsuits filed against the company. Some of more severe claims include allegations of "deceptive practices" and "violations of public policy." Whether or not these charges prove accurate remains to be seen but the damaging effect on its stock price is obvious and today's plunge through the bottom of the current trading range suggests further downside activity is forthcoming. Traders holding bullish positions in the issue should consider potential exit or adjustment strategies in the coming sessions. Among the other stocks in the credit spreads portfolio, Sony (NYSE:SNE) has also broken through a recent support area near $54 and if you didn't close the bullish play during last week's slump, you should certainly act before the stock drops further. One last concern is Affiliated Computer Systems (NYSE:ACS) and if the issue closes below the current trading-range bottom near $50, some type of exit (or offsetting) transaction should be initiated. Of course, all of the bearish positions: Mercury Interactive (NASDAQ:MERQ), XL Capital (NYSE:XL) and Weatherford (NYSE:WFT) are performing well and the adjusted positions in Clear Channel Communications (NYSE:CCU) and Qlogic (NASDAQ:QLGC) should expire profitably this month. Bullish spreads in defensive issues such as Raytheon (NYSE:RTN) and the Gold Index (CBOE:XAU) are also in good shape with only one week until expiration. Another play in that (defensive) category is the speculative synthetic position in Kraft Foods (NYSE:KFT) and last week, the issue hit a recent high near $44. The rally provided a favorable early-exit profit of up to $0.80 after only two weeks in play. In the straddles section, the neutral-outlook position on the technology sector; the Mini-NDX (CBOE:MNX), surpassed our expectations as the issue traded near $105 during Friday's sell-off. The speculative play offered an outstanding short-term profit, as well as reaching the downside break-even point in the bearish portion of the straddle, far in advance of its expiration in July. Another position that fared very well this month was the "Reader's Request" straddle in Nvidia (NASDAQ:NVDA), which offered a gain of over 100% for conservative volatility traders. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** GG - Goldcorp $10.41 *** Time-Selling Play! *** Goldcorp (NYSE:GG) is a North American-based gold producer with a high grade mine in Red Lake, Northwestern Ontario, Canada and its Wharf Mine in the historic Lead Mining area in the Black Hills of South Dakota, United States. In addition, the company owns an industrial minerals operation in Saskatchewan, Canada. Goldcorp's new Red Lake Mine, located in northwestern Ontario, began commercial production last year and the mine's high grade reserves are estimated to be in excess of three million ounces. Located deep in the Black Hills of South Dakota, the Wharf Mine produces approximately 100,000 ounces of gold annually and has produced over 1.2 million ounces since 1983. Located in the region of southwestern Saskatchewan, Saskatchewan Minerals is a North American producer of high-quality sodium sulfate. Here's a speculative, low cost time-selling play for traders who think the recent rally in Gold will continue through the summer months. The stock is in a relatively stable up-trend and the first level of resistance is slightly below the sold (short) strike at $12. In addition, the volatility in gold prices has generated some extreme movement in the issue, thus inflating its near-term option premiums. Strategy Description: The basic premise in a calendar spread is simple; time erodes the value of the near-term option at a faster rate than it will the longer-term option. In this case, the underlying issue is some distance below the strike price of the options, providing a speculative position with low initial cost and large potential profits. Two favorable outcomes can occur: the stock rallies in the short-term and the position is closed for a profit as time value erosion in the short options produces a net gain or; the underlying stock consolidates, allowing the sold options to expire and then eventually rallies above the long options' strike price, thus producing a positive return. The cost basis of the long options can be reduced through the sale of additional calls prior to their expiration in October. It is generally best to establish this type of spread at least 2 - 3 months before the long option expires, capitalizing on the ability to sell another option against the longer-term position. That is the basic idea in this spread play; selling time value in the options when they are overpriced (high implied volatility) and buying it back (if necessary) when they return to intrinsic value. Ideally, the spreader would like to have the stock finish just below the sold strike when the near-term option expires. If the short options are in-the-money at expiration, he will have to buy them back to preserve the long-term position. PLAY (speculative - bullish/calendar spread): BUY CALL OCT-12.50 GG-JV OI=910 A=$1.05 SELL CALL JUL-12.50 GG-GV OI=4628 B=$0.30 INITIAL NET DEBIT TARGET=$0.65-$0.70 TARGET PROFIT=50-75% ****************************************************************** EBAY - eBay Inc. $59.04 *** New Homes For Sale On Ebay? *** eBay (NASDAQ:EBAY) is a Web-based community in which buyers and sellers are brought together to browse, buy and sell items such as collectibles, automobiles, high-end or premium art items, jewelry, consumer electronics and a host of practical and other miscellaneous items. The eBay trading platform is an automated, topically arranged service that supports an auction format in which sellers list items for sale and buyers bid on items of interest, and a fixed-price format in which sellers and buyers trade items at a fixed price established by sellers. Through its wholly owned and partially owned subsidiaries and affiliates, the Company operated online trading platforms directed towards the United States, Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Singapore, South Korea, Spain, Sweden, Switzerland and also the United Kingdom. While reviewing the recent news articles on eBay, I was surprised to learn that you can bid for and buy a "home-under-construction" on the auction site. KB Home, one of the nation's largest housing contractors, is teaming up with eBay to auction 55 homes online. KB Home is auctioning homes in California, Arizona and Texas with opening bids ranging from $121,000 to $900,000, as part of a new effort to become a bigger presence online, which is where many of its homebuyers research homes. The auction, which marks eBay's first entry into the new home market, will include some other popular homebuilders such as Hammonds Homes and Beazer Homes USA, and the demand for this type of marketing is expected to increase in the coming years. eBay is always exploring new ways to boost the number of auctions, which directly enhances their revenues, and it appears they have picked a clear winner this time around. Traders who think EBAY's share value will benefit from the new products being sold at the world's largest online auction site should consider this conservative position. PLAY (conservative - bullish/credit spread): BUY PUT JUL-45 QXB-SI OI=4374 A=$0.60 SELL PUT JUL-50 QXB-SJ OI=8369 B=$1.15 INITIAL NET CREDIT TARGET=$0.60-$0.70 PROFIT(max)=14% ****************************************************************** CCU - Clear Channel $44.32 *** Back For More! *** Clear Channel Communications (NYSE:CCU) is a diversified media company with three major business segments: radio broadcasting, outdoor advertising and live entertainment. The company owns and programs, or sells airtime for over 1,000 domestic radio stations and a national radio network. In addition, the company has equity interests in various domestic and international radio broadcasting companies. The company also is engaged in outdoor advertising and is a promoter, producer and venue operator for live entertainment events with over 100 venues domestically and 31 venues internationally. The company also owns or programs 19 television stations, owns a media representation firm and also represents professional athletes. Clear Channel Communications was the target of a bearish play in early May and although the issue gave us some trouble initially, the rally failed just short of a solid resistance area (and our sold strike) at $55. The issue eventually slumped to a previous trading range near $48, however recent allegations of antitrust violations have pushed the stock to yearly lows on heavy volume and the technical indications show no signs of a recovery in the near-term. Traders who believe the current bearish activity will continue for the next few weeks can profit from that outcome with this position. PLAY (conservative - bearish/credit spread): BUY CALL JUL-55 CCU-GK OI=4343 A=$0.40 SELL CALL JUL-50 CCU-GJ OI=4674 B=$1.20 INITIAL NET CREDIT TARGET=$0.80-$0.90 PROFIT(max)=18% ****************************************************************** GM - General Motors $55.45 *** Reader's Request! *** General Motors (NYSE:GM) is a diversified automotive business with interests in communications services, locomotives, finance and insurance. GM's automotive business designs, manufactures, and/or markets vehicles primarily in North America under the Chevrolet, Pontiac, GMC, Oldsmobile, Buick, Cadillac, Saturn and Hummer nameplates, and outside North America under the Opel, Vauxhall, Holden, Isuzu, Saab, Buick, Chevrolet, GMC and Cadillac nameplates. GM's communications services relate to its Hughes Electronics subsidiary, which includes digital entertainment, information and communications services, and satellite-based private business networks. GM also is engaged in the design, manufacturing and marketing of locomotives and transmissions. GM's financing and insurance operations are conducted primarily through General Motors Acceptance Corporation, which provides a broad range of financial services. The company's quarterly earnings are due on July 16. One of our readers submitted this issue for a bearish spread and indeed, GM appears to be in the early stages of a major retreat. The initial selling pressure (as the chart turned downward) was supported by heavy volume and there is no clear support level to stem the slide until it reaches the $50 range. In addition, the potential for a successful (technical) recovery is significantly affected by the resistance at the sold strike price; a perfect condition for a bearish credit spread. PLAY (conservative - bearish/credit spread): BUY CALL JUL-65 GM-GM OI=4485 A=$0.15 SELL CALL JUL-60 GM-GL OI=17701 B=$0.70 INITIAL NET CREDIT TARGET=$0.60-$0.70 PROFIT(max)=14% ****************************************************************** - Speculation Plays - These positions are based on recent increased activity in the stock and/or its underlying options. Both of these plays offer favorable risk-reward potential but they should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ****************************************************************** ORCL - Oracle Software $8.57 *** Bottom Fishing! *** Oracle (NASDAQ:ORCL) is a supplier of software for information management. The company develops, manufactures, markets and distributes computer software that helps corporations manage and grow their businesses. The company's software products can be categorized into two broad areas: systems software and business applications software. Systems software is a complete Internet platform for developing and deploying applications on the online and on corporate intranets. Systems software products include database management software, application server software and development tools that allow users to create, retrieve and modify the various types of data stored in a computer system. Business applications software, which can be accessed with a standard Web browser on any client computer, automates the performance of business processes for customer relationship management, supply chain management, financial management, project management and human resource management. The company's earnings are due on June 18. Oracle is certainly one of the more established stocks in the software segment and it was very successful in the late 90's, as evidenced by 5 stock splits and a share value of $40 before the recent massive sell-off erased the market capitalization of almost every technology issue. Now the issue languishes in the $8 range but analysts say the slump in sales of the company's products is stabilizing and they expect ORCL's share value to begin a long-term recovery in the coming months. These positions utilize Jim Brown's (OIN Founder/Chief Editor) popular technique of writing "in-the-money" Puts to profit from future upward movement in the underlying issue. A near-term Put is also purchased to limit downside risk in the position if the recovery does not begin in the next few months. More information on this unique strategy can be found at: http://members.OptionInvestor.com/editorplays/042201_1.asp PLAY (speculative - bullish/short-put combination): SELL PUT JAN03-15.00 VOC-MC OI=9492 B=$6.60 BUY PUT SEP02-7.50 ORQ-UU OI=10375 A=$0.80 INITIAL NET CREDIT TARGET=$6.00-$6.10 TARGET PROFIT=$2.75-??? -or- PLAY (more conservative - bullish/short-put combination): SELL PUT JAN03-10.00 VOC-MB OI=8251 B=$2.60 BUY PUT SEP02-7.50 ORQ-UU OI=10375 A=$0.80 INITIAL NET CREDIT TARGET=$2.00-$2.10 TARGET PROFIT=$1.25-$1.50 Note: There is a collateral requirement for the sold (short) Put, whether it is partially covered in the initial spread or exists "naked" when the long option expires. Please review the terms of the collateral requirements with your broker. ****************************************************************** PRX - Pharmaceutical Resources $29.00 *** Speculation Only! *** Pharmaceutical Resources (NYSE:PRX) is a holding company that, through its subsidiaries, is in the business of developing, manufacturing and distributing a broad line of generic drugs in the United States. PRX operates primarily through its wholly owned subsidiary, Par Pharmaceutical, a maker and distributor of generic drugs. The company's product line consists of many prescription and, to a lesser extent, over-the-counter generic drugs representing various dosage strengths. In addition to manufacturing its own products, the company has a number of strategic alliances with several pharmaceutical and chemical companies providing it with products for sale through various distribution, development or licensing agreements. The company markets its products primarily to wholesalers, retail drug store chains, drug distributors and re-packagers. Shares of Pharmaceutical Resources have been "on the move" in recent sessions after the company said it expects second-quarter earnings to significantly surpass consensus estimates, boosted by strong sales. The company's revenues are benefiting from momentum in their base business, higher than anticipated sales of Megestrol oral suspension, robust sales of Fluoxetine and the launch of Flecainide Acetate. An analyst at U.S. Bancorp Piper Jaffray says that pharmaceutical companies are one of the fastest growing sectors in healthcare, due to increasing utilization by an aging patient population and the sector is viewed as a "strong bet for investors searching for earnings growth and visibility, without significant macroeconomic risk." Traders who agree with a bullish outlook for companies in the Specialty Pharmaceuticals Group can speculate on the performance of one of its most popular stocks with this position. PLAY (very speculative - bullish/synthetic position): BUY CALL AUG-35 PRX-HG OI=219 A=$0.45 SELL PUT AUG-25 PRX-TE OI=121 B=$0.60 INITIAL NET CREDIT TARGET=$0.25-$0.35 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 $825 per contract. ****************************************************************** - STRADDLES AND STRANGLES - ****************************************************************** SEIC - SEI Corporation $29.77 *** Probability Play! *** SEI Corporation's (NASDAQ:SEIC) principal subsidiaries are SEI Investments Distribution Company, SEI Investments Management Corporation and SEI Trust Company. SIDCO is a broker-dealer registered with the Securities and Exchange Commission. SIMC is an investment advisor. SEI Trust is a trust entity chartered in the Commonwealth of Pennsylvania. SIDCO and SIMC also provide a range of administration and distribution services to proprietary mutual funds established by banks and financial institutions and intermediaries. The client serves as the investment advisor for the proprietary funds, and the funds are sold to customers of the client. SEIC is organized around its four main business lines, which are Technology Services, Asset Management, Mutual Fund Services and Investments in New Businesses. The number of issues with statistically inexpensive options has fallen in recent weeks but there are still some good candidates in the strategy and this stock meets our basic criteria for a favorable straddle: cheap option premiums, a history of adequate price movement and the potential for volatility in the stock or its industry. Selecting straddles with this process provides the best combination of low risk and potentially high reward but, as with any position, you must review the play thoroughly and make your own decision about its future outcome. PLAY (conservative - neutral/debit straddle): BUY CALL SEP-30 QEI-IF OI=120 A=$2.40 BUY PUT SEP-30 QEI-UF OI=21 A=$2.60 INITIAL NET DEBIT TARGET=$4.75-$4.85 TARGET PROFIT=40-70% ****************************************************************** ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************ MARKET WATCH ************ Will last week’s volatility dry up next week? We’ll find out with several plays ready to be triggered. To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/061602.asp ************** MARKET POSTURE ************** Market averages finished above support last Friday. But not before breaking down below those levels. To Read The Rest of The OptionInvestor.com Market Posture Click Here http://www.OptionInvestor.com/marketposture/061602.asp ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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