The Option Investor Newsletter Monday 06-17-2002 Copyright 2001, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 06-17-2002 High Low Volume Advance/Decline DJIA 9687.42 +213.21 9687.77 9476.50 1.23 bln 2400/ 821 NASDAQ 1553.29 + 48.55 1555.07 1519.26 1.59 bln 2332/1138 S&P 100 516.18 + 14.42 516.18 501.76 Totals 4732/1959 S&P 500 1036.17 + 28.90 1036.17 1007.27 RUS 2000 470.74 + 11.67 470.75 459.07 DJ TRANS 2729.93 + 56.79 2735.24 2672.85 VIX 27.62 - 2.31 29.12 27.00 VXN 54.98 - 0.69 55.33 53.30 TRIN 0.35 PUT/CALL 0.75 ****************************************************************** NEWSFLASH! By Buzz Lynn buzz@OptionInvestor.com Sometimes I struggle for new words to express the same idea. How is it possible for a prairie cowboy to write in his diary that he ate cornbread and beans again today while keeping it interesting? What he wouldn't give for the opportunity to write "steak and potato chips" for once! I see that the markets are up triple digits on any given day and the only words I hear coming from the lips of investors and the dominant financial press are, "Is this the bottom? Screaming buys?" Or, "Encouraging - is the rebound 'finally' here?" Sorry, this cowboy can only report, "legumes and baked maize meal." The S&P is selling at 40.8 times earnings while yielding 1.59%. So my emphatic answer is, "No!" This is all blather in a primary bear market, where long-term, "buy and hold" strategies cease to produce returns for those interested in preserving, let alone growing their nest eggs. Now for traders, it's a whole different story. Just knowing that history repeats thanks to the ebbs and flows of human psychology through the rivers of time is the basis for making profits. In economic terms, it always boils down to supply and demand. Demand can be gauged for the most part by volume. By that measure, there isn't enough to raise prices across the board. That just makes sense given the foreign owners can take their money home and receive a better return for it there. And as locals (U.S.), we've collectively speculated enough and are much more hesitant to send our $$$ out into the cruel market unless the prospect of improved profits are there. Anybody seen that lately? Me either. And the big picture doesn't appear as though it's going to change overnight. But the little picture is subject to headline exposure and chart oscillators. Oscillators are oversold, which could mean a temporary rally isn't far off. More on that in a minute. Just remember as we see equity prices rise, many attempts to rationalize it will sound like, "Well, profits are going to improve in the second half of the year. Therefore, now is the time to back up the truck for all you can afford. Why will profits improve? Because the markets are rising and everyone knows that prices follow earnings." Current market bear, Bill Fleckenstein notes that, "If this isn't a case of a cat chasing its tail, I don’t know what is." I agree. But as the shorts cover near the oscillator bottom, triple-witching week works its magic on keeping volatility high, the hopeful pitch their eyes toward ORCL earnings tomorrow, and the semiconductor book-to-bill ratio is released, equity prices are position for a rebound if only for a short while. Speaking of which. . . Fables, Book-to-Bill, and Urban Legends. This one always gets me. Over the last year, people high on semi-dust are quick to point out that the book to bill ratio is increasing and now back over 1. Well sort of. The emphasis is always on the increased booking with assumption is that billing (Remember, that's the part where manufacturers get paid.) is rising but not as fast as booking. By golly, the rising ratio must mean the whole sector is on fire, and thus there are abundant "compelling values" throughout the whole sector. Reality check: flat billings can produce the same results. Check this out from the ISI. ISI Book to Bill Table: Note that billings have remained relatively flat over the last six months. Analyst suffering from truth decay should call this by its rightful name, flat revenue. This only looks good if we accept the premise that billings will catch up to bookings and that bookings will keep rising. I've heard of some beautiful swampland and a particular bridge that happen to be for sale too. Count me among the skeptics. Nacchio Cheese. Another one bites the dust. . .a high-profile, corporate CEO, that is. Over the weekend, Joe Nacchio was removed from his post as CEO of Qwest Communications. Phillip Anschutz, Q's largest shareholder and previous supporter of Nacchio, finally voted with the board over the weekend for the ousting. Times are definitely tough in the telecom industry and Q becomes another company, along with T, GX, WCOM, WCG, etc., to fall on hard times. Nacchio leaves Q having issued over $25 bln in debt to buy out other competitors, including its biggest acquisition, former baby bell, U.S. West. The former head of Tellabs (TLAB), Richard Notebaert, who was also the head of Ameritech (another baby bell that merged with SBC) may have got the new job based on his ability to clean up a company and package it for sale. With over $25 bln in debt, that's quite an undertaking for the incoming Notebaert. As for Nacchio Joe (not to be confused with Tokyo Joe), who had a penchant for talking up his favorite stock (Q) in front of media cameras, he managed to unload $345 mln in shares in the last two years in what looks like terrific timing on his part (big wink of the eye) and will receive roughly two years of salary and bonus at roughly $10 mln per year as he says, "Cheese!" for the camera at his exit interview. Anderson's non-Fairytale Ending. Not to be outdone, the jury finally returned a "guilty" verdict in Arthur Anderson's obstruction of justice trial. Surprisingly, AA's lawyers say they plan to appeal. Buy why? To what end? I can't imagine ANY company wanting to keep them as an auditor or consultant. Their remaining customers are worth something to another firm that may want to buy them. But I would question the integrity of any management that would want to keep AA on the job. That said, AA's customers that haven't already defected in droves ought to be doing so now. And if you are a firm that used to compete with AA, the new customers will come to you now without you having to pay AA for the privilege. Why pay AA for the business that will otherwise cost nothing following verdict? No reason to now. An appeal accomplished nothing for the firm. Poof! The End for AA. Piece Dividends. CNBC notes that dividends are making a comeback. No kidding! As we noted last week, corporate leaders had foregone dividends on the theory that that their ten best business ideas could produce a better return than investors' first best business idea known as dividends. CNBC points out that even while profits are down, dividends are on the rise - a sort of "peace" offering to keep investors interested in the company stock. It may not be so far fetched that corporate brass is shifting to the belief that shareholders demand for a real return IS a better idea than managements' previous ten best. However, a dividend doesn't mean a company is safe from financial storms. Some managements have actually cut dividends causing investors to label them a peace of a different kind - a piece of . . .well, never mind. NT, F, Q, and T are all examples of companies that have eliminated or cut dividends in the past few month. T, the original widows' and orphans' favorite, pioneered the territory by eliminating their dividend nearly two years ago. That's the Piece Dividend. I would not be surprised to see EK cut theirs in the future too. Let's go to the charts. Dow Industrial chart - INDU (weekly/daily/60): Here we are at resistance on the daily and 60-min charts. Sure the daily chart emerged from oversold in May, but that didn't keep the markets from falling. Will it be different with this long green candle from today? Possible, but history repeats and to think of today's rally in any other terms than a one-day wonder is to defy the odds. The overbought 60-min stochastic coupled with the 60-min candles seem to suggest that the next move is down. That said, it is quite possible that we get a few extended days of bullishness to correct for the predominantly down days we seen over the last month, but no without a 60-min chart entering oversold again first. I would not be surprised to see 9500 again on the downside with 9750 acting as resistance. If I were a trader, I'd be praying for a gap up on the heels of today to somewhere over 9700, then take puts as the 60-min stochastic rolls down. Expecting then that we see a bounce from the oversold condition, I'd look to book profits and re-consider calls then. Just an aside for the Dow only. . .I note above that the 50-dma (magenta) is falling rapidly toward the 200-dma at 9850 (gray). Both of those will provide big resistance, and if the 50 should cross down under the 200, there is virtually no chance that this rally is "for real". Remember, the Dow has been the star performer and strong man ahead of the NASDAQ and the SPX. If the strongest of the major indexes is to fail at that juncture, I'll be a bearish trader across the board, especially on NASDAQ stocks. NASDAQ Composite chart - COMPX (weekly/daily/60): For the NASDAQ, I'd take the same approach. Note that daily stochastics are on the rise, but candles are at a reasonable point of resistance. While the 60-min stochastic painted nicely for bulls today, the candles are at resistance and the stochastic looks like it wants to roll over. Pray for the pop and drop to trade calls then look to be long at a higher low. S&P 500 chart - SPX (weekly/daily/60): Compared the Dow, the granddaddy index (SPX) sure isn't leading the charge like it used to. Here's yet another chart that has a rising daily stochastic with the 60 in overbought, and at resistance to boot. Same story here. . .Ideally, a pop and drop creates a quick put opportunity with support coming in around 1020, which sets up a reasonable risk for going long. Again, this is a fantasy, with a probable chance of success from what I see on the charts. Big resistance at 1100 and 1077 too from the 200 and 50 dma's respectively. Tying this all together, this is a bear market with spurts in the bulls' favor. That will keep it rangebound for years to come in my opinion. Accounting Fraud, CEO's in Jail, insider sales scandals, fallen former corporate heroes (Oh, and did I mention falling equity prices?) are not part of a bull market. They are part of a bear market and will not just go away because we had an "encouraging" day in the market. Sure is good for a couple of trades though! There. . .we shook up the format a little, but in the end, we have beans and cornbread. See you at the bell. ******************** INDEX TRADER SUMMARY ******************** TIME OVER TIME by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - The market only needed the absence of negatives over the 2-day span of time of the weekend to continue the rally that began from new lows on Friday - the new lows and subsequent upside reversals now look like "bear trap" reversals. Due to the closes of the various indices being right at resistance trendlines on the hourly charts and reading overbought on the shorter (5-hour) stochastic indicator, it could have gone either way. The backdrop to this rally was the very "oversold" Arms Index (TRIN) readings that have been seen in this market - recently (June 7) we saw the 10-day Arms Index above 1.50. This is noteworthy in itself, given the historical tendency for this to be associated with strong rallies developing within 3-4 weeks after such a 10-day reading. However, this recent high 10-day TRIN was the 3rd such reading level in as many months! Obviously, this indicator can be way early or doesn't work so ell as a "contrary" indicator; i.e., extreme selling pressure does not suggest a market reversal reliably in a time frame that we can predict. What we do know is that this was an historical extreme - 3 readings in a row like we've had. I have often spoke of a tendency for extremes of one kind to be followed by some periods of the opposite extreme. Therefore, the 1-day very low TRIN reading of today, at .34 (extreme buying pressure) on the NYSE, does not made me immediately bearish - that it, expecting the market to fall apart. It may correct, but I don't think that this rally is going to reverse back into the bear trend that we're so used. Now, I have been suggesting that the market was "due" for an intermediate rally for a while. Maybe, this time is different and the 3rd. move to the oversold extreme suggested by the 10-day TRIN at such an extreme will signal at least the start of a decent summer rally. Time will tell. Meanwhile, we've also gotten overbought on a short-term basis. Nasdaq hourly charts especially have pattern that suggest that prices could roll over to the downside over the next couple of sessions. Down from here and/or sideways at least to "throw off" this near-term overbought conditions. S&P 500 ($SPX.X) Daily/Hourly charts: The rally came from the area of the lower envelope lines but occurred after a period of prices "sliding" down the line. Volume was not huge on either exchange, but I rely on price first - volume should come along later if the rally has any "legs". On the SPX, which trades in a broader channel typically on an hourly chart basis, only one prior (up) swing high has been exceeded. Look for resistance now at each next higher swing high - at 1039- 1040, then at 1050. The top of the channel is 1058. If this area is reached I would turn seller. Pullbacks to the prior swing high at 1023, should offer support - then, if pierced, at 1010. As noted we are at overbought extremes on the short and longer stochastic models on the hourly charts. This situation is "within" the context of the daily stochastic oscillator showing upward momentum, rebounding from an oversold extreme. I view a good-sized pullback as a buying opportunity, but the next short-term index play looks like it is in puts. After such a strong 2-day move especially - rare to see a 3rd.strong up day move in a market that, at best, is transitioning to a rally phase for a while. S&P 100 ($OEX.X) Daily/Hourly charts: Unlike the broader "500" index, the OEX rallied to above two of its prior swing highs, and like the SPX is now quite close to implied resistance suggested by the next prior high that has not been exceeded. 520-521 looks like the next resistance area to watch; then, not before 537. My best guess is that we'll see a rally reversal from either the closing level or this few points higher, at the prior hourly top. Look for support on pullbacks to the 508-510 area, then to 502-505.. Dow Index (1/100: $DJX.X) - Daily/Hourly charts: Favor selling DJX in the 97.6-98 area, and buying on pullbacks. The first area of expected support is in the 94.5-94.7 area, with "better" support expected around 93.5. While its possible that the lows in the 92.6 area might be re-tested, it seems more likely that this will prove to be wishful thinking to those short the Dow index. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: As said on Friday and repeated here: 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. One prior swing high has been exceeded (28.2) - the next one is at 28.8. Expect resistance at 28.8-29 - above this area, at 29.5- 29.7. I favor shorting at and above 28.5 - for example, on a higher opening tomorrow. The chart pattern on the hourly chart has the "curved" look of an index that is about to "roll over" to the downside. A first level of support is at 27.7, then next at 27.00. I would want to observe the intraday price action over the next 1-2 days, but it looks now like 27.00 and under is the place to buy the Q's. Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** TRADERS CORNER ************** In Volatile Markets, Know Your Exit Strategy by Mark Phillips mphillips@OptionInvestor.com And I mean know it inside out! I've talked at great length in the past about determining your exit point for a given trade before entering it. That is a must for any successful trader that wants to remain in this game for the long term. But in these volatile markets, we need contingency plans. What if due to factors beyond your control you cannot exit a given trade when your exit point (either for a profit or stop-loss) is reached? I've been trading the OEX (S&P 100) options lately in my pursuit of profiting from the large-range moves of late in the broad market. As the OEX rolled over from its month-long descending channel last Thursday afternoon, I took a position in the June $500 Puts on the expectation that the index would visit the sub-500 area prior to the end of the week. Sure enough, the OEX continued down into the close on Thursday, ending at its low of the day and allowing me to go to bed that night with a bit of a profit cushion in the trade. Imagine my glee when I awoke the next morning to see the futures down sharply on negative news. The negative open had my position moving deep into the profit zone and then there was the spectacular drop in the Consumer Confidence numbers that seemingly dropped the bottom out of the market. It had the looks of a possible panic session, but true to my discipline, I was ready to exit the play once the OEX hit $495. Sure enough that target was hit before the end of amateur hour and at the time the contracts that I had paid a meager $7 for were trading north of $20. I'm not one to be greedy and with my profit target achieved, it was time to leave the party. I keyed up those contracts in my broker window, sent an order to sell the entire position and was dismayed when no confirmation of a sent order showed up on my computer. What now?? After 2 more attempts to close my position, I finally got an error message back indicating that there was no order routing available. Huh? What does that mean? All the while, I am watching the price of my puts decline as the oversold bounce gets underway. I am a big fan of technology and greatly prefer to do my trading online due to greater efficiency. What I was faced with here though, was a situation in which technology was standing in my way. So did I continue to fight with the technological issues? No way!! I picked up the phone, got my broker on the phone and asked what the problem was. I was quickly and efficiently informed that the CBOE's electronic order system was down. Uh-oh, that doesn't sound good. Fortunately, my broker anticipated my needs and informed me that they could still place an order with the CBOE, just not through the electronic system. Done! I gave the verbal order to my broker and let the process take its course. Within 5 minutes, I had the confirmation that my order had been filled, and I was successfully out of the trade. Whew! The good news is that I netted better than 100% for less than a 3-hour hold. The frustrating part was that if I could have exited when I made my original attempt, it would have been a 200% profit. Ouch! I hate to think what would have happened if I had a less-responsive and capable broker. By the close of trading on Friday, the contract I had been trading was down to about $9 and a lack of decisiveness would have left me watching all my intraday gains melt away. So while the trade didn't go as well as I would have liked, I certainly won't sneeze at a solid return on invested capital. As I do with all trades, I then turned my attention to determining what lessons I had learned from the experience. OEX options are only traded on the CBOE, meaning that if there is a connectivity problem with that exchange, I can't just redirect my order to a different exchange. Fortunately in this case, I was able to get my order executed by phone, but if the CBOE had been offline, I may not have been able to exit the trade. The lesson learned here is a reminder of the inherent risks of trading that we were first confronted with following the September terrorist attacks. It is entirely possible in our world to be in a trade that goes against us while we are unable to get out. How will I change my trading relative to the OEX? I probably won't, but in the future, if I have a problem with an electronic trade execution on the OEX, I will pick up the phone and call my broker even quicker. But what if it isn't just a simple technology issue? What if the CBOE is completely offline and I have an open trade that I need to exit based on my predefined criteria? Well, the OEX is a broad-based market average, including industrial old-economy names as well as many technology-related issues. One action that I could have taken in the trade I've profiled here would have been to initiate a hedge of my OEX put position profits using other instruments. Specifically, as I saw the broad markets bouncing, I could have initiated call positions on the DOW (DJX) and NASDAQ (QQQ). Then as my OEX Puts lost value, the calls on the DJX and QQQ would have at least partially offset the loss. It wouldn't be a perfect hedge, and I would lose on both sides of the trade as volatility dropped, but it is a better solution then sitting helplessly in front of the computer like a deer caught in the headlights. And then once I regained the ability to exit my OEX trade, I could simultaneously exit the calls that I used to initiate the hedge. The net result would depend on many factors, but it is a safe bet that I would be able to exit the entire trade at a later time, preserving most of the profits that had accrued when I initially decided to exit the trade. Of course, this also highlights the risks of overtrading. If this had been a large trade (relative to my account size), I might not have acted as rationally as I did. Fear tends to grow into panic quickly when you have a trade going against you and you know that you have really placed too much capital at risk in the trade. And panic is the enemy of the rational decision-making process. What I've done here is highlight a successful trade that could have been much more profitable without the challenge that I described above. On the other hand, it could have ended up much worse had I neglected to take decisive action. This is one of the key differences between hypothetical trading results and the cold, hard reality of the fast-paced trading profession that we have chosen. Hopefully my description of the process I went through, as well as some of my post-trade reflections sensitizes you to some of the less-common pitfalls we face as traders. Additionally, it is my hope that this little saga helps you to better prepare yourself for an adverse trading climate in the future, helping to better define your own exit strategy. The thing that sticks in my mind as I wind this up is that history tends to repeat, both on the micro and macro level. I am confident that the lessons learned from this trade will be beneficial the next time a similar situation presents itself. I wasn't a Boy Scout in my youth, but I do subscribe to the motto of "Being Prepared"! I fully expect there WILL BE a next time and I will be prepared. Have a great week! Mark ************************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 GAME PLANS *********************** THE SECTOR BEAT - 6/17 by Leigh Stevens Some of the weakest sectors of recent weeks such as the Biotech and Internet stocks were the strongest today, as traders decided that enough was enough and went on a bargain-hunting binge. The Semiconductors were a key group to help boost Nasdaq. The recovery in the Bank and Broker sectors were key to a strong rebound in the Financial Index - this in turn helped boost the S&P. Very few solid and sustained rallies occur in the NYSE market without the participation of the "money" stocks. UPDATES ON FOLLOWING SECTORS below - Amex Composite (and Russell 2000) small cap sectors; Brokers; Cyclical Index; Forest Products; High Tech index; Defense stocks; Gold stocks; Internet Index; Oil Services; Oil sector; Software Index; Semiconductors; Telecoms; Transportation average HIGHER ON THE DAY ON Friday - DOWN ON THE DAY on Friday - HARDLY ANY "RED INK" TODAY AND THEY WERE TWO SECTORS THAT BOTH REFLECT PRECIOUS METALS - AMAZING! Not acting so "precious" these days..... SECTOR HIGHLIGHT - 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 Not jumping immediately into the Biotech HOLDR's was costly as there was not price dip at all on the opening. Will likely cancel the recommendation unless correction develops very soon. PRIOR COMMENTS: Only bullish technical aspect to Biotech chart was RSI divergence, as the Relative Strength Index did not "confirm" recent price low. Needs close back above 375 to reverse. Bounced from the low end of a long-standing downtrend channel and may follow through for a while. Closing move above 375 still is key to turnaround. Next resistance: 420 area. TRADE RECOMMENDATIONS & REVIEW - NEW TRADE(S) - Buy BBH, Biotech HOLDR's at 80.50 or less; Stop: 76.70 Close: 87.70 - 6/17 - Open: 84.9 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 - Friday, 6/14 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) PRIOR COMMENTS: The small cap index rebounded from support in the 897-900 area, after having retraced about 50% of its strong rally from its Sept. bottom, in some contrast to the main indices and big cap stocks many of which got to at or near their prior lows at the September "panic" bottom. Strong follow through suggests bottom is in place - overhead resistance now at 931. Support in the 900 area. LAST UPDATE: 6/17 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 PRIOR COMMENTS: Only bullish technical - RSI divergence, as it did not "confirm" recent price low. Needs close back above 375 to reverse. Bounced from the low end of a long-standing downtrend channel and may follow through for a while. ** SEE CHART ABOVE IN SECTOR HIGHLIGHT ** Closing move above 375 still is key to turnaround. Next resistance: 420 area. LAST UPDATE: 6/17 Broker Dealer Index ($XBD.X) PRIOR COMMENTS: Bullish Price/RSI divergence set up at recent low at bottom of downtrend channel. XBD needs to get back above 436 to reverse. The Broker Index appears to have hit at least a temporary bottom given "touch" to low end of longstanding downtrend channel. Rebounded to resistance in 435-436 area; next resistance: 465 - 472 zone. LAST UPDATE: 6/17 Computer Technology Index ($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 PRIOR COMMENTS: New closing low in 551 area suggested that the cyclical index was headed to convergence with its 200-day moving average in the 534 area. The Index rebounded strongly after approaching its 200- day MA. Following this, cleared prior lows in 550 area. Next resistance: 570-572 area. May have hit bottom LAST UPDATE: 6/17 Defense Index; Amex ($DFI.X) STOCKS: ATK; BA; COL; DRS; EASI; EDO; ERJ; ESL; FLIR; GD; INVN; ITT; LLL; LMT; NOC; OSIS; RTN; SSSS; TDY; TTN; UIC PRIOR COMMENTS: "Bear flag" pattern looked to be forming, suggesting another downswing ahead. Continue to have objective to lower levels, perhaps back to 600 area. Close above 653-655 is needed to reverse downtrend. Support looks like 623 at recent lows, then 615 area. LAST UPDATE: 6/17 Disk Drive Index ($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 ($FPP.X) PRIOR COMMENTS: A key level to watch is the prior (down) swing low in the 345 area - this was also the level of price peak in Dec. and the again in late-January. Index held above important prior lows in the 345-345 area. Resistance: 362, then 370. LAST UPDATE: 6/17 Gold & Silver Sector Index ($XAU.X) STOCKS: ABX; AEM; AU; FCX; GOLD; HGMCY; MDG; NEM; PD; PDG; SIL PRIOR COMMENTS: 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. XAU needs to climb back above 77 on closing basis to suggest that bullish trend might be back on track. Retreat to below 75 continues bearish pattern - potential support at 71, then 67. LAST UPDATE: 6/17 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. 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 ($MSH.X) PRIOR COMMENTS: The Index attempting to rally from the low end of its downtrend channel. Upside follow through after MSH got to low end of channel is potentially bullish for the near-term, but Index needed to regain 50-day MA in 397 area before getting too excited about tech. LAST UPDATE: 6/17 Internet Index; CBOE ($INX.X) AMZN; AOL; CHKP; CMGI; CNET; CSCO; DCLK; EBAY; ELNK; EXPE; FMKT; HLTH; HOMS; INKT; INSP; JNPR; OVER; RNWK; TMCS; YHOO As with the High-tech Index, the Internet sector has had recent strong rebound from low end of its downtrend channel. Charts look quite similar. Key overhead resistance is 95-96, at its 50- day MA. Rebound to, but not above, is about best I see for this sector currently. LAST UPDATE: 6/17 Natural Gas Index ($XNG) Networking Index ($NWX.X) Oil Index; CBOE ($OIX.X) - STOCKS: AHC; BP; CVX; KMG; MRO; OXY; P; RD; SUN; TOT; UCL; XOM. PRIOR COMMENTS: Rebounded from important chart and 200-day MA support levels. Strong follow through from rally that began at key support at 306. Resistance at 321 needed to suggest move was going to be back up to re-test "line" of resistance at recent highs in the 330 area. LAST UPDATE: 6/17 Oil Service Sector Index ($OSX.X) STOCKS: BSI; BJS; CAM; GLBL; HAL; NBR; NE; RDC; RIG; SII; SLB; TDW; VRC; WFT PRIOR COMMENTS: Holding prior lows from April - may be a buy again. Good upside follow through on gap higher, tends to "confirm" support in the 93-95 area and may be low end of its trading range for now. Resistance at 103, at 50-day MA - close above this level needed to suggest that a move might be underway back toward high end of its range around 110-112. LAST UPDATE: 6/17 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 ($RUT.X) PRIOR COMMENTS: The Russell 2000 strongly rebounded from a key support area, having retraced around 50% of its strong rally from its Sept. bottom - in major contrast to the main indices and big cap stocks many of which got down to at or near their prior bottoms. Support: 448-450; Resistance: 470-471, then 482 area, at top of downside chart gap. LAST UPDATE: 6/17 Semiconductor Sector Index ($SOX.X) STOCKS: AMAT; AMD; CMOS; CREE; IDTI; INTC; KLAC; LLTC; LSCC; LSI; MOT; MU; NSM; NVDA; NVLS; PMCS; RMBS; TER; TXN; XLNX PRIOR COMMENTS: Completed 75% retracement - SOX needs to hold 425-426 on closing basis to suggest that it may have reached a bottom and is NOT necessarily going to re-test its Sept. bottom around 350. Good upside follow after new low for the move - a possible "bear trap" reversal suggests that SOX may re-test near overhead resistance in the 470 area - a close over this level, and ability to find support in this area on subsequent pullbacks, is needed to suggest there is potential for more than a "dead cat" bounce here. LAST UPDATE: 6/17 Software Index; Goldman Sachs ($GSO.X) STOCKS: ERTS; INFA; INKT; INTU; ISSX; ITWO; IWOV; JDEC; MANU; MENT; MSFT; MUSE; NATI; NOVL; NTIQ; ORCL; PMTC; PRGN; PRSF; PSFT; RATL; RETK; REY; RHAT; RNWK; SEBL; SNPS; SY; SYMC; TIBX; VIGN; VRTS; WEBM; WIND; YHOO PRIOR COMMENTS: Bullish Price/RSI divergence - and possible exhaustion gap - signaled potential to reverse to the upside, but move above 120 needed to suggest more upside. Bullish falling "wedge" pattern is also a potentially bullish indication for a sector reversal ahead. Some upside follow through to recent upside reversal after new low (for the move) in 110 area, which is now key support. Microsoft is leading the way - but other stocks in the index need to also get in gear for the group to rally much further. LAST UPDATE: 6/17 Telecoms Index; No. American ($XTC.X) STOCKS: AT; BLS; FON; LU; LVLT; MCIT; NT; NXTL; Q; SBC; T; TMX; VZ; WCOM Group has looked like the stocks were going to find support - however, the index may have found a "resting" place around recent lows at the low end of its downtrend channel in 424 area. LAST UPDATE: 6/17 Transportation Average; Dow Jones ($TRAN) Airborne Inc. (ABF); Alexander & Balwin (ALEX); AMR Corp (AMR); Burlington Northern (BNI); CNE Transportation (CNF); CSX Corp (CSX); Delta (DAL); FedEx Corp. (FDX); GATX Corp (GMT); J.B.Hunt Transport Services (JBHT); Norfolk Southern (NSC); Northwest Airlines (NWAC); Roadway Express (ROAD); Ryder System (R); Southwest Airlines (LUV); UAL Corp. (UAL); Union Pacific (UNP); US Airways (U); USFreightways Corp. (USFC); Yellow Corp. (YELL) PRIOR COMMENTS: The DJ Transportation average has been "basing" above its 200-day moving average, performing better than the Dow Industrials in this regard. TRAN has been failing to regain closes above 2738, at its 50-day average but has closed above its March-May down trendline on recent rally. Chart picture continues to look bullish as long as 2620-2622 is not exceeded to the downside. LAST UPDATE: 6/17 Utility Sector Index ($UTY.X) A trading range market like this is what momentum or "overbought/oversold" oscillators are very effective for, as when prices retreat back to such a well-defined "line" of support AND the Stochastic, RSI or MACD indicators are registering oversold, it usually represents a good trading opportunity. Once again, the UTY sector index rebounded from the low end of its range in the 304-305 area. 328-330 is resistance, then 335. Wireless Telecom Sector Index ($YLS.X) NOTE: RISK to REWARD guidelines - Determining an objective is important, even if it is a moving target, as this is the reward potential. Determining reward potential is critical to establishing whether a stop that makes “sense” (e.g., a sell stop that was placed under a key support level) would, if triggered, result in a dollar loss that is in proportion to profit potential; e.g., 1/3 of it. (On occasion, when the purchase price of call or put is equal to 1/3 or less of the estimated reward potential, there may not be a specific exit suggestion, as the cost of the option is equal to the amount that is being risked.) Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ************************Advertisement************************* ”If you 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 ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Monday 06-17-2002 Copyright 2001, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. ************************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 ************************************************************** ***************** STOP-LOSS UPDATES ***************** BGEN - call Adjust from $38.50 up to $40 OHP - call Adjust from $47 up to $47.75 ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ CB $73.11 +2.81 (+2.81) Insurance stocks were one of best performing areas on Monday as investors propelled the broad markets significantly higher. Certainly there was a short-covering component to the rally, and volume was less than convincing, but that didn't stop CB from gaining 4% to close just fractionally above our $73 stop. Closing at its high of the day is not a good sign for the bears and with our violated stop, CB is a drop tonight. Use any weakness in the morning to negotiate a more favorable exit from the play. MMC $96.25 +3.70 (+3.70) After its sharp fall from grace in recent weeks, shares of MMC were deeply oversold and prudence demanded caution to protect against the possibility of short-covering bounce. As it turned out, Friday's rebound was just the opening volley, as the stock responded positively to an upgrade this morning from Morgan Stanley. After gapping higher, the stock continued to push higher, ending near its best level of the session and right near our $96.50 stop. Despite the fact that our stop wasn't taken out at the close, we are dropping the play due to the fact that MMC closed near its high of the day on very heavy volume. SPW $127.95 +6.74 (+6.74) Short-covering hit shares of SPW this morning, raising the stock to just below our $127 stop by the middle of the session. It was looking like the rally would relax going into the close until a sharp surge in buying volume in the final hour pushed the stock as high as $130. SPW fell back a bit in the final 15 minutes, but the fact that it still held above our $127 stop leaves us no choice but to pull the plug and move the play to the drop list tonight. ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** BGEN – Biogen, Inc. $44.01 +1.59 (+1.59 this 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. Most Recent Write-Up 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. Comments Things were looking up for the Biotechnology sector (BTK.X) last Friday, as the BTK led the broad market recovery, helped along by the positive news from BGEN. AMGN helped to extend the rally on Monday with an upgrade from AG Edwards. Benefiting from the continued positive sector movement, BGEN tacked on 3.75% to close just above $44, moving solidly into the gap left behind in early June. Now that the stock has moved into the gap, there is a strong likelihood that it will at least move to the top of that gap near $47.50. The stock now appears to have strong support just above $42 and an intraday pullback near that level would make for an attractive entry into the play. Alternatively, target a rally through near-term resistance ($44.50) for entering new momentum-based positions, so long as the BTK continues its advance. Raise stops tonight to $40. BUY CALL JUL-40 BGQ-GH OI=1934 at $5.50 SL=3.50 BUY CALL JUL-45*BGQ-GI OI=6177 at $2.20 SL=1.00 BUY CALL OCT-45 BGQ-JI OI=3443 at $4.80 SL=3.00 BUY CALL OCT-50 BGQ-JJ OI=8657 at $2.80 SL=1.50 Average Daily Volume = 4.73 mln ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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