The Option Investor Newsletter Tuesday 06-18-2002 Copyright 2001, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 06-18-2002 High Low Volume Advance/Decline DJIA 9706.12 + 18.70 9721.75 9636.96 1.13 bln 1486/1500 NASDAQ 1542.96 - 10.30 1567.99 1542.77 1.51 bln 1567/1919 S&P 100 516.73 + 0.55 518.41 513.00 Totals 3053/3419 S&P 500 1037.14 + 0.97 1040.83 1030.92 RUS 2000 460.71 - 1.03 474.64 469.49 DJ TRANS 2733.68 + 3.80 2743.86 2720.35 VIX 27.33 - 0.27 28.57 26.93 VXN 54.55 - 0.43 55.39 53.93 TRIN 0.95 PUT/CALL 0.96 ************************************************************* Positive, Negative, Negative, Negative, Negative.. That was the news flow after the market closed on Tuesday. After an amazing day of holding on to gains from Friday's bounce the markets appear ready to take a hit at the open on Wednesday. For weeks it seems we have been closing right on support and hoping for good news to keep us from falling over the edge. Tonight the markets (Dow/S&P) closed just under resistance and appeared poised to rocket over those levels if good news from Oracle scared the bears. How quickly things change. Positive: After the bell Oracle announced earnings that beat the street on revenue that hit estimates. The crowd went wild and shorts, always expecting the worst, raced to cover in after hours. The stock traded as high as 10.31 from a $8.98 close. The news seemed great on the surface with new license revenue at $1.15 billion compared with estimates of only $1 billion. The initial guidance was weak with statements like "no improvement in business in sight" and "the summer is usually weak." Still the "Oracle prospered with higher margins in the worst IT recession in years" comments filled shorts with terror. They should not have been so quick on the trigger. Negative: During the conference call the news was not so exciting. The company stressed the "tough conditions" and low visibility going forward. The stock tanked and was trading back down in the $9.00 range as trading drew to a close. That stinky smell is back and those cautious comments could weigh on ORCL as the summer progresses. They said they were experiencing more competition from IBM and MSFT and sales over the next quarter could be down as much as -15% to -25%. They said they did not see any improvement in the IT sector for "at least" six months. Still pumped? Negative: Chipmaker AMD warned after the close that they would miss revenue estimates by -25% to $620-$700 million and down sharply from $820-$900 million. They said they would suffer a substantial loss in the 2Q as a result. The reason given was a broad weakness in the personal computer market in both the U.S. and Europe. In April AMD had forecasted a return to profit in the 2Q. The stock fell to $8.95 from a $10.35 close. Negative: Personal Computer maker Apple Computer warned that earnings would fall below estimates of $.13 cents at $.08 to $.10 cents. Revenues would be about -$200 million lighter than expected. The reason, slow sales, very weak consumer sales and lack of a seasonal uptick in May/June. Normally they experience a strong bounce in May/June as college graduates buy new computers as they launch into their careers. Apple said this did not happen this year. They stressed the very weak consumer sales. AAPL lost nearly -$3 in after hours to $17.35. Negative: Intel announced they were closing down their web hosting service and would take a $100 million charge. They said the demise of the dot.com boom had made the web hosting business not part of their long term plan. They were shedding non-core assets to concentrate on their main chip business. This is not a big deal in business terms for Intel and could actually be seen as a positive. But......... Intel did make a point of saying that the $100 million charge was not accounted in the guidance they issued last week. Think about this for a minute. Do you think they just came up with this idea overnight? I doubt it. So what was the purpose of waiting a week and trying to slip it in unnoticed? Simple. They can lump up the charges and calmly restate earnings downward again without saying they are "restating earnings." Intel does nothing without thinking through all the ramifications. INTC was trading down -$1 in after hours but the "charge" issue has not hit the airwaves yet. It has been totally ignored in light of the AAPL/AMD news. It would not be considered "operating" earnings but would offer an opportunity to hide other "kitchen sinks" in the numbers. Negative: CIEN warned after the close that sales would be "down meaningfully" from the last quarter even if the revenue from ONI systems was included. The merger is set to close this week and even with the addition of the ONI revenue they are going to fall seriously short. Estimates had been for $100 million in revenue and CIEN now says it will be substantially less than their $87 million in the first quarter. They said final sales would depend on how many existing orders were cancelled or delayed. (Sounds promising) Last quarter CIEN lost -$622 million and with substantially reduced sales this quarter is not looking good. They claim their core business could remain weak for years to come. That is exciting thought for investors! CIEN was trading near $4 in after hours. Positive: Also released after the close but ignored by the mainstream press was the Book-to-Bill number for May. The number increased slightly to 1.26 from a revised 1.22 in April. This is the highest level in almost two years. Shipments rose in May for the second month in a row. It is still down -41% from a year ago but growing. Orders rose for the sixth month in a row. This should be extremely positive going forward All this negative news came at the end of a really positive day. The economic reports were very good with the CPI flat and showing no inflation and Housing Starts rising +11.6%, the highest rate in six years. There was another downgrade on IBM which had no real impact and the market appeared to be shaking off bad news like water off a duck. That duck however could be invited to dinner tomorrow as the main course. The bombing in Israel, killing 19 and injuring 50, is drawing the wrath of the Israeli army as I write this. There are likely to be numerous news stories in the morning about the retaliation. Many of the traders in New York are Jewish with ties back to Israel. This always drags on the market. Also the Brazil wild card is heating up again. The debt is on the verge of default again and this impacts not only South American countries but overseas countries as well. Japan's economy could take another swoon if Brazil troubles continue. Brazil's debt is 55% of its GDP. Wednesday could be exciting. There are no material economic reports so stocks will be left to trade on their own merits. Now that is a scary thought! The bullishness from the last three days will be tested and a lot of conclusions about the market health will be drawn. S&P Futures are down and this negativity could change by morning but I would be very surprised. The profits from the last three days are at risk and suddenly traders are not so sure that the "bottom" is behind us. With warning season in full swing we never know who will be next. IBM, Dell, HPQ or any number of others could do the deed at any moment. Traders were buying the last three days to avoid missing the bounce, not because they loved the stocks. We will see tomorrow just exactly how confident they are about those purchases. Remember, volume equals validity. Without volume there is no conviction. Enter Very Passively, Exit Aggressively! Jim Brown Editor ******************** INDEX TRADER SUMMARY ******************** VOL DEMINISHES by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - VOLatility and market VOLume that is - the CBOE Volatility Index for the OEX tapered off today (27.33, -0.98%), along with the NYSE and Nasdaq total trading volume numbers, down for two days running. Bearish traders were not selling into rallies for a chance - they are sullen and subdued, but unconvinced. Traders have not gone wild either - my favorite "sentiment" indicator, the ratio of CBOE total equities call volume in relation to total daily put volume jumped on Monday, to a ratio of 1.7 but this is no where near an extreme. In fact, this is one of the dynamics of the rally - not a lot of conviction but not a tremendous amount of disbelief either. Traders have been anticipating an oversold rebound - after all, the media talking heads have been telling us to expect some kind of summer rally for awhile now. I think the bears are unconvinced and I can't fault their market analysis. One technical analysis of the Dow chart at bottom, in response to a subscriber question, suggests that we may have another down "leg" ahead, perhaps after a re-test of DJIA resistance in the 10,000 area. And, after all, only the Nasdaq has re-tested its lows of last Sept. Most of the oversold sectors, especially tech and biotech are rebounding, but only from the very LOW end of their downtrend channels as I have been showing in the Sector Trader wrap up. Once they get into mid-channel or up to the top end of these daily chart channels - I suspect it may be bombs away again. We would all love to love the tech darlins again, but we have been spurned so many times that the flame of that romance is only embers and ashes. I can't see where the leadership for a sustained market turnaround is going to come from just yet - it does not look like t will be the financials, tech or manufacturing in general. The consumer defensive/consumer durables will not provide enough horsepower to pull the whole market higher - nor will the Healthcare/Health Provider sectors, which may have or be in the process of, topping out for now. The small caps are back in gear I think, after correcting between 38 and 50% of the Sept.-April rally, in terms of the S&P 600 small cap ($SML.X) and the Russell 2000 ($RUT.X) index - however, this group is mostly going to pull THEMSELVES up. S&P 500 ($SPX.X) Daily/Hourly charts: Near resistance in the S&P 500 (SPX) is at 1039-1040, then at 1050. I would turn seller in this area, if reached. 1050 is sort or "triple threat" resistance - as implied by a prior hourly (up) swing high, the top of its broad hourly downtrend channel, and the level of the "pivotal" 21-day moving average. Consequently, a close above 1050 would be quite bullish, but not something I think likely, at least near-term. I could see SPX winding up at 1050 on expiration Friday, then correcting to lower levels next week. Support is anticipated in the 1025-1023 area, then at 1015. Purchases are suggested in the 1015-1012 area. The "emerging" hourly uptrend channel (blue dashed lines) is still within the context of a broad hourly downtrend channel. A bullish breakout would only be "confirmed" by an hourly, then a daily, close above 1050 in my estimation. S&P 100 ($OEX.X) Daily/Hourly charts: I suggest selling in the 520-522 area, with an exit point at 527 initially. A close above 522, at the 21-day moving average, would suggest caution on the short side - although one close over the "pivotal" trading average does not "prove" a further up move until/unless this level holds up on the following day also. Support begins at 515-514, then extends down to the 510-509 area. A would not anticipate a close under 500 - if it happens, a bearish technical outlook is confirmed again. Dow Index (1/100: $DJX.X) - Daily/Hourly charts: I favor selling the DJX in the 97.6 - 98.00 area, on up to 98.50, resistance implied by the 21-day moving average. There is a resistance trendline on the daily chart that comes in a bit higher, around 99.5-99.6 that is significant also. Support is anticipated at 96, then in the 95-94.5 area, based on a cluster of prior hourly lows and the intersection of a previously broken hourly down trendline - one that may now act as support. A close below 94,5 turns the chart picture bearish again. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: Resistance was apparent this afternoon in the 28.8-29 area. Above this area, next resistance is 29.5-29.6, based on the hourly up trendline and the level of the 21-day moving average and I favor selling in this area. Some corrective action seems likely tomorrow (Wed.) Support is at 28-28.2, then at 27.5, where a buying opportunity may set up. Beside strictly price levels, I would like to see at what level the hourly stochastic is at a more neutral, if not oversold, level. A sideways to lower trend into Thursday would likely accomplish this. If the market goes up fast, with few corrections along the way, then the rally is surely unsustainable - except this week, there is the influences of index options and futures expiration, which is a "wild card" influence. MINI-TRADER'S CORNER - Subscriber QUESTION: "On a daily chart I see a head & shoulders on the DJ-30. How far can it go up to not break the right shoulder? If it is a true H & S, what would be the down side, around 8750? " RESPONSE: Possible Head & Shoulder's (H&S) Top pattern in the Dow Jones Industrial Average (DJIA) -- Basis the Dow Index (DJX) calculation would be: Top of the middle top or "Head" = 106.60; To Neckline = 96.4 (trendline between bottom of two "shoulders"); Difference = 10.2 Subtracting 10.2 from point on DJX neckline break at 99.1 = 88.90 or DJIA 8,890, as a possible "minimum" downside objective implied by the H&S top pattern. DJX could rebound "to" neckline, at 99.7 (Dow 9,970) currently and it would just be a "return" to the neckline resistance, which is not uncommon - if any such rally turned lower from there, downside target (at 88.9 or DJIA 8,890) implied by H&S top pattern would remain intact. Encyclopedia of Chart Patterns study (Tom Bulkowski) found that average decline predicted by an H&S top is 15% from the point where the neckline was broken. Decline so far from the "neckline", which has been to 92.6 (9,260), is 6.5% so far. This analysis would suggest that there is substantial downside potential yet in the market. I will be curious as to what happens if there is this return to the Dow neckline - of course, the neckline rises over time - soon it will be at DJX 100, or Dow 10,000 - sound like a familiar level? I did an explanation of the Head & Shoulder's pattern and how to compute "implied" objectives based on this pattern on my Trader's Corner article last week at http://www.OptionInvestor.com/traderscorner/061602_1.asp THIS PATTERN IS NOTICED BY TECHNICAL TYPE TRADERS BECAUSE ITS FAIRLY RELIABLE IN ITS OUTCOME - ONE FURTHER EXAMPLE: Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ------------------------------------------------------------ WINNER of Forbes Best of the Web Award • optionsXpress voted Favorite Options Site by Forbes • Easy screens for spreads, collars, or covered calls • Free streaming quotes • Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ **************** MARKET SENTIMENT **************** Tech Bears Be Careful: Bull Alert By Eric Utley The Nasdaq-100 Bullish Percent ($BPNDX) reversed into bull alert Tuesday. The reversal came from the 16 percent level. To put the recent level of the $BPNDX into perspective, it was through Friday's session the most oversold since September. Just where the NDX and its components go from here is unknown. But what we do know is that short term risk in the NDX has shifted to the upside, the bears know that and so do the bulls. The bears are going to be much more conservative about putting on new short positions with the $BPNDX in bull alert at the 23 percent level. There's room for 77 percent of the NDX stocks to turn bullish, while only 23 percent more to zero on the downside. With the upside risk now nearly three times that of the downside, obviously bears are going to be more inclined to run for cover than press to the downside. After all, they have some mighty fine profits captured during the last month. The bulls in technology will start getting a bit more aggressive to the long side, using the stronger names in the NDX, the ones already on buy signals, emerging from short-term bases. The charts to use as references for what the bulls might be looking for are Microsoft (NASDAQ:MSFT) and eBay (NASDAQ:EBAY). Both stocks are trading relatively well versus the NDX, and both are on buy signals. So let's keep this short and simple, if you're bullish, the better bets are in NDX names. If you're bearish, there's better downside risk, read that as potential, in the NYSE and S&P (ex-tech) names given the higher readings of the bullish percent data. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 9706 Moving Averages: (Simple) 10-dma: 9616 50-dma: 9987 200-dma: 9847 S&P 500 ($SPX) 52-week High: 1316 52-week Low : 945 Current : 1037 Moving Averages: (Simple) 10-dma: 1026 50-dma: 1075 200-dma: 1106 Nasdaq-100 ($NDX) 52-week High: 2071 52-week Low : 1089 Current : 1138 Moving Averages: (Simple) 10-dma: 1136 50-dma: 1251 200-dma: 1417 Gold and Silver ($XAU) The XAU was back at it again Tuedsay, charging higher. The index earned the day's best performing sector spot once again. It finished 3.72 percent higher for the day. The usual suspects were on the leader board Tuesday, including Harmony Gold (NASDAQ:HGMCY), Gold Fields (NYSE:GFI), Anglogold (NYSE:AU), and Agnico Eagle Mines (NYSE:AEM). 52-week High: 89 52-week Low : 49 Current : 76 Moving Averages: (Simple) 10-dma: 78 50-dma: 78 200-dma: 63 Fiber Optic ($FOP) The FOP was knocked down again Tuesday. The index shed 3.16 percent, earning the day's worst performing sector spot. Leading losers included Tellabs (NASDAQ:TLAB), who lost its CEO to Qwest Communications (NYSE:Q), another component of the FOP. Others included ONI Systems (NASDAQ:ONIS), which is being acquired by CIENA (NASDAQ:CIEN), Applied Micro Circuits (NASDAQ:AMCC), and CIENA. 52-week High: 139 52-week Low : 49 Current : 52 Moving Averages: (Simple) 10-dma: 54 50-dma: 70 200-dma: N/A ----------------------------------------------------------------- Market Volatility The VIX was lower by a fractional amount Tuesday. It appears to be resting near its 10-dma, just above the 200-dma. I didn't like the lower VXN in light of the 10 point drop in the Nasdaq. I wish it were a little higher, but it's not. CBOE Market Volatility Index (VIX) - 27.49 -0.11 Nasdaq-100 Volatility Index (VXN) - 54.65 -0.33 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.96 442,008 424,082 Equity Only 0.77 350,441 268,994 OEX 1.06 26,647 28,358 QQQ 0.79 31,945 25,190 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 53 + 0 Bull Correction NASDAQ-100 23 + 4 Bull Alert DOW 43 + 0 Bear Confirmed S&P 500 46 + 1 Bear Confirmed S&P 100 47 + 0 Bear Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.03 10-Day Arms Index 1.23 21-Day Arms Index 1.33 55-Day Arms Index 1.36 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when the do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals Advancers Decliners NYSE 1667 17411554 NASDAQ 1565 1879 New Highs New Lows NYSE 97 38 NASDAQ 68 82 Volume (in millions) NYSE 1,178 NASDAQ 1,588 ----------------------------------------------------------------- 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 reduing 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 ----------------------------------------------------------------- ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's • optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's • 8 different online tools for options pricing, strategy, and charting • Access to options specialists via email, phone or live chat online • Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ *********************** INDEX TRADER GAME PLANS *********************** THE SECTOR BEAT - 6/18 by Leigh Stevens It was a quiet day in both the market and the market sectors too for the most part. There were no significant changes in the technical picture for any of the industry groups or sectors. The gold stocks rebounded a bit, but not to an extent that changed the bearish chart picture on the XAU index. Healthcare, while higher, appears to be "churning" and possibly building at least a temporary top. It's not an exciting day, when some of the best upside momentum continues to be shown by the Utility sector, having a strong 3-day rebound from the low end of its multimonth trading range. Airlines had a "dead cat" bounce, but nothing that turns around its bearish chart picture. The banks and broker stocks within the financial index are holding their gains which "supports" the overall market - which gave back little ground today after a strong 2-day advance - that's a first for awhile. HIGHER ON THE DAY ON Tuesday - DOWN ON THE DAY on Tuesday - The weak get weaker, as the networking, fiber optic ($FOP.X), wireless and semiconductors came under renewed selling pressure. The SOX weakness today suggests to me that the Nasdaq may give some ground tomorrow. SECTOR HIGHLIGHT - Biotechnology Index ($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 The biotech HOLDR's reversed at resistance implied by the prior swing low and may continue correcting here - I am canceling the buy recommendation I had on the Biotech trust stock, as the buy in point is too low to realistically buy a small correction - and, if there is a big correction, I would want to evaluate the price action further before suggesting anything. SMALL CAP - I still like the small cap sectors. Have noted in my Index Trader wrap up, the Russell 2000 iShares chart as an example of how a "Head & Shoulder's" downside objective was fulfilled at the recent low. TRADE RECOMMENDATIONS & REVIEW - NEW TRADE(S) RECOMMENDATION(S) - NONE TRADE LIQUIDATIONS - NONE OPEN POSITIONS - NONE INDIVIDUAL SECTOR REVIEW - continued tomorrow - see prior day for the last updates and charts Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ------------------------------------------------------------ We got trailing stops! • Trade online with trailing stops at optionsXpress, at no extra cost • Trailing stops based on the option price or the stock price • Also place Contingent, Stop Loss, and "One Cancels Other" orders • $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. 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The Option Investor Newsletter Tuesday 06-18-2002 Copyright 2001, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** AZO $80.83 -0.77 (+0.24) The good news is that AZO has been holding up rather well over the past two weeks. The bad news is that it isn't going anywhere. After the stock's breakout above $78, it appears to be moving into a consolidation phase, defined by support near $79 and resistance near $83. It is hard to define the catalyst that will break the stock out of this funk, so we are going to pull the plug tonight. There are better opportunities out there and that is where we want to focus our attention. PUTS: ***** WHR $69.35 +0.96 (+2.95) The rebound in WHR late last week from the $65 level appears to have some legs to it. The stock penetrated to the upside above short term congestion above the $70 resistance level during today's session on a slight up tick in trading volume. We want to be cautious with the oversold nature of the stock going forward, and are choosing to drop coverage on the play tonight. Look for a pullback to exit positions into early tomorrow, or set a stop at today's intraday high of $70.50. LLL $58.72 +3.62 (+6.67) There's nothing so frustrating as picking a new put near the bottom. After adding LLL to the put list, we got a nice drop down to the $52 level and the stock even closed at its low of the day on Friday, diverging nicely with the broad market rebound. But this week has seen strong buying on the heels of the company's antitrust clearance for its acquisition of PerkinElmer's Detection Systems business. Tuesday's strong rally pushed LLL solidly through our $57 stop, forcing us to drop the play. All positions should now be closed, but for any laggards, look to exit on any intraday weakness tomorrow. RYL $52.50 +0.65 (+3.40) RYL's rebound off the lows on Friday was starting to look a little long in the tooth yesterday afternoon and we were looking for a fresh bearish entry. But that was before the very strong Housing numbers were released this morning. That shot the stock up to the $54 level before profit taking appeared. What was disappointing was the fact that the stock found support in the afternoon above yesterday's highs near $52. Right now, it looks like the risks are weighted to the upside, so we're going to drop the play tonight to get out of the way of a risk picture that has now shifted against us. Look for any opening weakness to provide a more favorable exit point for open plays. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue DGX 90.79 1.62 0.93 Rebounded from higher relative low AZO 80.83 1.01 -0.77 Dropped, head and shoulders top??? OHP 50.95 0.97 0.65 Steady trend, super strong stock!! BGEN 42.90 1.59 -1.11 Biotech back in favor, empty gap VRTX 18.77 0.71 0.23 Gaining upside momentum to $20 AET 50.87 0.96 1.03 New, consolidation leads to break DUK 32.92 0.60 1.21 New, revival of sentiment and bulls PUTS WHR 69.35 1.99 0.96 Dropped, showing signs of strength PMI 39.34 0.93 -0.04 Inside day set up, entry point!!! MIL 35.01 1.33 -0.39 Lifted by short covering in biotech HIG 61.94 2.24 -0.23 Failed to follow through at 200-dma ENZN 26.38 1.44 -0.60 Stalling near short term resistance IBM 75.94 0.97 -1.20 On the verge of another breakdown?? RYL 52.50 1.75 0.65 Dropped, extremely strong housing # IWM 93.78 2.13 0.15 Entry near short term resistance LLL 52.05 3.05 3.62 Dropped, strong rebound in defense ZLC 39.21 0.87 -0.79 Lagging strength in retail sector PDX 24.98 0.84 0.77 Short covering helped higher, entry TDS 64.60 2.50 -1.05 New, entry point into telecom put ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity • No hidden fees for limit orders or balances • $1.50 /contract (10+ contracts) or $14.95 minimum. • Zero minimum deposit required to open an account • Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************** PLAY UPDATES - CALLS ******************** BGEN $42.90 -1.11 (+0.48) After the strong rebound off the lows, Biotechnology stocks took a much-needed breather on Tuesday, resulting in a roughly 1.2% loss for the BTK index. In light of the strong rebound off the lows near $328, a 5-point loss fits nicely within the concept of normal profit taking. That appears to be the case with BGEN as well, with the stock giving back most of yesterday's gains to end just below $43. That allowed the intraday oscillators to fall back near oversold and that could be setting us up for another attractive entry point tomorrow. BGEN has solid support now at the $42 level and a dip and bounce near there would make for an attractive entry, so long as the BTK is able to continue its recovery. Traders looking for confirmation before playing will want to wait for the stock to rally through the $44.25 level before taking a position. Keep in mind that our first upside target is the top of the early-June gap at $47.75. Keep stops set at $40. DGX $90.79 +0.93 (+2.55) Health Care stocks have been in the spotlight again this week and DGX investors have taken advantage of the bullish action to drive the stock back above the $90 level. Granted, the dip on Friday provided an extraordinarily good entry point for those that were ready and willing to take it. For those that missed that entry, the question is whether to buy the current strength or wait for another pullback. With solid buying volume and consistent strength in price over the past two days, any dip into the $89-90 support level should make for a solid entry point on the subsequent rebound. Alternatively, momentum traders can target new entries on a push through the $92 level, while keeping in mind that there is some solid resistance overhead in the $94 area. Keep stops set at $88. OHP $50.95 +0.65 (+1.62) While the broad markets vacillated in a narrow range on Tuesday, the Health Care Payor's index (HMO.X) snuck its way to a new all-time high, propelling shares of OHP up to a new all-time closing high, just a nickel below $51. With daily Stochastics just completing a bullish reversal without even dipping into oversold, it looks like the stock is prepared to continue ticking off new highs. In fact, with the positive developments in the industry and the HMO index solidly in rally mode, we would even look favorably on new positions taken on a push through Tuesday's intraday high of $51.24. Alternatively, look for an intraday dip to support in the $49.50-50.00 range to provide a new entry point. Note that the 3-week ascending trendline is now just above $49. Raise stops to $48.75. VRTX $18.77 +0.23 (+0.94) After the rebound off the lows on Friday, the Biotechnology sector (BTK.X) was due for a pause to catch its breath and that's what we saw on Tuesday, with the BTK falling back approximately 1.2%. Showing that it is gaining strength relative to the BTK, shares of VRTX actually posted a fractional gain. The performance was looking even better midday, as the bulls attempted to challenge the $20 resistance level. But with the lack of strength in the broader sector, they just couldn't get the job done and gave back the intraday gains at the close. Action points are easy to define here, with a breakout over the $20 level being the trigger for momentum traders and an intraday dip and bounce near the $18.50 intraday support level. An even better entry could materialize with a larger dip near the $17.50-18.00 support zone, but we would want to see strong buying volume come in to support the stock before taking a position. Raise stops to $16.50. ************** NEW CALL PLAYS ************** AET - Aetna $50.87 +1.03 (+1.97 this week) Aetna Inc., incorporated in December 1982, is a health benefits company whose business operations are conducted in the Health Care, Group Insurance and Large Case Pensions segments. On December 13, 2000, the Company was spun off, with the remaining entity merged into a subsidiary of ING Groep N.V. The Health Care segment consists of health and dental benefit products including health maintenance organization, point-of-service, preferred provider organization and indemnity products, and group insurance products including life, disability and long term care insurance products. The Group Life Insurance segment consists principally of renewable term coverage, the amounts of which may be fixed or linked to individual employee wage levels. Large Case Pensions manages a variety of retirement products, including pension and annuity products, offered to qualified defined benefit and contribution plans. The health care providers can't be stopped. A quick glance over the new highs list every day reveals health care related stocks hitting new yearly highs. The trend shows little if any signs of slowing down, which has us returning to Aetna, a provider of health benefits. The company is hitting on all cylinders with estimates being raised week after week. Not only is the general operating environment most bullish for AET, but the company is taking continued strides to cut costs in an attempt to further boost profitability. This one two combination is causing for a major rally in the stock, which appears poised on the edge of another major breakout after today's move higher on active trading volume. The stock has spent the last eight weeks consolidating its earlier run between the $45 and $50 level. That consolidation appears to be ready to be broken given today's advance up to the $50.88 level. The stock hit a high in late April at the $51 level, and a breakout above that level would confirm today's attempt and possibly lead to further upside in this strong stock. Look for momentum entry points on a breakout above the $51 level in the coming session. Confirm any breakout attempt with strong intraday advancing volume. If the stock pulls back one last time before breaking out, then look for a bounce from the rounding 10-dma below at the $49 level. Our stop is initially in place at the $48.75 level. BUY CALL JUL-45 AET-GI OI=1600 at $6.60 SL=4.75 BUY CALL JUL-50*AET-GJ OI= 717 at $2.90 SL=1.50 BUY CALL OCT-50 AET-JJ OI=2353 at $5.10 SL=3.00 BUY CALL OCT-55 AET-JK OI=1396 at $2.90 SL=1.75 Average Daily Volume = 1.16 mln DUK – Duke Energy Corporation $32.92 +1.21 (+1.91 this week) Duke Energy offers physical delivery and management of both electricity and natural gas throughout the United States and abroad. The company is a leading domestic gatherer and processor of natural gas and develops, constructs an operates energy facilities worldwide. DUK offers these and other services through seven business segments: Franchised Electric, Natural Gas Transmission, Field Services, North American Wholesale Energy (NAWE), International Energy, Other Energy Services and Duke Ventures. The past several weeks have been a rough road for Utility stocks with several energy concerns like DYN, WMB, MIR and ILA getting hit by severe selling pressure due to credit concerns. Now that that concern appears to be waning, the weight of these troubled companies appears to be lifting from more stable energy concerns and the bullish effect can be seen in the recent rise in the Dow Utilities index (UTY.X) The UTY has been recovering for the last couple weeks after bouncing from major support near $305. The rally has really extended nicely in the past couple days, with the UTY index clearing near-term resistance at $321 on Tuesday. Turning to stronger stocks in this sector, we came across the chart of DUK, which has likewise been rebounding over the past week. The stock has come a long ways since finding support near $28.50 last week, so a bit of profit-taking would not be out of the question, before the stock continues its recovery. Particularly encouraging is the fact that DUK closed fractionally above its 7-week descending trendline (currently $32.50) on Tuesday. This is right at resistance left behind from the mid-May drop, so it is natural to expect a mild pullback in the near future. Look to initiate new positions on a drop to and bounce from the $30-31 support area. A successful retest of that support level will set the stage for the stock to rally to the $35-36 area over the near-term. Initial stops are set at $29. BUY CALL JUL-32*DUK-GZ OI=3577 at $1.90 SL=1.00 BUY CALL JUL-35 DUK-GG OI=5893 at $0.70 SL=0.25 BUY CALL OCT-32 DUK-JZ OI=1579 at $3.20 SL=1.50 BUY CALL OCT-35 DUK-JG OI=2628 at $1.90 SL=1.00 Average Daily Volume = 4.46 mln ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's • $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees • Easy screens for spreads, collars, or covered calls! • Contingent, Stop Loss, Trailing stop, or OCO • 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************* PLAY UPDATES - PUTS ******************* PMI $39.34 -0.04 (+0.89) PMI, like most stocks in the last two days, rallied on short covering following last Friday's big reversal from the gap lower move. The stock traced an inside day set up today on its lightest volume day in over two weeks, which means that the pause or consolidation should lead to either a breakout in the direction of the current trend or a reversal from that trend. For traders with open put plays on this stock, that means sliding stops down to yesterday's high at the $39.65 level. If the stock is going to move higher over the short term, we should know as much rather quickly by a break above yesterday's high. Conversely, if the stock's trend continues lower over the coming days, then we'll see a breakdown below the inside day set up today with a move below yesterday's low at the $38.58 level. The inside day sets up a favorable entry situation for breakdown traders, who simply need to watch for a decline below the $38.58 level in tomorrow's session on an increase in volume and confirmation in the broader market. MIL $35.01 -0.39 (+1.37) The rebound in the biotechnology sector over the last two days allowed for MIL to finally rally after its month long declining trend. But the stock's rally came on relatively lighter volume, and it stopped today overhead at the 10-dma at the $36 level. The stock's inability to trade through that technical level has us thinking that the recent strength was nothing more than short covering, and has set up another favorable entry point into put plays on further weakness in the biotech sector. Look for future rollovers from the 10-dma, which closed at the $35.85 today. Confirm relatively weaker volume on any rally attempt up to the 10-dma, and confirm weakness in the biotech index before entering new positions. If you're looking for more confirmation in new positions, watch for MIL to take out Monday's low at the $34.17 level. HIG $61.94 -0.23 (+2.01) HIG staged a monster rally in the last two days following its major reversal from last Friday's session from the $58 level. The rally in the stock came on strength in the broader financial sector which saw banks, brokers, and insurers all turn higher. Although HIG did stage a big rebound in the last two days, the stock had grown extremely oversold over the short term. It was due for a relief rally, and that's exactly what happened in the last two days. The stock failed just below its 200-dma in today's session, which is the level to monitor for new entry points in the coming sessions. Further rollovers from the resistance just above current levels between the $62.69 level, which is the 200-dma, to the $64 level can be taken as new entry points into a rally attempt on relatively lighter volume. A breakdown below today's low at the $61.45 level could offer momentum players a chance to take new entry points into put plays. Confirm direction in the broader market before entering bearish plays. ZLC $39.21 -0.79 (+0.08) The broader retail sector has been edging higher in the last two days on the strength in the broader market as measured by the Dow and S&P 500. The sector strength carried ZLC higher through yesterday's session when the stock stopped its rally attempt right at the $40 level. Volume was relatively lighter during yesterday's move up to the $40 level as was the case in the broader market. In today's trading, the stock traded briefly above its 10-dma in the early part of the day, but promptly rolled over from that level as the day wore on. ZLC displayed some definite signs of relative weakness versus both its sector and the broader market during today's session, which is a good thing going forward for this put play. Additional rollovers from the 10-dma can be taken as entry points into new put plays provided that the market isn't charging higher. Remember that we're looking for this stock to eventually breakdown below the $38 level, so entries taken near the 10-dma on rollovers offer good downside in this play. PDX $24.98 +0.77 (+1.61) PDX spent the last two days trending higher on what appeared to be short covering, such as the case in the broader market. The stock moved higher today on less than its average trading daily volume, which revealed that the buyers weren't too interested in taking this stock higher. Instead, it appears to have been a case of short term selling exhaustion for the reason that the stock was able to climb higher after its sell off late last week. Most relief rallies eventually fail, and we don't think PDX's recent rebound is going to be the exception. The stock is going to start facing short term resistance at the $26 level where traders can start looking for a rollover entry point into new put plays. If the stock continues higher from there, we'll look for intraday rollovers from the $27 to $28 level if further short covering carries the stock that far. To the downside, momentum traders can sit on the sidelines until the stock takes out the short term support below current levels at the $23 level. Look for a breakdown below the $22.50 level. ENZN $26.38 -0.60 (+0.84) We've been sitting on the edge of our seats over the past couple days as the short-covering rally in the Biotechnology sector (BTK.X) propelled ENZN right up to major resistance at the $27 level. Yesterday, the stock closed 2-cents below that critical level (the site of our stop) and after one last bullish attempt this morning, the stock drifted lower into the closing bell, ending just above the lows of the day. It is interesting to note that the 20-dma ($26.89) is providing resistance again, just as it did in late May. So is this an entry point? Simply put, it likely depends on the action in the BTK, as further sector weakness will hit the weaker Biotech stocks like ENZN the hardest. Repeated rejections at the $27 resistance level can be used for initiating new positions, although the safer play will likely be to wait for the stock to fall back below intraday support at $26. We're keeping our stop at $27 as a close above that level will break the bearish trend and have us prudently moving to the sidelines. IBM $75.94 -1.20 (-0.23) Yesterday's rally drove IBM as high as $77.75 before the bears started leaning on the stock again and that rollover below the $78 resistance level looked like a pretty good entry point. Apparently we weren't the only ones, as Morgan Stanley was out before the open, cutting estimates based on their view that hardware purchases remain a low priority for IT spending. It is interesting that the firm made no mention of what we think is the main catalyst here, which is the expectation that IBM is going to have to warn based on a falloff in its Services revenue. Whatever the catalyst, the stock is still trading heavy, and that could be seen on Tuesday, as the opening drop took it down to $75.50. There were several attempts to take out this support level throughout the day, but the bulls prevailed, helped in part by the resilience of the broad market. A breakdown below the $75.50 level can be used for fresh entries, although a rollover up near yesterday's intraday highs would be even better. In the wake of today's downgrade-related drop, we're lowering our stop to $79. IWM $93.89 +0.26 (+2.39) So, is it a bounce or a recovery? Inquiring minds want to know! It was a safe bet that the Russell 2000 would get a decent bounce from the level of the February lows, especially with the broad market staging an oversold bounce. That was the reason we initiated the play with such a wide stop, so that we could take advantage of the rollover after the bounce had run its course. Sure enough, the IWM began to weaken after the opening pop on Tuesday, rolling over right at the $94.50 level, which had served as resistance since early June. That rollover turned out to be a solid entry as the IWM declined throughout the morning. Despite the afternoon bounce, weakness reappeared near the close and could be hinting at another down leg tomorrow. Another pop up to resistance can be used for new entries, although a drop under the $93 intraday support level would be more encouraging from a bearish perspective. Judging by the picture on the PnF chart, supply is definitely in control here and the real test of the bull-bear debate will likely center around the $91 support level. Should IWM fall through that level again, we will be able to start looking for the current bearish target ($76) to be achieved. Keep stops set at $95. ************* NEW PUT PLAYS ************* TDS - Telephone Data Systems $64.60 -1.05 (+1.45 this week) Telephone and Data Systems, Inc. (TDS) is a diversified telecommunications service company with wireless telephone and wireline telephone operations. TDS conducts substantially all of its wireless operations through United States Cellular Corporation (U.S. Cellular) and substantially all of its wireline telephone operations through its wholly owned subsidiary, TDS Telecommunications Corporation. TDS, U.S. Cellular and TDS Telecom hold various investments in publicly traded companies, the majority of which were the result of sales or trades of non-strategic assets. Minority positions are held in Deutsche Telekom AG, Vodafone plc, Rural Cellular Corporation and VeriSign, Inc. Even the seemingly strong telecommunications companies are being dragged through the mire that has become their industry. Many analysts are predicting further bankruptcies in the telecom business following the most recent declaration by XO Communications. And despite the recent perceived good news such as the appointment of a new CEO at Qwest Communications (NYSE:Q), the fundamentals of the business just aren't getting any better. UBS Warburg noted that much on Thursday when the brokerage firm lowered its price target on TDS citing the negative sentiment by the market on the telecommunications group. Negative sentiment is an understatement for TDS' trend that has been in place since early April when the stock was trading above the $90 level. Almost -$30 later, the trend appears no where near its end as the selling volume continues to increase on the way down. The last two days of a bounce did nothing more than to work off the stock's short term oversold nature, and in doing so setting up another entry point into put plays. As long as the stock remains below its 10-dma, now at the $67.42 level, the longer term descending trend will remain in place and we will like put entries at or around current levels. Traders looking for a little higher of entry points can look for a rollover from the $67 level. Momentum traders can look for a breakdown below yesterday's intraday low at the $63 level. Our stop is initially in place at the $69 level. BUY PUT JUL-65 TDS-SM OI=78 at $3.70 SL=2.25 BUY PUT JUL-60*TDS-SL OI=50 at $2.00 SL=1.00 Average Daily Volume = 244 K ------------------------------------------------------------ WINNER of Forbes Best of the Web Award • optionsXpress voted Favorite Options Site by Forbes • Easy screens for spreads, collars, or covered calls • Free streaming quotes • Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. 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The Option Investor Newsletter Tuesday 06-18-2002 Copyright 2001, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. ********************* PLAY OF THE DAY - PUT ********************* PMI - PMI Group $39.34 –0.04 (+0.89 this 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. Most Recent Update PMI, like most stocks in the last two days, rallied on short covering following last Friday's big reversal from the gap lower move. The stock traced an inside day set up today on its lightest volume day in over two weeks, which means that the pause or consolidation should lead to either a breakout in the direction of the current trend or a reversal from that trend. For traders with open put plays on this stock, that means sliding stops down to yesterday's high at the $39.65 level. If the stock is going to move higher over the short term, we should know as much rather quickly by a break above yesterday's high. Conversely, if the stock's trend continues lower over the coming days, then we'll see a breakdown below the inside day set up today with a move below yesterday's low at the $38.58 level. The inside day sets up a favorable entry situation for breakdown traders, who simply need to watch for a decline below the $38.58 level in tomorrow's session on an increase in volume and confirmation in the broader market. Comments PMI set up the classic inside day pattern during today’s session. The stock traded within yesterday’s high and low range, which now become the action points for this play. Those with open positions should consider lowering stops to the $39.65 level. Those looking for new entry points need simply watch for a breakdown below Monday’s, which was the $38.58 level, and confirm such a move with weakness in the broader market and an increase in volume. ***June contracts expire next week*** BUY PUT JUN-40 PMI-RP OI=128 at $0.50 SL=0.00 BUY PUT JUL-40*PMI-SP OI= 15 at $1.30 SL=0.75 Average Daily Volume = 325 K ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's • optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's • 8 different online tools for options pricing, strategy, and charting • Access to options specialists via email, phone or live chat online • Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************ MARKET WATCH ************ More bullish plays are being triggered from the Watch List. Is that a sign of things to come for the market? To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/061802.asp ************** MARKET POSTURE ************** The NDX and OEX barely missed resistance today. The INDU and SPX broke above their respective resistance levels. To Read The Rest of The OptionInvestor.com Market Posture Click Here http://www.OptionInvestor.com/marketposture/061802.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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