The Option Investor Newsletter Monday 06-24-2002 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) ****************************************************************** 06-24-2002 High Low Volume Advance/Decline DJIA 9281.92 + 28.03 9369.95 9083.56 1.57 bln 1341/1898 NASDAQ 1460.34 + 19.38 1476.56 1414.69 2.04 bln 1624/1953 S&P 100 493.04 + 3.62 497.97 480.25 Totals 1965/3851 S&P 500 992.72 + 3.58 1002.11 970.85 RUS 2000 459.09 - 1.98 462.59 452.79 DJ TRANS 2739.57 - 16.07 2754.81 2710.51 VIX 29.87 - 1.41 32.88 29.27 VXN 58.65 - 0.65 60.32 56.24 TRIN 0.83 PUT/CALL 0.79 ****************************************************************** Cornbread and Beans Again By Buzz Lynn buzz@OptionInvestor.com Maybe time to get ready for steak and potato chips? No I don't really care that MSFT announced their earnings date of July 18th. The thinking there is that by making the actual date so close to today's announcement that there isn't any bad news to warn about, and thus, the earnings are going to be OK. MSFT didn't guide up either, but you can't keep a good bull down. Nor do I care (at least for trading purposes) that George Bush presented his plan to establish a Palestinian State over the next three years. Some would suggest that's the reason for the rally today. Fact is that the markets had already moved up a great margin off their lows prior to Bush's first utterance. Those are not good reason for steak and chips. Nope, what I'm gauging is sentiment based on what charts tell me. Today, we saw a near re-test (970) of September's S&P 500 closing low of 966. Similarly, the NASDAQ tested the September 27th low of 1418 by posting a low today of 1414. The Dow has so far, fared better than both. Furthermore, the recovery off today's low was met with stronger than usual volume of 1.57 bln shares on the NYSE and over 2 bln on the NASDAQ. While this was going on, the negative volume that had swamped positive volume early today had reversed to slightly in favor of positive volume by today's market highs. That was really solid action. But in the final hour, the positive volume fell apart and the negative volume again held the advantage by the close. Another piece of the puzzle is that the VIX fell back (only slightly) under 30, thus demonstrating investors'/traders' sloughing off a bit of fear. But in the end, no steak and chips - at least not yet. We'll be watching for the daily and 60-min stochastics to hit oversold again and for the VIX to pop back over 30, heck maybe 40, meanwhile, again, testing support. Bulls shouldn't rejoice yet. I equate this to coming 500 miles a cross the desert with dwindling water and knowing water is "only" 40 miles away. When searching for the bull, as in searching for the water, we may know where it is, but we're not there yet. And when we do finally get there, it will amount to a bullish correction, but still within a primary bear market - just like a pond, but still in the middle of the desert with many mile until completion of the ultimate crossing. Until earnings justify prices, this market will continue to slide for - dare I say it - years. The speculative excesses will take that long to correct; the Dollar will have to rise again against other currencies and Americans will have to pay off some major debt to begin saving again. Did we begin that process with today's rally off the lows? No way. It's no secret that Fundamentals Guy is building an Ark, not just predicting the weather. To that end, I've been reading up on big picture items - huge debt, inflationist monetary policy, no personal savings, sinking Dollar - these items make the American stock markets pale in comparison. What follows are some interesting snippets from stuff I've uncovered. From Bill Gross of Pimco Bonds: "After all, think of the obvious – how does a government ease its way out of a debt crisis? By eroding the real value of debt with a bit of unanticipated inflation; by cheapening its currency; by bolstering nominal corporate profits; by levering up the public sector (federal deficits) and in so doing delivering the relative debt of the private sector. Bingo." More: "It (U.S. economy) has morphed through the years from an economy primarily based on production, to one substantially reliant on growth via debt and new derivative life forms. We now live in an age of paper, and this paper maché facade is not a permanent, nor lasting one." My take: This jibes with John Rutledge's positing a few months back, which I relayed in a Trader's Corner, that we are experiencing a massive asset redistribution from paper (stocks, bonds, derivatives) to tangible (gold, real estate, lumber, oil). Here's yet another black eye for Merrill Lynch, not that they need one while one of their high profile brokers figures large in the Martha Stewart insider-trading hullabaloo. From a Reuter's article, "Fifty-one percent of 280 fund managers who oversee $711 billion in assets said in a Merrill Lynch survey that U.S. earnings are the worst in the world when it comes to predictability, volatility and transparency. Not seeing any improvement any time soon, the managers say the U.S. stock market is the one place where they most want to be underweight." My take: Any Buy rating issued by a Merrill analyst, especially on CNBC, ought to be met with a cold, skeptical shoulder. More to the point, nearly half of those surveyed by Merrill (49%) still think this is a market in which to remain invested. Well, perhaps 51% of CNBC guests (at least the ones that manage funds) will now recommend their clients underweight the U.S market? Don't bet on it. There are still 49% that need converting. Only then will it be safe to don pointy horns again. Oh, this just in. . .Trim tabs is reporting a net outflow of $15 bln (with a "b") from mutual funds over the last four weeks. Janus alone had redemptions of $1.3 bln. Investors are clearly voting with their feet and leaving the building. . . just like Elvis. OK, let's look at the charts quickly. I'm not going to spend much time here tonight since, were I not to show charts, I could merely say that the dailies still need to reach stochastically oversold before I become convinced of a real trading rally. To boot, the 60-min charts are rolling over already from today's overbought rally. For those that appreciate a visual though, here are all three major markets. Dow Industrials chart - INDU (weekly/daily/60): I'd expect 9100 to be tested again, or even 9000. Today does not constitute a much hoped for V-bottom reversal. And even if it did, this is still a bear market. NASDAQ Composite - COMPX (weekly/daily/60): No trend reversal in sight. But long-term support held today. Still 60-min chart rolling over and daily not yet to oversold. Let's see if 1414 holds or if it heads to 1387, the absolute September low. S&P 500 - SPX (weekly/daily/60): Same story here. Daily stochastic falling, but not there yet; 60- min rolling over. Support at 970, then 966. However, in the background are two statistics that are likely to go unmentioned. First the Russell 2000, the broadest market indicator actually fell today compared to other indexes. Still, it remains far off its September low of 373. Even more to the point, while the Dow rose today, the Transportation index went negative. The latter is a bad sign for those strict Dow theorist who look for the transports to confirm the Dow's move to confirm a bull market. For tomorrow, hard to say exactly what this market will do. However, with sentiment still negative as measured by daily and 60-min stochastics, coupled with a VIX at 29.97, I think there will be further tests of support to come this week. And with every test, hopeful bulls will jump the gun to buy the very bottom to which the bears will respond by shorting the rally. If that sounds like a week of solid volatility with big potential for swings, you're right! Just what a trader wants! But for the buy and hold crowd, the day to buy is not yet here. But when it comes, there may be even a few weeks to perhaps months of profit potential as the weekly stochastic emerges to begin another up- cycle from oversold. Again, it won't be permanent, but merely a bully rally within a primary bear market. Trade 'em but don't fall in love. See you at the bell! ******************** INDEX TRADER SUMMARY ******************** LOOKING FOR A BOTTOM by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - Today, everyone seemed to be wondering the same thing - where the heck is the bottom? Mostly now what I notice is the complacency in the view that there will be some big capitulation - is this like a "bell ringing" - that will identify THE bottom. Well, I have some historical perspective on this - it ain't always so! There is not always a big volume event. Finding a bottom by looking at just the indexes can be so difficult as to be impossible. We have the OEX in an apparent successful test of its Sept. low today. That looked like a bottom. SPX is well above its prior low, but it reversed from the area of the envelope band I consider important, plus it reached the low end of its hourly downtrend channel - "could" be a bottom. The Dow is well above its Sept. low, so who knows? The Nasdaq Composite and the QQQ Nas 100 tracking stock rallied from the low ends of their hourly downtrend channels. The Composite didn't quite reach its Sept. bottom - the Nas 100/QQQ did and have been trading under these prior lows, but each has rebounded back to or above their prior recent lows of 6/14. What's a boy to do to know!? Well, we probably won't know for sure on this bottom question for a while yet - but, because not many expect today to have established even an interim low, it probably IS. I went back to the same key Nasdaq/Dow stocks that have been struggling to find bottom that might be able to tell us if the Nasdaq 100/S&P 100 indexes, which have reached (or exceeded slightly) their Sept. low points, are telling us that we may have at least hit the low end of the range for awhile. I'm going to leave aside the fact that I have a top pattern on the Dow that suggests it may be headed lower still. I'll just share with you what I'm watching in key stocks, that may tell us what is what with the indexes. If these stocks find bottom, then some cautious bullishness ought to creep into our trading play book. CISCO - What I've noticed with bellwether Cisco is the possibility that the stock is forming a Head & Shoulder's bottom. You'll see this in other charts also. The key will be that CSCO doesn't sink much lower than today and starts to go sideways to higher - this would finish the "right shoulder". Intel - A key to the chip stocks and the semiconductors tend to be the most telling bellwether sector for Nasdaq. The "SOX" Semi index is featured in my Sector Trader wrap - the interesting thing with SOX is that it is well above its Sept. low - not so with Intel. The dashed level line touches the INTC Sept. low. Note that INTC has rebounded above it and the low end of its downtrend channel. A double bottom low - time will tell - stay tuned! Microsoft - Possible Head and Shoulder's bottom has already formed with the neckline resistance at the red down arrow. MSFT has been the leader of the Nasdaq pack and has better earnings coming with its price increases coming for large corporate customers - they (the customers) are fighting this, but I'm not sure that they have any real choice but to go along with them. Oracle - Interesting for this same potential Head & Shoulder's bottom formation. We need to see some further action in the stock, but ORCL is looking promising for in terms of a putting in a low around recent levels. Possible double bottom low in Qualcomm here - time will tell on this. S&P 100 Index ($OEX.X) - Daily/Hourly charts: Key support becomes the prior hourly low in the 488 area. Look for a pullback tomorrow. Watch for a successful "retest" of this level or just for OEX to stay above it. 480, at today's low is the next potential support. S&P 100 (OEX) near resistance is at 499-500, then 503-504. A daily close over 500 would be bullish. In the S&P 500 (SPX - not shown), key support is 982; then, at today's low at 971. Near SPX resistance is 1000, then 1005. A close over 1000 would be bullish. Dow Index (1/100: $DJX.X) - Daily/Hourly charts: The action of the Dow 30/Industrials is the least convincing to me relating to whether today might have marked a tradable bottom. It won't be that difficult to get a bit better view of this soon however. 92.6 is key support, at the prior low. Below this of course is today's bottom at 90.8 in DJX. Near resistance is at 94, then in the area defined by two prior lows, at 94.5-94.7. Until we get back above here, not much is going on. However, ability to hold above today's low this week, is potential basing action. Again, more (trading) action is required to fill in the blanks. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: Key near support is 26.2, at the prior low. Today's low at 25.2 looms large as a potential bottom. Expect some period of weakness tomorrow, but I think the 25-26 will develop as support, given what we're seeing in the key 5 Nasdaq stocks highlighted above. QQQ resistance is implied by zone formed by prior lows at 26.8- 27.5. 27.00 is of "pivotal" significance in terms of QQQ getting above it and staying above it. The getting is easier than the "staying". Conversely, if 27 is a ceiling on rallies and the closing levels and acts as resistance, look for more sideways/lower action. Key resistance in the Nasdaq Composite looks like 1490, then 1509-1510. Key support is 1445, at the prior low, then today's bottom at 1114, which was also at the low end of COMP's downtrend channel. NOTE: The "centered" moving average on the hourly charts that is not shown, unlike like on the daily chart - the average on which the moving average "envelopes" are based - is 21, meaning, on the hourly chart, that the lower band is a line that "floats" at 5% below the 21-hour moving average based on the average of the close of the last 21-hours. Don't worry, help is on the way, I going to write my THIS week's TRADER'S CORNER (Thursday) article on the "ins and outs" of moving average envelopes. 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 ------------------------------------------------------------ ************** TRADERS CORNER ************** Getting Ready to Change Gears by Mark Phillips mphillips@OptionInvestor.com Has anyone else noticed the almost habitual serious and somber mood on CNBC lately? No matter the day, it seems the regulars can't help imploring every guest that will give them the time of day, "Will the selling ever stop?". To me this is a VERY positive sign as even the varsity cheerleaders are getting discouraged. My good friend and colleague, Buzz Lynn postulated several months back about the emergence of what came to be termed MOPO (Mother Of all Put Opportunities). Well, needless to say it appeared right where it should according to all the technical indicators in late March. Daily and Weekly Stochastics were topped out and rolling down from overbought territory and there was nothing for the bulls to latch onto in order to pull the markets higher. At the time, the financial media was trumpeting the economic and market recovery that was surely underway, with many of these pollyannas proclaiming the birth of a new bull market. Yeah right! I've got some trained, flying pigs in my back yard too. But seriously, how did I know they were wrong? My favorite market timing indicator, of course. That's right, I'm going to bore you with another article on the topic of the VIX. My reasoning is that if you understand nothing other than the behavior of the VIX relative to the broad market and daily/weekly Stochastics oscillators, I believe you can make an obscene amount of money without being glued to the computer, day-trading every little blip in the market. To be sure, the trading opportunities don't come along very often, but when they do, informed and disciplined traders know to make hay while the sun shines. Look at the weekly chart of the S&P 500 (SPX.X) vs. the Volatility Index (VIX.X). Can you see the pattern that tends to repeat? Selling climaxes in the SPX are accompanied by parabolic rises in the VIX. Conversely, every time the VIX dips down into the 18-20 area, we can see that it corresponds to a market that lacks the impetus to rally any further. Weekly Chart of S&P 500 vs. the VIX My favorite part about this relationship is that it holds true in both bull and bear markets. Regardless of whether we are in a bull or bear market, the VIX tends to move to one extreme or the other in conjunction with the broad market reaching a near-term top (or bottom) a couple times a year. Selling or buying that climax move and holding the position for several weeks or even a few months rarely fails to deliver handsome returns. In fact, can you find a single instance over the past 5 years of a substantial market rally that WAS NOT preceded by a high (greater than 30) VIX reading? Better yet, is there a single time where a VIX above 40 DID NOT presage a strong rally? That's my point. The VIX has been rising again and should it have a blowoff run above 40, I will be aggressively targeting September OTM calls. My wife called it the Mother of All Call Opportunities (MOCO). Alright, it isn't really the Mother, but maybe a favorite Aunt. MOCO would be targeting THE BOTTOM and I don't believe anyone will be able to call that one until well after the fact. Let's just say that it is a strong call-buying opportunity and leave it at that. As an aside, if you take the time to peruse some charts on your own after my bold statements, take a look at the weekly chart of the SPX. How many of the VIX-induced rallies over the past 5 years commenced from a point of oversold on the weekly Stochastics? How many sharp declines began when the VIX fell below 20 with the weekly Stochastics topped out in overbought? Are you starting to connect the dots. A great investor (although the name escapes me) that the time to buy is when there is blood in the streets and nobody wants to own stocks. Doesn't that sound like a sentiment that is being trumpeted louder and louder on Wall Street right now? This is contrarian investing at its finest and we've got front-row seats for the show. At this stage of the game, a repeat of the climax in selling that we saw last September is far from a lead-pipe lock, but all the signs are lining up saying that we could absolutely get a repeat in the VIX department at the same time that the SPX retests its lows. Weekly Stochastics are already there, awaiting that final surge of selling that will drive the VIX higher and price lower for that next substantial bottom that will lead the next real rally. Now we just monitor the situation, but we definitely don't want to jump the gun. I won't even be interested in nibbling on this trade setup until the VIX tops 35. But I expect to see the north side of 40 before really beginning to implement my position. The higher the VIX goes, the better the risk/reward ratio becomes for this bullish trade, as more downside risk is removed from the market. But the potential return also increases as the VIX rises because the snap-back rally will be that much stronger. Think of the VIX in this case as a rubber band. At 30, it is stretched and will snap back if released, but not necessarily in a strong fashion -- there just isn't a lot of stored energy. But pull it back to 40 and when released, there is a much larger amount of energy released. Between 55-60, the rubber band is stretched almost to its breaking point and when released, the resulting action is explosive. It all goes back to human psychology. Remember that the VIX is a measure of investors' collective fear about the market. We, as humans are incapable of extreme levels of any emotion for an extended period of time and that is reflected in the behavior of the VIX. Notice that the VIX can move up into the 30-35 area and drift there for a period of months. But how long can it remain above the 40 level? Not long at all. And let it shoot above 50 and it is a sure bet that it will be coming down swiftly. Continuing with the physics analogy to the VIX, when the VIX is very low and the markets are approaching a top, it is like a ball thrown up in the air. Whether a 6 year-old or Nolan Ryan threw the ball, only determines how high it goes before running out of momentum. In market language, the height the ball is thrown is equivalent to how explosive and strong the prior rally was. But they all run out of steam, as gravity always pulls balls back to earth. The next question that must be addressed is how long it will take for the ball to come back to earth. That answer depends on what celestial body we are on at the time that we throw the ball. Let's say that a neutral or rangebound market would be the equivalent of throwing the ball up on the planet Earth. Then a bull market would equate to throwing the ball up on the moon, while a bear market is the equivalent of being on the planet Jupiter. Gravity is extremely light on the Moon, so there is a much smaller pull on the ball, arresting its upward motion and redirecting it back to the surface. Similarly, we've noted in the bull market of the late 1990's that the VIX can remain near the lower end of its range for weeks or months at a time before the market finally sells off. But with the heavy gravity found on the planet Jupiter (and in the current bear market), when the ball runs out of upward momentum, it is pulled back to the surface quite quickly. Hopefully my little detour into the world of physics wasn't too tedious for anyone, but I think it does a very good job of conveying exactly what is happening with the interaction of the VIX and the broad market. Coming back on track, we've been talking about my expectation that there is another spectacular spike in the VIX looming in our very near future, and following that event, I expect the broad markets to stage an impressive multi-week rally throughout the remainder of the summer. Is this THE BOTTOM? No Way!! But a very tradable one, nonetheless. As I see it, there is only one pitfall to the scenario that I have laid out here, and that is that the markets continue to drift lower without a sharp upward move in the VIX. Without pulling the rubber band very tight, there is not enough stored energy to release and launch the markets higher. Simply put, without a VIX in excess of at least 35 (preferably 40-45) there is no trade here. Period! Now that I've laid out the rationale behind the trading strategy that I'm looking to employ over the next few weeks, I'll leave you to peruse my logic and resulting conclusions. Can you find a hole in the theory? Something that I've overlooked? Fire away and show me the error of my ways, and I'll bet we can all benefit from the educational process. Barring the discovery of a major pitfall that I have neglected to consider, on Wednesday in my Options 101 article, I'll lay out the details of precisely how I plan to trade this event with my account, provided that fate is kind enough to stretch the rubber band to its limits before letting go. See you on Wednesday! Mark ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's • optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's • 8 different online tools for options pricing, strategy, and charting • Access to options specialists via email, phone or live chat online • Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ *********************** INDEX TRADER GAME PLANS *********************** THE SECTOR BEAT - 6/24 by Leigh Stevens You heard it here first folks - the Healthcare sector was forming a top and would reverse (down). Only I told you BEFORE it happened and the media talking heads are telling you today about the turnaround AFTER the cat is out of the bag so to speak. Weakness hit Airlines again on earnings downgrades. Telecoms, Internet and Defense took their lumps today too. The Dow Jones Transportation average recent rally has been fading a bit lately, but the Dow Transports did eke out a close above its 50-day moving average. Semiconductors had its dead cat bounce today; Biotech rallied, continuing a rebound from the low end of its downtrend channel. Gold ($XAU.X) was about the only sector rallying before the market turned around, but lost much of its intraday advance by the close - I think the rebound in gold is a good shoring/but put opportunity. I will FEATURE Defense, Gold stocks, Healthcare, and the Semiconductors as sectors of potential trading interest. HIGHER ON THE DAY ON Monday - DOWN ON THE DAY on Monday - NEW FORMULATIONS ON S&P 600 SMALL CAP AND THE RUSSELL 2000 - Standard & Poor Corp. rolled out its newly rebalanced SmallCap 600 Index on Friday. The S&P determines growth and value stocks for the SmallCap 600 by taking the top half of the index's market cap and labeling it "growth", based on price-to-book ratios, and assigning the bottom half into the "value" category. Some of Friday's volatility may have been caused by the buying and selling related to money managers rebalancing portfolios to more accurately reflect the revamped S&P 600 SmallCap Index's new value and "growth categorizations. The brave new world of the S&P 600 Small Cap has stocks like Alpha Industries and Bio-Technology Genetics now in the value index's makeup. Stocks that now fall into the growth group include Cullen Frost Bankers and La-Z-Boy furniture. Hey, it's a growth business - selling recliners to American coach potatoes! Such shifts go against conventional thinking that value stocks are more "old economy" versus newer businesses involving tech and biotech. S&P's criteria for categorizing a stock as being either growth or value is based on only one variable: price to book (value). The measure considers the level a stock is selling at in relation to its per-share book value, which is the net value given to assets carried on a company's balance sheet. Standard & Poor's acknowledges that the current approach may be too "narrow", as investors don't generally buy stocks on "price to book" as a guide to how the stock will do. Around the corner - an even more complex refiguring: The Russell 2000's new lineup of small-cap stocks, broken into growth and value sectors, is rolled out this Friday. Russell is a bit broader in its criteria, using price to book, PLUS growth rates. The new Russell 2000 mix shows stocks like Arica and Bio- Technology Genetics being categorized as "Value" and Allegiant Bancorp and Bob Evans Farms taking on "Growth" status. Love those sausages! SECTOR TRADE RECOMMENDATIONS & REVIEW - NEW TRADE RECOMMENDATION(S) - Buy IJS at 88.50 - FILLED - Close: 89.19 (S&P 600 Small Cap Value fund iShares) Stop at 87.60 Buy IWM at 91.00 - FILLED - Close: 91.31 (Russell 2000 iShares) Stop: 89.50 Buy BBH at 79.10 - NOT Filled - Low: 80.00; Close: 83.45 (Biotech HOLDR's Trust stock) Stop at 76.00 OPEN POSITIONS - Long IJS at 91.25 Long IJS at 88.50 Average price: 89.87 (S&P 600 small cap value iShares) Stop: 87.60 Long IWM at 91.00 (Russell 2000 iShares) Stop: 89.50 TRADE LIQUIDATIONS - NONE SECTOR HIGHLIGHT(S) - Defense Index; Amex ($DFI.X) STOCKS: ATK; BA; COL; DRS; EASI; EDO; ERJ; ESL; FLIR; GD; INVN; ITT; LLL; LMT; NOC; OSIS; RTN; SSSS; TDY; TTN; UIC SOME PRIOR COMMENTS: Close above 655 and the 50-day moving average is a bullish plus, but the 660-661 level is the key "line" of technical resistance - a close above here, AND the ability to stay above it on subsequent pullbacks, is needed to suggest that the bullish trend might be back on track. However, there would still be the double top at 680 to overcome for DFI. More action is needed to say that this sector is not still building a top. TODAY: A "key" reversal at the "line" of resistance at 660-661 area and after completion of a 62% retracement (660) of the recent downswing. The Index fell below its 50-day moving average and I think will it will be heading still lower - my target has been to the 600 area. UPDATE: 6/24 Gold & Silver Sector Index ($XAU.X) STOCKS: ABX; AEM; AU; FCX; GOLD; HGMCY; MDG; NEM; PD; PDG; SIL SOME PRIOR COMMENTS: 75.00 was key support and 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 would continue bearish pattern. TODAY: Reversal from today's highs back to XAU's 50-day moving average, suggests that recent rally is a retracement rally only and the stocks in this group are going to work lower. This sector is a short/buy put candidate, especially if XAU gets back up the 83-85 price zone. I doubt that it is going to get that high. Gold bugs, bam humbug! - I never saw this sector as offering more than an upside trading opportunity, followed by a shorting opportunity. UPDATE: 6/24 Healthcare Index; Morgan Stanley ($HMO.X) STOCKS: AET; AHG; ATH; CAH; CI; FHCC; HUM; MME; OHP; OPTN; PHSY; TGH; THC; UNH; WLP SOME PRIOR COMMENTS: Potential for a top, even with move to new high above 645 - possible downside reversal is suggested by the bearish price/RSI divergence. A close below the prior top at 645 provides initial evidence for a downside reversal, but "confirmation" would be on a close under 630 at the up trendline. Bearish on chart (besides already noted higher highs on decline relative strength) was rising bearish "wedge" pattern. Move below 630 support and a close below the 50-day moving average would "confirm" a bearish reversal. TODAY: There was the decisive downside penetration of the up trendline that I was anticipating. The sector closed at its 50-day moving average. After a bit of a recovery rebound, I think the HMO index will work lower, to between 587 and 564 or between the 38 and 50% retracement points. UPDATE: 6/24 Health Providers Index; Morgan Stanley ($RXH.X) This sector represents the hospitals, urgent care facilities and the like - the health care providers that bill for health services. SOME PRIOR COMMENTS: Key resistance at the former high. Looks like a potential double top has formed. Key support is in the 343 area - a close below this level, suggest a trend reversal, with potential back to 325. TODAY: Sharp break, increasing the downside momentum. Close at support at 343.6, which is a pivotal area. A close below today's puts the index under the prior lows and builds a more bearish chart picture. UPDATE: 6/24 Semiconductor Sector Index ($SOX.X) STOCKS: AMAT; AMD; CMOS; CREE; IDTI; INTC; KLAC; LLTC; LSCC; LSI; MOT; MU; NSM; NVDA; NVLS; PMCS; RMBS; TER; TXN; XLNX SOME PRIOR COMMENTS: Looks like a SOX re-test of its Sept. bottom is next. I assume the 350 area represents major support. 350 was the area where the Semiconductor Sector Index ($SOX.X) bottomed in late-Sept./early-Oct. The SOX can, of course, turn around at any point higher than this level - it doesn't have to "retest" 350 as support. TODAY: Nothing has developed yet that suggests a turnaround. A retreat to around 350 would suggest that the SOX was at support implied by the low end of the downtrend channel. Or, to 344 the (intraday) low back in Sept. A close above 400, or better, 404-405, would suggest that a turnaround in the SOX could be underway. There is not always a re-test of the prior lows. Time will tell - stay tuned! LAST UPDATE: 6/24 Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ------------------------------------------------------------ We got trailing stops! • Trade online with trailing stops at optionsXpress, at no extra cost • Trailing stops based on the option price or the stock price • Also place Contingent, Stop Loss, and "One Cancels Other" orders • $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. 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 06-24-2002 Copyright 2001, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity • No hidden fees for limit orders or balances • $1.50 /contract (10+ contracts) or $14.95 minimum. • Zero minimum deposit required to open an account • Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ***************** STOP-LOSS UPDATES ***************** IBM - put Adjust from $74.25 down to $73.50 ENZN - put Adjust from $26.50 down to $25.50 TDS - put Adjust from $68 down to $66.50 ************* DROPPED CALLS ************* AET $48.45 -1.93 (-1.93) Last week's Supreme Court ruling continued to weigh heavily on HMO stocks on Monday, with the HMO index falling more than 3.2%, easily taking the unenviable award as the worst performing sector for the day. Following its recent push to fresh multi-year highs, AET pulled back sharply, ending with nearly a 4% loss on the day. That easily pushed the stock below our $49 stop and the initial bounce off of $48 lacked the punch necessary to get the bulls' interest. As the market weakened again toward the end of the day, AET once again fell below our stop and judging by the late-day weakness, it is time to take leave of the stock. Exit remaining open positions on any rebound in the morning. OHP $46.18 -2.93 (-2.93) Despite its recent relative strength, OHP broke down in a big way on Monday, pressured by heavy selling in the HMO sector. The principal cause for the weakness appears to be lingering concerns about last week's Supreme Court decision, as the entire Health Care Payor index (HMO.X) fell 3.27%. For its part, OHP shed nearly 5% on very heavy volume, rapidly abandoning its position of relative strength. Turn the lights out, this bullish party is over. With our violated stop at $48.75, OHP is clearly a drop tonight. ************ DROPPED PUTS ************ None ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's • $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees • Easy screens for spreads, collars, or covered calls! • Contingent, Stop Loss, Trailing stop, or OCO • 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********************* PLAY OF THE DAY - PUT ********************* IBM - International Bus. Machines $69.70 +0.95 (+0.95 this week) International Business Machines uses advanced information technology to provide customer solutions. The company provides value to its customers through a variety of solutions including technologies, systems, products, services, software and financing. IBM's three hardware product segments are comprised of Technology, Personal Systems and Enterprise Systems. Other major operations consist of a Global Services segment, a Software segment, a Global Financing segment and an Enterprise Investments segment. Most Recent Write-Up Investors have got to be wondering where support is for IBM. After piercing the $75 level a couple weeks ago, it seemed a foregone conclusion that the stock was heading lower...much lower. Sure enough, once the broad market bounce failed in the middle of the week, shares of Big Blue have seen heavy selling pressure, culminating with Friday's plunge under the $70 level. So how far can she go? Looking at the weekly chart shows the first meaningful support at $67, with major support coming in at $60. In addition to that being strong support from 1998, it is also the 62% retracement of the stock's rally from the 1993 lows to the 2000 highs. As if that weren't enough, the current sell signal on the PnF chart is pointing to an eventual price target of $61. That makes a potent case for continuing to sell all rallies in the stock and that's just what we intend to do. While highly unlikely, we'd we thrilled to get a rally up to the $74 resistance level for new entries. But short of a broad market rebound, that isn't likely to happen over the near term. So we'll have to set our sights a bit lower, looking for a failed rally first at $71 and then at $72.50. Of course if the selling continues, new positions can be considered on a break below the $68 level. Just keep a sharp lookout for a short-covering rally off the $67 level. Lower stops to $74.25. Comments Still waiting for a warning. The downgrades of Big Blue are still flying and the negative pressure that they have created over the past couple weeks will likely mute the effect of the warning, if it appears. IBM tagged an intraday low of $67.25 before rebounding to close just below the formidable $70 resistance level. Consider us unconvinced either in the broad market rebound or that of IBM. There is a lot of technical damage to be undone, and rather than looking at this as a motivation to close the play, we're once again thanking the short-covering for giving us an attractive entry point. Look to initiate new positions on another rollover near $71.50-72.00 and lower stops to $73.50. BUY PUT JUL-70*IBM-SN OI=32437 at $4.10 SL=2.50 BUY PUT JUL-65 IBM-SM OI=14233 at $2.10 SL=1.00 Average Daily Volume = 8.86 mln ------------------------------------------------------------ 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 ------------------------------------------------------------ ******************* 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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