The Option Investor Newsletter Thursday 06-27-2002 Copyright 2002, 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) ************************************************************ 06-27-2002 High Low Volume Advance/Decline DJIA 9269.92 +149.80 9269.92 9034.96 1.74 bln 1909/1078 NASDAQ 1459.20 + 29.90 1459.41 1412.96 2.03 bln 2150/1306 S&P 100 491.61 + 9.04 491.62 476.53 Totals 4059/2584 S&P 500 990.64 + 17.11 990.67 963.74 RUS 2000 458.72 + 5.75 458.74 449.75 DJ TRANS 2692.55 + 54.90 2697.37 2637.60 VIX 30.02 - 2.31 33.60 30.02 VXN 63.13 - 1.01 66.14 63.13 TRIN 1.02 PUT/CALL .76 ************************************************************* Surprising Strength The markets posted a decent day after a head fake at the open left the markets trading in negative territory for a couple hours. Buying began around 1:30 in the big caps as mutual funds stashed cash in high dollar, highly liquid stocks for their quarter end window dressing. The buying spread out to some mid caps and even some Russell stocks by the day's end. There was evidence of some short covering but it was limited since most bears expect lower levels next week. Chart of the Nasdaq Chart of the Dow The day started out well with the final GDP for the 1Q coming in at 6.1% growth. This was revised upward from 5.6%. Unfortunately the estimates for the 2Q are more in the 2.5% range. Spending on homes was still up +14.6% which we already knew. Business spending declined less dropping only -6.2% compared to -13.8% in the last quarter of 2001. The keyword here is "declined". There was no increase and spending is still declining. Still the report was bullish for the market. The jobless claims fell to 388,000 and traders were trying to spin this into a positive claiming the four-week moving average has now fallen for the ninth consecutive week. A small straw for investors to grasp. Helping the market the most today were positive comments about the semiconductor sector by two different brokers. Lehman Brothers analyst Dan Niles said investors were beginning to understand that demand will not pick up until sometime in 2003 but values on the equipment makers were beginning to reach compelling valuations. He was not so compelled on INTC, HWP and IBM. He cut estimates on those companies saying the excess PC inventories and the weakening European demand would cause them to guide lower. BAC said the sales of chips could grow by 20% during the next six months and the bottom was behind us. Bear Stearns recommended investors aggressively buy AMKR and MTSN due to valuations. WCOM announced they would cut 17,000 jobs or 20% of their work force and slash capex spending by half. The race is on to raise cash to avoid serious hurdles ahead. The main players in the fraud story were subpoenaed to appear before congress and offer explanations. There was a rumor after the close that WCOM and the SEC were on the verge of a settlement in the case. Now that is fast! According to sources WCOM needs to settle fast in order to pay severance to the 17,000 employees. I guess it is pay the SEC or pay the employees and guess who will get precedence. It is in their best interests to settle quickly before it gets so blown out of proportion in the media that settlement becomes impossible. The first number is always the smallest number when dealing with the government. Arthur Anderson would have been much better off closing a high dollar settlement long before any conviction put them out of business. Volume today was decent with the NYSE trading 1.74 billion shares and 2.0 billion on the Nasdaq. Combined up volume beat down by 2:1 with advancers nearly beating decliners 2:1. Good but not great. Not great for a bounce off the bottom. Helping improve the internals was the institutional buying for end of quarter statements and finally some Russell buying appeared. Friday at the close is when the Russell 1000,2000,3000 changes take effect. Fund managers who track the Russell will dump the drops and load up on the additions at the close if not before. This along with the end of quarter window dressing should make Friday pretty volatile. Resistance for the major indexes is still just above us. For the OEX it is 502, Dow 9420, S&P 1007, Nasdaq 1475-1485. This gives the averages plenty of room to run on the buying mentioned above as well as short covering on any WCOM settlement. While I am not predicting Nasdaq 800 or the end of the markets as we know them anytime soon, I still believe there are lower numbers in our future. If you are a trader then you know what to do. If you are thinking about buying some long term calls here I would caution you that waiting until after the July-4th holiday or even after the July earnings might make more sense. There are still some big name companies that could warn and the summer months are not shaping up well economically. This could drag on stock prices for another couple of months. Fortunately the history of the markets back to the depression show that 2-3 year bear markets tend to rally in double digits for three years after. We just have to be patient. Patience is not what many investors are showing today. TrimTabs.com said there were a whopping -$9.2 billion outflow from equity funds in the week ended Wednesday. That is a lot of money when you consider the average daily turnover on the NYSE is only about $40 billion. The $9 billion last week follows a string of outflows averaging over $4 billion a week. The rapid escalation could be pointing to the eventual capitulation event. When outflows more than double it does not take a rocket scientist to see the trend accelerating to the downside. Makes you wonder how much cash funds have available to dress up portfolios. It also proves the need to sell those same stocks next week to meet the next wave of liquidations. I would like to welcome back John Seckinger to Option Investor. John was the editor of NetBulls.com, our Internet stock site during the bubble days. We believe he was solely responsible for the Nasdaq crash by making short recommendations on Internet stocks. (grin) He was a member of the CBOT at 27, handling institutional accounts. He founded a daily newsletter sent to over 70 institutions. He has a BA in economics, MBA in finance and accounting. He specializes in both fundamental and technical analysis. He is a cross between Abbey Cohen, Barton Biggs and Arch Crawford. (BIG GRIN) Seriously, we welcome him back and look forward to his contributions to the Market Monitor beginning on Friday. Despite the creeping return to positive territory, Enter Very Passively, Exit Very Aggressively! Jim Brown Editor ******************** INDEX TRADER SUMMARY ******************** SOME LEGS by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - I don't mean that ones that are gorgeous in a dress or tennis shorts, but the ability of the market to put together back to back rally days - sometimes called "legs", as in the market maybe has a leg to stand on - well, maybe it found one good leg to stand on. Hey, that's better than in a wheelchair as of late - the market has looked either like a train wreck, or like someone who had been IN one! American Express (+3.95%) and Motorola were storied stocks today as each backed their Q2 targets. AXP helped recovery in Financial sector. The Motorola indication helped tech in general - Cisco finished up nearly 3%, Oracle up 5.5%, Sun Micro (SUNW) was up nearly 10% although the stock is just back to $5 area. The good economic news of the final revision to GDP Q1 growth was upwardly revised to a 6.1 percent growth rate from the prior estimate of 5.6. Business investment was also revised higher. S&P 100 Index ($OEX.X) - Daily/Hourly charts: The continued strong rebound from yesterday, which began at new lows for the current downtrend - two back-to-back rally days AND a close at the high, is a strong bullish action/pattern - at least action suggestive for a move back up to 500, maybe 506. It was important to the bulls that the S&P 100 continued to trade mostly above the 480 September low. MARKET MONITOR NOTE: Relative to OEX call buy recommendation made at OEX 477.3 - Raise STOP to OEX 476.00 from 474.50. Sell objective on long calls is OEX 494. Will revise as needed tomorrow (Friday). The note above was my earlier intraday Market Monitor revision on the stop-loss point and giving a trade profit objective on long OEX calls as being 494 in the OEX. The trade strategy here is to take a hoped for "easy" potential objective for a move at least back to the top hourly envelope line - at 494. While I also assess upside potential as being to as high as 500, back to the last rally high; and above 500, to the 505-506 area where the top of hourly downtrend channel intersects, and also the area of the 21-day moving average. If there is a move back up to the top of the hourly downtrend channel to around 505, it should offer a shorting/put buying opportunity. Dow Index (1/100: $DJX.X) - Daily/Hourly charts: DJX closed in the resistance area implied by the prior low from mid-month (in red). Above this area, 94 looms large as an area for the bears to come out again. From yesterday - "If 90.8, at the swing bottom prior to today's 89.3 low, becomes support on Thursday, the day would shape up bullishly. So, the 91 area continues to be key near support, 94 the key resistance, at the top of the hourly downtrend channel." Above 94, the "pivotal" resistance is 95.6, at the 21-day moving average. We may well get there, but probably not straight away. My best guess is that Friday will be up again, then Monday will likely bring a correction. A likely time for a pullback is after 3 up days - that always gets the media talking heads attention and invites a bearish response especially if there is any flare ups in corporate revelations or from the violence hot spots in the global arena. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: MARKET MONITOR NOTE: QQQ stock bought at 25.5 - suggest raising stop to 25.20 from 24.50. SELL at 26.60. 26.80-27.00 is the key resistance for QQQ, at the prior (up) swing high and also the important September bottom (27.00). I would be a buyer at 25-25.25 and a (short) seller in the 27 – 27.50 area. Bullish rebounds in MSFT, QCOM, ORCL & CSCO have been key to understanding via, the "bottoms up" approach, the relatively vigorous rebound (7 percent) in QQQ from its Monday low, although of course this being from a "low" starting point. INTC only needs to STOP sinking and this tech rally can carry a bit higher before we're looking at some more significant resistance, especially at 56.00 on MSFT, 15 area in CSCO and 20 in Intel. NOTE: The "centered" moving average on the hourly charts is not shown (unlike the daily chart) - it is 21; e.g., on the hourly chart, the lower band is always 5% below the 21-hour moving average. My today's TRADER'S CORNER (Thursday) article is 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 ------------------------------------------------------------ **************** MARKET SENTIMENT **************** On A Dime By Eric Utley Investors and traders awoke to what could have been the washout day Wednesday morning following the news about WorldCom (NASDAQ:WCOM). But when faced with the possibility, then instead chose to buy. And buy they did into Thursday's session, lifting the major averages solidly higher for the day. Whatever was the catalyst to turn the sentiment in the market I don't claim to know. All I do know is that going into Wednesday's session we were awful oversold by several counts. The ARMS Index was flashing as much, with the short and intermediate term numbers in extreme oversold readings. Interestingly, those extreme readings have already been worked off with the exception of the 5-day which closed right on 1.50. The fear measures of the market imploded on the reversal in stocks which is a pattern that we've seen time and time again this year. Moreover, the put/call numbers reversed from their high readings such that all four numbers we track in this column are now below the 1.00 level. So, yes, we're still oversold but there's been no wall of worry built in the last two days. Whatever worry was there seems to have been brought down in just the last two days. That does not bode well over the intermediate-term for stocks, but it might be a back burner issue over the short term. The reason I speculate as much is because the gold equities really took it on the chin today. In fact the sector earned the day's worst performing group, staging a little breakdown of its own. The unwinding of gains in the gold index may reveal a belief by the market the stocks in general have some room to the upside. So it could be that we're seeing some money come out of the run in the gold stocks and being put to work in other stocks in tech, finance, and industrials. But then there's the issue of quarter's end, which usually brings out the worst in money managers. Never mind that the Street is coming under fire from every direction, I'm sure there are still plenty of managers out there trying to squeeze a few basis points of performance out of the last few days of the second-quarter. I think that part of today's rally was attributable to window dressing, which makes it all the more suspect in my mind no matter how oversold the indicators are. I suppose we'll know just how much marking up is taking place in this market during tomorrow's session. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 9270 Moving Averages: (Simple) 10-dma: 9391 50-dma: 9856 200-dma: 9819 S&P 500 ($SPX) 52-week High: 1316 52-week Low : 945 Current : 991 Moving Averages: (Simple) 10-dma: 1003 50-dma: 1058 200-dma: 1101 Nasdaq-100 ($NDX) 52-week High: 2071 52-week Low : 1089 Current : 1051 Moving Averages: (Simple) 10-dma: 1075 50-dma: 1207 200-dma: 1402 Fiber Optic ($FOP) So an index gets crushed to a new all time low the prior day and then it rebounds by more than 6 percent the next day. What do you think that was about? I'm guessing short covering. Whatever the reason, the FOP was the day's best performing index with its 6.41 percent gain. Sector leaders included Qwest Communications (NYSE:Q), which gained 50 percent on the day, or about $1, Finisar (NASDAQ:FNSR), JDS Uniphase (NASDAQ:JDSU), and CIENA (NASDAQ:CIEN). 52-week High: 133 52-week Low : 40 Current : 44 Moving Averages: (Simple) 10-dma: 48 50-dma: 65 200-dma: N/A Gold ($XAU) The recovery in stocks caused a sharp sell off in gold equities over the last two days. The XAU was the worst performing sector for the day with its 3.73 percent drop. Leading to the downside included Anglogold (NYSE:AU), Agnico Eagle Mines (NYSE:AEM), Harmony Gold (NASDAQ:HGMCY), Gold Fields (NYSE:GFI), and Newmont Mining (NYSE:NEM). 52-week High: 89 52-week Low : 49 Current : 73 Moving Averages: (Simple) 10-dma: 77 50-dma: 79 200-dma: 64 ----------------------------------------------------------------- Market Volatility Both the VIX and VXN reached extreme levels in recent sessions, but there's been no follow-through. Furthermore, neither index has been able to hold onto their gains, which tells me there's no disbelief in this rally. CBOE Market Volatility Index (VIX) - 30.02 -2.33 Nasdaq-100 Volatility Index (VXN) - 63.13 -1.01 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.76 556,885 421,867 Equity Only 0.55 449,403 248,926 OEX 0.70 24,892 17,331 QQQ 0.55 43,181 23,741 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 48 + 0 Bull Correction NASDAQ-100 14 - 1 Bear Confirmed DOW 26 + 3 Bear Confirmed S&P 500 38 + 0 Bear Confirmed S&P 100 35 + 3 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 1.50 10-Day Arms Index 1.42 21-Day Arms Index 1.47 55-Day Arms Index 1.38 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 2039 1174 NASDAQ 2137 1283 New Highs New Lows NYSE 99 144 NASDAQ 96 155 Volume (in millions) NYSE 1,845 NASDAQ 1,941 ----------------------------------------------------------------- Commitments Of Traders Report: 06/18/02 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 Get this, S&P commercials grew less bearish by a wide margin last week. They brought in their net short position by about 18,000 contracts. Not by surprise, small traders grew less bullish by about 12,000 contracts. Commercials Long Short Net % Of OI 06/04/02 369,298 440,027 (70,729) (8.6%) 06/11/02 388,751 457,018 (68,267) (8.1%) 06/18/02 437,530 487,956 (50,426) (5.4%) Most bearish reading of the year: (111,956) - 3/6/02 Most bullish reading of the year: ( 36,481) - 10/16/01 Small Traders Long Short Net % of OI 06/04/02 167,713 58,885 108,828 48.0% 06/11/02 174,357 69,464 104,893 43.0% 06/18/02 181,178 88,517 92,661 34.3% 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 eased off of their recent bullishness by adding back a few more shorts. Small traders went in the opposite direction by adding a few more longs than shorts. Commercials Long Short Net % of OI 06/04/02 47,875 39,100 8,775 9.3% 06/11/02 45,946 36,878 9,068 10.9% 06/18/02 54,816 49,169 5,647 5.4% Most bearish reading of the year: (15,521) - 3/13/01 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 06/04/02 12,162 21,420 (9,258) 27.2% 06/11/02 14,561 25,330 (10,769) 27.0% 06/18/02 20,883 29,153 (8,270) 16.5% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 8,460 - 3/13/01 DOW JONES INDUSTRIAL Dow commercials bought into the weakness last week to the tune of more than 3,000 contracts added to their net bullish position. Small traders made the money. They added to their net short position by more than 4,000 contracts. Commercials Long Short Net % of OI 06/04/02 20,564 16,169 4,395 11.0% 06/11/02 20,369 17,172 3,197 8.5% 06/18/02 25,995 19,115 6,880 15.1% 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 06/04/02 7,114 9,639 (2,525) (14.7%) 06/11/02 7,500 9,925 (2,425) (13.9%) 06/18/02 5,379 11,813 (6,434) (37.2%) 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 - 6/27 by Leigh Stevens The NYSE Financial sector ($NF.X) is holding the low end of a broad trading range - so naturally the Bank and Broker sectors were higher. The Defense, Financial, Gold, Internet and the Oil Service sectors are in my SECTOR HIGHLIGHTS section below. Some bearish sector ideas and a bullish play on the oversold Internet index are part of what is actionable in these stock groups. HIGHER ON THE DAY ON Thursday - DOWN ON THE DAY on Thursday - SECTOR TRADE RECOMMENDATIONS & REVIEW - OPEN/NEW TRADE RECOMMENDATION(S) - Short OSX at 64.00 or more; Stop at 67.2 (Oil Service HOLDR stock) Buy HHH at 22.80 or less; Stop at 21.70 (Internet HOLDR stock) OPEN POSITIONS - Long BBH at 79.10 (Biotech HOLDR's Trust stock) Stop: 75.15 (5 percent from entry), revised from previous initial stop suggested at 76.00 TRADE LIQUIDATIONS - NOTE ON POSITIONS - IJS (S&P 600 SmallCap Value fund) and IWM (Russell 2000 iShares), listed as "open positions" in 6/25 wrap, were in fact stopped out by the 6/25 close, on their respective stops. 6/25 - Sold IJS at 86.60 on recommended 87.60 stop. 6/25 - Sold IWM at 89.50 on recommended 89.50. 6/27 UPDATE - STILL LIKE S&P 600 SMALLCAP VALUE ISHARES & RUSSELL 2000 INDEX ISHARES. BOTH BROKE OUT TO UPSIDE TODAY ABOVE HOURLY DOWNTREND RESISTANCE. SECTOR HIGHLIGHT(S) - Defense Index; Amex ($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: 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. Key reversal at the line of resistance at 660-661 area and after completion of a 62% retracement (660) of the recent downswing. I think will it will be heading still lower - my target has been to the 600 area. TODAY: A closing downside penetration of 620 would "confirm" a Head & Shoulder Top pattern, with an objective down to the 565 area. A close above 660 however would suggest otherwise in terms of this possible top formation. Time will tell, but some of the stocks look extended and offering put play consideration. UPDATE: 6/27 Financial Index; NYSE ($NF.X) STOCKS: This index is composed of all the financial stocks on the NYSE; e.g., banks, insurance, etc. The Financial Index is trading at the low end of a well-defined trading range. There have been two recent lows that have rebounded from the same area, around 552. Banks, brokers and the other financial type stocks need to be in the position to rally and provide some "leadership" to the market if there is at least and interim bottom in place. We have some evidence that the financial stocks have stopped going done - now, the bullish possibilities have to be proved by a move back above the 200-day moving average, currently at 583. LAST UPDATE: 6/27 Gold & Silver Sector Index ($XAU.X) STOCKS: ABX; AEM; AU; FCX; GOLD; HGMCY; MDG; NEM; PD; PDG; SIL SOME PRIOR COMMENTS: Retreat to below 75 would continue bearish pattern. Reversal at XAU's 50-day moving average, suggests that recent rally is a retracement rally only - sector is a short/buy put candidate - saw this sector as offering a shorting opportunity. TODAY: Looks like start of the next down "leg", with a target to the 63 area in a retest of the 200-day moving average. UPDATE: 6/27 Internet Index; CBOE ($INX.X) AMZN; AOL; CHKP; CMGI; CNET; CSCO; DCLK; EBAY; ELNK; EXPE; FMKT; HLTH; HOMS; INKT; INSP; JNPR; OVER; RNWK; TMCS; YHOO SOME PRIOR COMMENTS: Internet sector has had recent rebound from low end of its downtrend channel. TODAY: The Internet sector Index looks like it could have a rebound from recent lows made at the low end of its daily downtrend channel and accompanied by an oversold RSI extreme. For a high-risk play, suggest buying the Internet HOLDR's at 22.80 or better. Stop at 21.70, risking 5% from entry. LAST UPDATE: 6/27 Oil Service Sector Index ($OSX.X) STOCKS: BSI; BJS; CAM; GLBL; HAL; NBR; NE; RDC; RIG; SII; SLB; TDW; VRC; WFT PRIOR COMMENTS: Holding prior lows from April - may be a buy again as 93-94 may be low end of its trading range for now. TODAY: The whole pattern of the Sector looks like a large top of the Head & Shoulder's variety. One measure of the downside potential if this view is correct is to around 75 on the OSX index and to perhaps 52 on the Oil Service HOLDR's. Suggest shorting the OSX at 64.00; Stop at 67.2. LAST UPDATE: 6/27 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! 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The Option Investor Newsletter Thursday 06-27-2002 Copyright 2002, 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: ***** DUK $30.84 -0.45 (-0.92) It's the end of the line for DUK. Despite the fact that it managed to hold up better than the rest of the market on Wednesday's roller-coaster ride, the action of Thursday was far from encouraging. Even with the Utility index (UTY.X) posting a small gain, DUK rolled over at its descending trendline to post a fractional loss for the day. With the stock losing relative strength, the prudent move is to drop it now before our stop is violated. PUTS: ***** MIL $31.70 +0.76 (+0.66) It's time to bid a happy farewell to MIL. The stock has gone nowhere this week. We were particularly unhappy with the stock's failure to react to yesterday's sharp open lower in the broader market, which should have brought on the sellers in this stock. But they didn't come, which may signal that the short term selling in this stock has dried up. Look to exit into weakness tomorrow, or set a stop at $32 to protect gains. NVLS $34.77 +1.86 (+2.54) The sentiment quickly shifted in the semiconductor sector in the last two days despite the continued negative news from the technology sector of the market. The bulls rushed back into NVLS today on what appeared to be a big round of short covering. Though the stock will most likely turn back lower eventually, we don't want to ride this wave of bullishness higher. JCI $79.53 +2.38 (+2.76) JCI turned back higher today to the tune of more than 3 percent. The stock stock's reversal in the last two days has us worried about more upside potential from here. Look to take defensive action in tomorrow's session with a tight stop above today's high. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu DUK 30.84 -0.10 0.04 -0.41 -0.45 Dropped, turned down DHI 25.45 0.26 -1.84 0.29 0.00 Still holding its own QCOM 27.46 0.68 -0.44 0.69 0.38 Close to breaking out BA 44.80 0.23 0.13 -0.15 2.08 Super INDU stock!!! ESST 18.01 0.40 -1.09 0.96 0.90 New, strong chip turn AGN 66.20 1.68 -1.04 -0.05 2.03 New, drug recovery SNPS 54.70 -1.26 -0.25 0.60 1.21 New, Nasdaq leader PUTS MIL 31.70 0.49 -1.06 0.41 0.76 Dropped, not moving IBM 71.90 0.95 -1.10 1.45 1.85 10-dma rollover entry ZLC 37.18 0.10 -0.84 -0.72 0.24 Broke below 200-dma!! TDS 59.50 1.25 -2.00 -1.73 -0.02 Thank you WorldCom!!! NVLS 34.77 1.21 -1.69 1.16 1.86 Dropped, shorts cover EMMS 19.61 -0.03 -3.27 -0.03 0.41 Short covering relief KMI 38.60 0.00 -0.20 -0.93 -0.47 Finally broke 40 mark EXPE 59.18 -2.87 -3.16 -1.75 -0.71 Rebound from 200-dma JCI 79.53 -0.72 -3.17 -1.26 2.38 Dropped, auto bounce LXK 53.94 0.31 -3.33 -0.71 2.60 Short covering bounce MXIM 38.25 1.64 -2.35 1.01 1.36 Sector rotations in QLGC 39.33 -1.19 -3.91 -1.25 3.13 Technical damage done XL 82.70 -0.34 -2.01 -0.30 -3.00 New, change sentiment ACS 45.48 -1.48 -3.16 0.45 -1.70 New, outsourced out ------------------------------------------------------------ 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 ******************** QCOM $24.46 +0.38 (+1.34) QCOM came so very, very close to breaking out of its short term resistance today. The stock's intraday high reached to $27.90. We were just $0.10 away from a breakout, but the stock couldn't manage it. The 10-dma may have had something to do with during today's session. The stock closed right on its 10-dma, which is setting up for an explosive short covering rally in tomorrow's session if the Nasdaq can find its legs. Just keep watching for a breakout above the $28 level and confirm it if it comes with heavy volume on the way up. Ideally we'll see the Nasdaq confirm such a breakout as well. Once the $28 level is cleared, QCOM has a shot are trading back up to the $30 level in the next day or two. Beyond there, there's a big gap that needs to be filled up to the $32 area. BA $44.80 +2.08 (+1.83) We were initially attracting to the BA play due to the fact that it looked like the $41.50 level would provide a springboard for the stock to rally on the first hint of improvement in the broad markets. Things couldn't have gone any better, as BA dipped to $41.87 on Wednesday before staging an impressive rally. That rally continued on Thursday, with the stock gaining 4.86% as the bulls propelled it through the $44.50 resistance level. From the looks of the last 2 days gains (likely due to the recent contract awards the company has received), there is still more upside to come. An intraday pullback to the $43 area, followed by a strong rebound would be ideal, although we would settle for a dip and bounce from the $44 support level for initiating new positions. Buying a breakout still doesn't seem like the prudent way to play this one, especially with the next level of resistance looming between $45.50-46.00. If you're looking to buy the breakout, then wait for the $46 level to be crested first. We're snugging our stop up to $41.50 tonight. DHI $25.45 +0.00 (-1.29) In contrast to some of the explosive action seen in the Housing sector ($DJUSHB) in recent weeks, the past couple days have been rather quiet. Thursday's price range for the index was a perfect example with a rally, then decline, then rebound to end the day unchanged. True to form, our DHI play also ended the day unchanged, as investors continue to jockey for position, wondering whether the next move will be up or down. We're siding with the bulls on this one, relying on the relative strength that has supported this sector of late. Sure enough, in the wake of more positive housing numbers, the bears were not able to even get close to challenging the recent lows near $22 earlier this week. In fact it was encouraging to see the $24.75 support level hold up on both of the past 2 days. It looks like dips near this level continue to provide solid entries, allowing us to effectively manage risk with our stop set at $24.50. This is not the environment for momentum traders, as they should be on the sidelines until DHI clears the $27.50 resistance level, ideally with DJUSHB once again pushing to new highs, this time above $400. ************** NEW CALL PLAYS ************** ESST - ESS Technology $18.01 +0.90 (+1.27 this week) ESS Technology, Inc. is a designer, developer and marketer of highly integrated digital system processor chips. The Company offers a broad array of DVD chips, video CD chips, communication chips and personal computer (PC) audio chips. These chips are the primary processors driving digital video and audio players, including DVD, video CD and MP3 players. The Company's chips use multiple processors and a programmable architecture that enable it to offer a broad array of features and functionality. The Company is also a supplier of chips for use in modems and similar communication products, and a supplier of PC audio chips. The Company sells its chips to distributors and original equipment manufacturers of DVD, video CD, MP3, modem and PC products. Wall Street's bulls were out calling for a rally in the semiconductor sector Thursday morning. What other sector would they expect to lead a tech recovery? It began with a call from SG Cowen. The brokerage firm believes that a launching of the 64 bit Hammer processor by Advanced Micro Devices (NYSE:AMD) could provide a short term trade to the upside. Separately, Lehman Brothers' Dan Niles recommended that investors start looking at chip stocks from a valuation basis, because so many in the sector had been beaten down he said that he expected a rally in the group. That was enough to spark some momentum in the beaten down Semiconductor Sector Index (SOX.X) which led the recovery in the Nasdaq today with its 3 percent gain. The move could have some legs given the oversold nature of the technology group. We're turning to a stock in the group that has held up relatively well during the most recent downturn, which is ESST. The stock has essentially traded sideways since late April, which is a lot more than can be said for the semiconductor sector as a whole. The stock's relative strength should offer some favorable upside if indeed the chip sector stages a rebound over the next week or two. Watch for a breakout above today's high at the $18.26 level on a pick up in advancing volume. Target the $20 level to the upside. But if the $20 level is broken, the stock could easily see the upside of $22 in the short term. Dips down to the $16 level can be used to pick up entries on weakness. Our stop is initially in place at the $15.25 level. BUY CALL JUL-17*SEQ-GW OI=2396 at $1.75 SL=0.75 BUY CALL JUL-20 SEQ-GD OI=2237 at $0.75 SL=0.25 BUY CALL AUG-17 SEQ-HW OI= 54 at $2.90 SL=1.50 BUY CALL AUG-20 SEQ-HD OI= 101 at $1.65 SL=0.75 Average Daily Volume = 2.85 mln AGN – Allergan, Inc. $66.20 +2.30 (+2.89 this week) Allergan is a technology-driven, global healthcare company that develops and commercializes specialty pharmaceutical products for the ophthalmic neurological, dermatological and other specialty markets, as well as ophthalmic surgical devices and contact lens care solutions. Its revenues are principally generated by prescription and non-prescription pharmaceutical products in the areas of ophthalmology and skin care, neurotoxins, intra-ocular lenses and contact lens care products. The company's are sold to drug wholesalers, independent and chain drug stores, pharmacies, commercial optical chains, commercial optical chains, food stores, hospitals and individual medical practitioners. The Biotechnology sector (BKX.X) has not been favorable to bulls over the past couple months, but that may be about to change. Similarly, the Pharmaceutical index (DRG.X) has been trekking its way to new multi-year lows recently, but it is looking like it wants to put in a bottom near the $300 level. That brings us to AGN, which after some vicious selling took it down to the $56 level last month, has been gradually improving despite a negative broad market. In fact, today's 3.5% rally sent the stock through its descending trendline ($65) for the first time since last November. This improving picture is seen on the PnF chart too, with the recent double-top breakout giving us a solid upside target of $83. There are still some formidable obstacles to scale before we reach that lofty target, and the first of them will be the 200-dma at $67.40. Right now, we want to target intraday dips back to the $64-65 support zone for new entries. A drop to strong support at $63 would be even better, but given the stock's breakout today, that doesn't look likely. Traders looking to enter on a breakout will need to wait for a push through $68 on strong volume before playing. And of course, there is more resistance looming right at $70, the site of the April highs. Initial stops are set at $62.25, just below Wednesday's intraday lows. BUY CALL JUL-65*AGN-GM OI=3780 at $2.85 SL=1.50 BUY CALL JUL-70 AGN-GN OI= 300 at $0.75 SL=0.25 BUY CALL AUG-65 AGN-HM OI= 2 at $4.00 SL=2.50 BUY CALL AUG-70 AGN-HN OI= 16 at $1.70 SL=0.75 Average Daily Volume = 1.44 mln SNPS - Synopsis, Inc. $54.70 +1.21 (+0.31 last week) Synopsis is a supplier of electronic design automation software to the global electronics industry. The company's products are used by designers of integrated circuits (ICs), including system-on-a-chip ICs, and the electronic products (such as computers, cell phones, and internet routers) that use such ICs to automate significant portions of their chip design process. SNPS' products offer its customers the opportunity to design ICs that are optimized for speed, area, power consumption and production cost, while reducing overall design time. Over the past 2 months, the Semiconductor index (SOX.X) has been absolutely taken apart, losing more than 40% of its value as of the lows posted yesterday. But we're starting to see the first signs of improvement for the SOX. Now if we're looking bullish on the SOX, we don't want to just pick any Chip stock. No, we want to grab one with high relative strength. And SNPS appears to have that in spades. While the SOX has dipped to within a few points of its September lows, SNPS is closer to its December highs than to its September lows. It is a safe bet that a big part of this strength is attributable to the company's recent earnings report, beating estimates by 2-cents. Not only that, but the company raised revenue guidance for the third quarter.Making the picture even more bullish, the stock has recently broken out above its 5-month descending trendline and is right on the cusp of a breakout over the $56 resistance level. That sure doesn't sound like anything we've seen in the broader Semiconductor arena lately, now does it? The PnF chart confirms the stock's strength, showing that it is currently on a buy signal, with a price target of $78, if you can believe it. Note that a trade at $78 would represent a new all-time high for the stock, but first we'll need to get through the $60 resistance level. With mild support near $54 and firmer support down at $51-52, it appears that there is plenty of support to give us the ability to enter new positions on an intraday dip and bounce. Alternatively, with the stock's relative strength, we can even consider new positions on a breakout over the $56 level, targeting a near-term rally to $60. Initial stops are in place at $50.50, just below the 200-dma. BUY CALL JUL-55*YPQ-GK OI=1197 at $2.85 SL=1.50 BUY CALL JUL-60 YPQ-GL OI= 810 at $1.00 SL=0.50 BUY CALL AUG-55 YPQ-HK OI= 103 at $4.10 SL=2.50 BUY CALL AUG-60 YPQ-HL OI= 6 at $2.05 SL=1.00 Average Daily Volume = 1.53 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 ******************* ZLC $37.18 +0.24 (-1.22) Well it finally came, now what? ZLC broke down below its 200-dma during yesterday's session and confirmed the breakdown with a decline below the $37 level. But the stock rebounded in today's session, so what gives? No stock moves down in a straight line, plus the rebound in the broader market most certainly gave relief to ZLC during today's session. But the important thing is that the stock gave the confirmation yesterday, which definitely shifted the stock into a bearish position, and forecast further downside over the short term. From here, we like entries on rollovers from the now overhead 200-dma very much. The level is right below the $38 mark now, and should be met by the declining 10-dma in the next session or two. A crossover of the 10-dma and 200-dma should help to accelerate the selling in ZLC. Look for that crossover as a potential entry point into new put plays. TDS $59.50 -0.02 (-2.50) Thank you WorldCom!! TDS got whacked a good one in yesterday's session and never really recovered like the rest of the market. Prior to the revelations at WorldCom, the stock bumped its head up against the downward sloping 10-dma in Tuesday's session which proved to be another excellent entry opportunity into new put plays. From here, we expect that the stock will continue working lower as further revelations come to the surface in the telecom industry. And we just know that there are more coming. For new entry points into put plays, look for the stock to fill its gap from the WorldCom news. A rollover from that point could be used to take new entry points. If you would rather try to get the stock a little higher, then wait for a relief rally back up to the pressuring 10-dma, which is now around the $62.50 level, just slightly higher than the site of the stock's gap. Momentum traders can try a breakdown below yesterday's low at the $57.90 level on increased declining volume. EMMS $19.61 +0.41 (-2.92) For whatever reason, Banc of America Securities upgraded EMMS from a market perform to an investment buy rating yesterday morning. Whether or not that was the reason the stock traded well relative to the rest of the market is unknown. But rebound the stock did. However that slight showing of relief only lasted for one day as the stock resumed its tumble in today's session. Another brokerage firm was on the horn this morning, but this time it was a downgrade. Wachovia lowered its investment rating from a strong buy to a buy rating. The stock proceeded to continue lower in the early going, reaching as low as the $16.76 level on an intraday basis. But it did manage a rebound into the close of trading on the rally in the broader market. Without that help, who knows how low EMMS would have fallen today. The stock certainly looks poised to continue lower, which a short term target now at the September lows down around the $14 support level. Look for new entries on an intraday rollover from the $20 level, or on a break below today's low in a weak market environment. KMI $38.60 -0.47 (-1.60) We could smell a breakdown coming in the last few sessions prior to which KMI spent a couple of days hovering dangerously above short term support at the $40 level. And sure enough, the stock broke down in a big way during yesterday's session and most certainly followed through to the downside during today's. The stock reached as low as the $37.11 level on an intraday basis, which was very close to the level that the stock traded down to during the spring sell off earlier this year. Hopefully the traded down near that area early during the day offered a good exit point for positions taken earlier in the week. Going forward, that level traced in late February is the only point of reference before the $35 level, and it's a weak point of support at that. Should the selling in the Natural Gas Index (XNG.X) continue as it has in the last couple of days, then KMI should easily reach down towards the $35 level. But the key will be the XNG.X's price action, so make sure to tune into the trading in the sector. Watch for a breakdown, and consider taking new entries into downside momentum into KMI. Otherwise, wait for a one or two day relief rally on relatively lighter volume as an entry point. EXPE $59.18 -0.71 (-8.51) PCLN lowered its financial outlook for the current quarter based on the lower than expected seasonal increase in airline ticket sales. The company added that it was experiencing a surprisingly weak June, which had in the past been its strongest month. Through PCLN has become one of the weaker competitors in the marketplace, its news does not bode well for PCLN, which staged a sharp gap lower during yesterday's session in part from the PCLN news. The stock continued to slide to just above its 200-dma in today's session before it staged a sharp rebound into the second half of the day on what appeared to be window dressing and a mix of short covering. The rebound has set up another favorable entry point into new put plays, with the 10-dma now coming down from the $66 level. Because this stock is very volatile, we want to give it plenty of room to trade, so we'd like to take an entry up near the downward sloping 10-dma. If it doesn't get that high, we'd take entries around the $62 to $63 range and look for another retest of the 200-dma. IBM $71.90 +1.85 (+3.15) After much intraday volatility over the past week, bullish investors are hoping that the worst is behind for IBM. On the surface it looks like they might be right, with the strong rebound over the past 2 days that has brought shares of Big Blue right back to the $72 resistance level, also the site of the 10-dma ($72.32). It is interesting to note that this moving average has constituted major resistance twice in the past month, turning back the bulls and leading to IBM moving to new multi-year lows. Can the 10-dma do it again? We think so, especially given the fact that the daily Stochastics are already halfway to overbought, while the price is just approaching resistance. We're looking at current levels as an attractive level for initiating new positions as IBM rolls over. With our stop set at $72.50, it makes risk easy to manage, with solid return potential as we look for IBM to head back for a retest of its lows near $66. LXK $53.94 +2.60 (-1.13) If you were looking for a short-covering rally, it would have been hard to find a better candidate than LXK, as it followed yesterday's rebound off the low's near $50.75 with a 5% rally on Thursday. Not only was it a strong rebound, but the stock came to rest right at its high of the day. In favor of the bears though is the fact that LXK came to rest just below the 200-dma ($54.04). And just above there, the stock has some formidable resistance in the $56.00-56.50 area. With the potential for a printer price war emerging between LXK and HPQ, the stock will likely have a hard time breaking out of the declining trend, without a strong broad-market recovery to help it along. Note that the 4-week descending trendline is resting at $56, right at resistance. Look for a rally failure near this level to provide attractive entry into the play. Alternatively, wait for the rollover to get moving and drive LXK back under the $52 level before initiating new positions. MXIM $38.25 +1.36 (+1.58) After tagging a new recent low early on Wednesday, shares of MXIM took a northerly turn along with the rest of the Semiconductor sector (SOX.X). While much speculation has surfaced that the Chip stocks are ready to rebound, there is little in MXIM's chart to suggest that the current rebound is anything more than short-covering. Note that despite the bullish environment on Thursday, MXIM ran into a brick wall of resistance just below $39. This was the site of the highs on Monday, as well as the bottom of the gap. While the rollover from that level would likely have made for a solid entry point today, an even better entry would come from a failure to rally through the $40 level, at the same time that the SOX rolls over from its own formidable resistance at $400. Keep stops set at $40.50. QLGC $39.33 +3.13 (-3.16) After plunging to a fresh 8-month low yesterday morning, shares of QLGC have been rebounding strongly, with Thursday's volume running nearly 90% above the ADV. On top of that, the past 3 days' action has created an island reversal chart pattern, which can be a potent bottom formation. But we've got an ace in the whole here (or at least we think we do), in that there is now heavy overhead resistance in the $42-42 area. That is why we initiated the play with such a wide stop in the first place. And coming back to the island reversal pattern, while it can be potent, it also tends to give a lot of false signals, so we don't want to place too much weight on it. Despite the fact we're still leaning bearish, we do want to wait for a rollover before entering new positions. A fresh blast of short-covering could push QLGC through our stop and have us moving the stock to the drop list this weekend, but we don't think that is the most likely scenario. At any rate, wait for the rollover either at $40 or near the $41-42 area, keeping stops set at $42.50. ************* NEW PUT PLAYS ************* ACS - Affiliated Computer Services $45.48 -1.70 (-5.89 this week) Affiliated Computer Services Inc. (ACS) is a global Fortune 1000 company that delivers comprehensive business process outsourcing and information technology outsourcing solutions, as well as system integration services, to both commercial and federal government clients. In the commercial sector the Company provides its clients with business process outsourcing, systems integration services and technology outsourcing. Within the federal government sector, ACS provides business process outsourcing and systems integration services. Spending on information technology products and services has not yet even shown a sign of bottoming, let alone rebounding. WorldCom's recent problems scratch just the surface of how bad the corporate spending environment has gotten. The only industries that have enough momentum to spend and investment on new technology are the health care and defense industries. But that's not enough to spread around to the very many IT companies still in the marketplace, competing for investment dollars. Not long ago, it was thought that outsourced work performed by the likes of ACS would help to stem the problems in corporate America. But we're finding out now that even the outsourcing firms are facing troubles of their own. The optimism for the outsourcing sector was seen in ACS through April and May when the stock traded at lofty levels up around yearly highs at the $56 mark, but since then it has fallen just like the rest of anything related to technology. The biggest threat to ACS is that it has a lot of catching up to do to the downside. The stock slid sharply lower this week through its 200-dma, a sign that the long term outlook for the company has changed. There's a minor support zone near the $46 level where the stock closed during today's session that was created earlier this year. Once below that level, there's not much support remaining for ACS until its lows hit last fall. Look for a breakdown below the $44 level to trigger further technical selling in this stock. Rollovers from the $48 level can be taken as entry points into a relief rally. Look to set stops at $48.25. BUY PUT JUL-45*ACS-SI OI=5493 at $2.70 SL=1.75 BUY PUT AUG-45 ACS-TI OI= 183 at $3.60 SL=2.75 Average Daily Volume = 1.01 mln XL - XL Capital $82.70 -3.00 (-4.10 this week) XL Capital Ltd., formerly EXEL Merger Company, is a provider of insurance and reinsurance coverages and financial products and services to industrial, commercial and professional service firms, insurance companies and other enterprises on a worldwide basis. The Company provides property and casualty insurance on a global basis. XL Capital generally writes specialty coverages for commercial customers. Specific lines of business written include third-party general liability insurance, environmental liability insurance, directors and officers liability insurance, professional liability insurance, aviation and satellite insurance, employment practices liability insurance, surety, marine insurance, property insurance and other insurance covers, including program business and political risk insurance. The insurance stocks were a favorite way to play the post September 11 rebound and the impending recovery in the economy. Many insurers of broad types were given the chance to hike premiums due to the increased demand from corporations and individuals. But the theme is being revisited by the market with the recent weakness in the leaders of the insurance business. The question of the strength in the U.S. economy as well as the continued turmoil around the globe has decidedly shifted the sentiment in this once very bullish sector. XL epitomizes that trend as the stock continues to slide lower from its yearly highs reached only one quarter ago. The stock is now on the verge of a major breakdown, which may have already begun with today's decline on relatively heavier volume. The stock is coming out of a short term bottom with three successive tests of relatively lower lows, and with today's close, the selling could really open up in tomorrow's session. Look to take new put entry points on a breakdown below the $82 level on continued active trading volume. Confirm direction in the insurance sector, as well as the broader market. If on the other hand the stock does stage a short term relief rally, look for a rebound up to near the downward sloping 10-dma, which closed today at the $86.50 level, for a potential entry point into new put plays. Our stop is initially in place at the $87 level. BUY PUT JUL-85*XL-SQ OI=214 at $4.20 SL=2.50 BUY PUT JUL-80 XL-SP OI=383 at $1.85 SL=1.00 Average Daily Volume = 871 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 Thursday 06-27-2002 Copyright 2002, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. ********************* PLAY OF THE DAY - PUT ********************* ZLC - Zale $37.18 +0.24 (-1.22 this week) Zale Corporation, and with its wholly owned subsidiaries, is a specialty retailer of fine jewelry. As of July 31, 2001, the Company operated 2,344 specialty retail jewelry stores and kiosks located primarily in shopping malls throughout the United States, Canada and Puerto Rico. The Company principally operates under six brand names including Zales Jewelers, Zales the Diamond Store Outlet, Gordon's Jewelers, Bailey Banks & Biddle Fine Jewelers, Peoples Jewelers and Piercing Pagoda. Zales Jewelers provides jewelry to a broad range of customers. Most Recent Update Well it finally came, now what? ZLC broke down below its 200-dma during yesterday's session and confirmed the breakdown with a decline below the $37 level. But the stock rebounded in today's session, so what gives? No stock moves down in a straight line, plus the rebound in the broader market most certainly gave relief to ZLC during today's session. But the important thing is that the stock gave the confirmation yesterday, which definitely shifted the stock into a bearish position, and forecast further downside over the short term. From here, we like entries on rollovers from the now overhead 200-dma very much. The level is right below the $38 mark now, and should be met by the declining 10-dma in the next session or two. A crossover of the 10-dma and 200-dma should help to accelerate the selling in ZLC. Look for that crossover as a potential entry point into new put plays. Comments ZLC didn’t respond with the gusto that was seen in the market averages. In fact, the bulls might have considered ZLC’s feeble rally attempt a let down today. Since confirming the trend with the break below the 200-dma yesterday, the stock is suspect to further downside. Its failure to put in a good day today confirmed as much. Look to enter new put plays on a rollover from the 200-dma in tomorrow’s session, or on a break below relative lows. BUY PUT JUL-40*ZLC-SH OI=58 at $2.30 SL=1.50 BUY PUT JUL-35 ZLC-SG OI=46 at $0.40 SL=0.00 Average Daily Volume = 253 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 ------------------------------------------------------------ ************** TRADERS CORNER ************** MOVING AVERAGE ENVELOPES/BANDS, Part 1 Another significant means to see support and resistance levels and one that will help define specific price levels where a market may be temporarily overbought or oversold, is by the use of moving average envelopes. Moving average envelopes are formed from upper and lower lines that “float” at a set percentage above or below a particular moving average. My favorite moving average length to use for this purpose is 21, which I use on time frames from Daily to Hourly; i.e., 21-days, 21-hours. The stock market, especially as represented by the S&P 500 Index, in an “average” market cycle or trend duration, will tend to see prices fluctuate in a range that is approximately 3-4 percent above or below this moving average. As we are interested in also seeing the high and low extremes relative to the envelope lines, bar or candlestick charts are used. In a strong uptrend, the band or envelope will expand to 4-5%, which will then contain within the envelope lines most of the highs and lows. Keep in mind that I demonstrate the use of moving average envelopes for the Indexes ONLY. Due to the bouts of volatility associated with earnings, business developments, etc., individual stocks tend to work less consistently than for the indexes, which "smooth" out the individual stock "hiccups" and reversals. A bar chart with a moving average envelope: The 10-year U.S. Treasury bond, which has replaced the 30-year issue (the “long bond”) as the most active – in either cash or futures markets – is very similar in its behavior relative to trading +/- 3% above or below its 21-day average. More volatile markets, stock averages or individual stocks will regularly trade at 5-10 percent or more above or below the 21-day moving average. The percentages best used as the envelope values, will vary from period to period. In a bull market, the upside rallies will usually extend to a greater percentage and the downside will be contained by a lesser percentage; e.g., 5% on the upside, 3% on the downside or vice versa. Charting software will typically allow different numbers to be used on the upper envelope or band versus the lower envelope. It is desirable usually that the moving average, which is in effect the centerline, would also be displayed - this due to it being the "mid-range" key support and resistance area. Someone looking for trading opportunities, either just on the side of the dominant or major trend or, on both sides of the market, can benefit from the use of the moving average envelope indicator. An investor looking for initial or additional entry buy points can often improve their entry point if they wait for prices to dip to the lower envelope line. A seller should do the reverse and watch rallies for an approach to or above the upper envelope. It is worth saying again that in a bull market the UPPER band will tend to see highs that are a somewhat GREATER percentage above the "center" moving average. In a bear market, the reverse tends to be true and the declines will typically bottom at a further distance from the centered moving average; i.e., it falls to lows that are a greater percentage than the upper envelope line. However, this is not typically a huge gap - for example, currently on SPX, I am using a 5% envelope line for BOTH the upper and lower envelopes. On the Nasdaq 100 ($NDX.X) currently, the most volatile of the major indices, my current settings for the two Daily chart envelope lines are 9% for the upper band and 10% for the lower envelope line. So it's not a huge difference between where the index tops out or bottoms, in percentage terms. However, there are other differences. In a downtrend or bear market, there will tend to be MORE instances of the index topping out in the area of the "centered" moving average and there will be more "touches" to the LOWER line. The reverse is true in a dominant uptrend or bull market, where there will tend to be a number of lows that are "contained" or held at the centered moving average and more "touches" to and along the UPPER envelope line. The following 7 characteristics categorize the tendencies of market action and behavior that are commonplace relative to moving averages and their upper and lower envelopes: 1. Determination of what moving average to use somewhat arbitrary but is found by what “works” in the most number of markets. The biggest variation is with the percentages above and below this line. I suggest starting with a 21-day moving average for most daily charts in stocks, most commodities and for other markets. 2. A common starting point for the index envelope size is 3-5%. The envelope size varies from trend to trend and market to market. For an envelope size that “works” – for example, the percent figure that contains within it 90% of the price swings above and below the moving average -- start with 3 to 5% and expand or contract the envelope size as is appropriate for the dominant trend. 3. If the last high was 5% above the moving average, keep the upper envelope line set at 5% -- the next high will often reflect the same extreme. Conversely, if the last significant downswing low was 3% below the moving average, keep this figure as the lower envelope setting until market action otherwise dictates. 4. If prices cross above the moving average, assume that this line will act as support on pullbacks and the next rally will have the potential to advance to the upper envelope line. If the stock or other item is in an uptrend, the envelope line may act as a rising line of resistance for multiple rallies – the rally tops will “hug” and move up "along" the upper envelope line. The key thing is that rate of increase will SLOW - the index will not always reverse on move to or above the line. 5. If prices cross below the center moving average, assume that this line will act as resistance on any rebounds and that downside potential is to the lower envelope line. If the trend is down, the envelope line may act as a falling support line and there may be multiple downswings that touch or “hug” and move down "along" the lower envelope line. 6. In an uptrend, buy declines to the lower envelope line – this area will both define where the stock or other item is both “oversold” and the specific price area that offers a opportune buying opportunity. If in a downtrend, sell advances to the upper envelope line – this area will help define where the market is both “overbought” and the specific price area that may be most opportune as a selling point. 7. Even if there is an extension of a price swing to above or below the envelope lines, the probability for a significant further move in that direction is limited, especially if the price swing is a counter-trend move. At a minimum, there should be a reaction (countertrend move) once prices are above or below the envelope line in question. This chart provides a further illustration of these points: Jim Brown here at Option Investor noticed that moving average envelopes applied to hourly charts "contained" most of the short- term trading swings. I have not used them as much on hourly charts, but with index options, moving average envelopes work well in general. The results of blending the prices of many stocks "smoothes" out the index such that the envelope "bands" do intersect most of the dominant highs or lows as can be seen with the S&P 100 ($OEX.X) chart below. There is generally a "touch" to the line - sometimes, in a sharp move lower, the index will break through the percentage envelope that has been generally or heretofore "working" in terms of measuring the extremes for that index in that TIME frame; e.g., within the last 6 weeks to 6 months, or longer. Unlike Bollinger Bands, the percent envelopes don't narrow in appreciably during times of narrow price swings. Or, conversely, expand way out during times of big price swings. More on Bollinger bands next week, which will be the subject of my next Trader's Corner. Every time I think of Bollinger, I think of John out on some expense account good time dinner I fated at Dow Jones Telerate and John holding his own in the drinks dept. He's a fun guy. I can't give his indicator too little attention, just cause I happen not to use it. Indicators are like a prospective mate, there are so many types and someone gets along and loves, the one that you have little interest in. Another chart example: Hourly Nasdaq 100 Tracking Stock (QQQ) - On the QQQ chart above, the "spike" up to above 29 - intraday high was 29.75 - was no end of frustration as to surety that it was either a "bad tick" or reflected actual trading. In this case it did, as QQQ trades until 15 minutes after the Nasdaq hours or until 4:15 eastern. Some company announcement came that caused a big spike up, in very thin volume. Notice that when the index goes through and STAYS ABOVE the 21- day average it does it quickly and maintains a pattern of higher highs. When a rally "fails" very quickly and fairly soon again has a pattern of falling relative highs and lows - and, within a few trading periods dips under the average - this technical event becomes a sell point. The sell areas in the overall downtrends seen in the two hourly charts above, is at the area of the moving average when the rally reverses there AND at the UPPER envelope line when there is a run (often rapid) through the moving average and a second swing higher. A trader could just concentrated on selling the rallies in a downtrend and buying the dips in an uptrend. Next time on Trader's Corner - Part 2 - Bollinger Bands ************** TRADERS CORNER ************** Follow-Through Buzz Lynn buzz@OptionInvestor.com With the crackup of WCOM yesterday, I decided to cruise some of my old articles for a follow-up to see how my previous thinking, reasoning, and ultimate conclusions turned out. Sometimes, the blind squirrel actually finds the acorn! Anyway, I did a lot of writing in February about the negative state of the economy and the markets. Back then, I noted: "I'm still of the belief that excess leverage and fictional accounting - read that, huge debt - world-wide deflation, even greater declines in the Japanese economy, and recent demand for gold suggest all is not well in the world, which I expect will lead to falling equity prices in the long run. My ballpark take on it all? 100-point lower highs and 100-point lower lows on the Dow for months, maybe years, to come. Follow-through: Well, since those comments, the markets have, in fact, drifted lower. Americans have incurred larger debt and still have no savings. Profits have not sprung back as anticipated, as prices of manufactured good continue to fall. Japan was a surprise though as the Nikkei tacked on roughly 20% following, but has since given most of that back. Gold rose from $300 to $320 per oz. Going forward: None of this has changed, nor do I see anything on the horizon that would modify my long-term view. As it turned out, the Dollar reached an all time high against foreign currencies and as the Dollar has fallen, money has been flying out of the markets and repatriating the countries who had previously been profit participants in the great U.S. bull market. Without profits, why keep the money here? No good reason if the returns are no longer around. This weakening Dollar is probably the single biggest reason that the U.S markets have taken their dramatic fall. Only it didn't take 19 homicidal hijackers this time around. I'm still thinking downward markets for years to come until those pieces of paper we call "stock' actually represent an ownership interest in a going business concern created to provide profits to its owners. That won't preclude bullish moves from the eternally hopeful though. One of the favorite tricks of the bear is to lure it's prey back in just enough for the prey to find itself "safe to get back in the water". . .just before it get eaten. Bears are patient. This will not end until everyone and their brother, or at least a vast majority of same, refuse to own stock even with double-digit dividends. For even those will severely scrutinized and shunned by investors burned from the most recent Enronitis, Tyco tricks, or WorldCom washouts. Then I remembered another article from February 12th in an open letter to CEO's and CFO's everywhere: "Fire AA (Arthur Anderson). To continue to use them is a liability to shareholder value. As a shareholder of a company that does continue to use AA, my confidence in your business judgment is greatly diminished and I am tempted to sell company stock now before I or anyone else gets "Enroned". If I was considering the purchase of an interest in your company, interest has since passed once I found out that AA did your books and offered you advice. I can't trust hem and I don't know why you do now knowing what you do about their involvement in numerous similar incidences, though none as spectacular as Enron. Nonetheless, shareholder value is of far more importance to the owners than any loyalty you have to the fox guarding your henhouse." "You report accurately, I buy shares. You don't, I save cash. Simple as that." Speaking of which. . .many speculated that Enron was an isolated incident, GX was an unfortunate victim of market conditions, and TYC had a renegade for a CEO. Meanwhile, Ford cut its dividend, as did AT&T a year before that, and K-Mart filed for Bankruptcy. Now, Mistress Martha of The Splendid Household is under heavy investigation for insider trading. Oh and did I mention that little old phone company, WorldCom, that fraudulently overstated its income by nearly $4 bln? These are not isolated incidents. There is still a very real danger of companies that have previously used AA, even those companies have since fired them, to have an accounting explosion for outright fraud. Previous accounting mistakes taken from the AA playbook are potential time bombs awaiting discovery or disclosure even after AA has long since left the scene. I would still as a matter of principle exclude those companies that used AA previously, even if they have since fired them, from a serious Buy consideration. The risks are too great. Here's another comment from February where I kind of blew it, or at lease underestimated the possibilities of retreat: "Philip Morris also has my interest as I've noted in previous articles. It still owns over 95% or Kraft Foods (KFT), which makes a nice slush fund from which to draw cash should tobacco litigation rear its head again. Meanwhile, MO pays a 4.63% dividend and sells for $50.65. Personally, I would be a buyer of MO at a later date when the price is more attractive as determined by chart oscillators. It is currently overbought across all timeframes and is looking ripe for a fall to lower levels. Support looks good around $45-$46; $43 if you want to press the entry. But it may never get there." Ummm. . .litigation is pretty ugly when it goes against you. That said, some tobacco jury awards have squashed the sector and it appears to have further room to fall, despite the juicy dividends. MO closed under $43 support today and doesn't look like such a great buy right now. Why? A casual look at the P and F chart tells the story. MO P and F chart (courtesy of Stockcharts.com): That long column of "O's" suggests that the price objective is $24. No guaranty that it will ever get there. In fact, it could reverse with a new column of "X's" should the price hit just $43, the Buy target mentioned above from February's column. But boy at $24, the dividend yield would be a whopping 9.6% and I'd be all over that. In fact, I'm likely to buy bits in the IRA on the way down. But I'll keep an eye on the P and F for clues. Again from February. . .It's related to total debt load and WCOM. Anyway, "Recovery or not, the Telecom-related companies are going to burn a bigger hole in planet Earth and perhaps vaporize their bankers in the process (unless they are wearing asbestos bunny suits). If you thought things were tough on JPM who had exposure to K-mart, Enron, and Global Crossing, stay tuned as the dominos continue to fall in banking and telecom. WCOM ought to be on our "ball of flames" lists too. I honestly had no idea just what a large ball of flames WCOM would turn out to be. I can't stress enough to keep your eyes open for companies with huge debt. That's just about the unhealthiest thing a company can have on its books in a deflating economy. It means that debts get paid from a shrinking stream of income. Still, in the case of WCOM there was no way to tell that income had been overstated. There were clues when bad debt from shenanigans at the MCI division got preserved as an asset under accounts receivable for years. I bet they count founder, Bernie Ebbers' debt of nearly $400 mln to the company as an asset under accounts receivable too. Even if they don't, they have not gone out of their way to defend themselves or deny the issue exists. I leave with this final though from February 5th: "Until then, the public sits in cash, or. . .buys gold. Until accounting scandals, or at least murky accounting issues are resolved, there will be no outpouring of cash into the equity market." I still think hard assets are relevant to the future and paper instruments are taboo unless there is a safe stream of income associated with it. Oh, yeah, and stay away from debt unless it's making the company some money. Make a great weekend for yourselves! ************** TRADERS CORNER ************** Bollinger Bands on Long-term Charts By: Surya Kavuri One way to look at technical analysis is as a way of applying what we learn from history. Simply put, finding patterns that reoccur. Let us take a look at the Monthly chart for S&P500. Looking at the candles since 1996, we see that there were no two consecutive months when like-colored candles pierced through the Bollinger Bands. What does that mean? This means that if a red candle pierced through the lower band, there is a very good chance that the next candle will pierce back as a white candle. If S&P-500 trades well below the lower band (at 970), there is a very good chance that it will come back above this level, at least temporarily, by next month. This gives us a tradable plan. If the index dips to, say, 950 or below: Watch the intraday technicals and buy calls on the first bullish setup. There is one problem with this idea. Monthly candle represent a lot of time. We know that SPX options would drain time value and we cannot afford to buy 4 weeks prior to expiration and hold for 3 weeks. To get better timing, let us look at the weekly chart of S&P-500. Here, the index is pushing down along the lower Bollinger Band. Monthly chart is telling us that, from here, there cannot be more than one large red weekly candle before we get a buy opportunity. This reduces wait time to a large red candle. Now look at the last two times we had a piercing of the lower band on the monthly chart. It was around Feb-Mar 2001 and September 2001. Can you see how the large red candles during those times in the weekly chart gave a buy signal ? What does this mean? If we get a major sell-off in S&P-500, We will get a long red weekly candle that pierces significantly through the lower band on the weekly chart as well. When you get a long red weekly candle that takes you beyond 950, we can buy calls for a tradable rally, at least to 970 level. This setup already occurred and worked once on Wednesday. It can occur again during this week or next week. ------------------------------------------------------------ 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 ------------------------------------------------------------ ************ MARKET WATCH ************ Two plays were triggered in recent days, and several others are near action points. Here’s two more ideas. To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/062702.asp ************** MARKET POSTURE ************** It’s been a busy two days for Market Posture. Does that mean we’re in for a period of inactivity? 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