The Option Investor Newsletter Sunday 06-30-2002 Copyright 2002, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. Entire newsletter best viewed in COURIER 10 font for alignment Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 6-28 WE 6-21 WE 6-14 WE 6-07 DOW 9243.26 - 10.53 9253.79 -220.42 9474.21 -115.46 -335.58 Nasdaq 1464.96 + 24.01 1440.95 - 63.79 1504.74 - 30.74 - 80.25 S&P-100 490.12 + .70 489.42 - 12.34 501.76 - 5.56 - 21.88 S&P-500 989.82 + .69 989.13 - 18.14 1007.27 - 20.26 - 39.61 W5000 9384.03 - 5.95 9389.98 -159.74 9549.72 -202.97 -353.80 RUT 462.66 + 1.59 461.07 + 2.00 459.07 - 11.44 - 16.96 TRAN 2730.32 - 25.32 2755.64 + 82.50 2673.14 - 13.52 - 62.60 VIX 29.13 - 2.15 31.28 + 1.35 29.93 + 3.28 + 3.75 VXN 57.95 - 1.35 59.30 + 3.63 55.67 + 3.43 + 6.29 TRIN 1.18 2.01 1.34 1.30 Put/Call .66 1.27 1.15 .79 ****************************************************************** Glad That Is Over! by Jim Brown The rebalancing is history for another year and the quarter is over. Whew! Unfortunately earnings warnings have another week to go. Still the Dow finished with only a ten point loss for the week but stretched its losing streak to six weeks in a row. Volume was strong with 2.13 billion on the NYSE putting it in the top five days of the year. The Nasdaq managed a whopping 2.5 billion shares as most of the Russell additions were Nasdaq stocks. With the huge "artificial" volume from the rebalancing unable to move the markets the prospects for next week are less than sterling. Chart of the Dow Chart of the Nasdaq The economic reports on Friday started the day off with a caution. The Chicago PMI dropped to 58.2 from its peak at 60.8 in May. It was expected to fall some after the May surprise but new orders fell strongly from 65.6 to 61.4. This worries many analysts that the slide could be heading toward another weak quarter and a double dip recession. Inventory drawdowns were slower than expected and it appears the manufacturing sector may be losing momentum. Mass layoffs increased for the third month in a row and impacted 180,000 workers. This does not account for the 17,000 from WCOM. There were 1,726 mass layoffs for the period with 28% from the manufacturing sector. This was the fourth month of increasing layoffs. Not surprisingly Personal Spending fell by -0.1% while Personal Income rose +0.3%. It appears the consumer is finally beginning to take the slowdown to heart. The Michigan Consumer Sentiment final June numbers dropped -4.5 points to 92.4. This was revised slightly upward from the initial estimates of 90.8 but is dropping due to the stock market, scandals and war worries. This was the biggest drop since the September attack. Excited about our prospects yet? The scandal of the day was Xerox on Friday. Seems that they incorrectly booked nearly $6.4 billion in revenues. Surprised? After being grilled repeatedly for the last couple years and paying a record $10 million in fines to the SEC for prior accounting errors it was revealed today that the problems were not over. CNBC kept running a recent interview with the CEO a couple weeks ago where she guaranteed that all the skeletons were out of the closet. Evidently she was not very well informed. The additional $4 billion in errors just turned up in an audit. XRX lost -2.00 to $7.01. The problem is not the XRX restatement since it will actually help their earnings going forward, it is simply another hit to investor confidence. That investor confidence was even more shaken by news that the Dow posted the worst 2Q since 1970 and the Nasdaq posted the worst first half ever with a -25% loss. The S&P posted the worst six months since 1974. The Dow has lost ground for six consecutive weeks. With over 100 million investors in the U.S. everyone has felt the pain. The Nasdaq alone has lost more than -$739 billion in market cap this year. That is real money that evaporated from brokerage accounts, retirement accounts and mutual funds. That works out to about -$7,390 from everyone with an account. I know I paid my share and some others as well. Those losses may not be over. The rally off the Wednesday lows was nice to see but it was prompted by the end of quarter window dressing and Russell rebalancing. It was not prompted by the urge to buy stocks by the retail investor. Fund managers had stockpiled cash on the sidelines to handle redemptions ($9.2 billion last week) and to wait for the bottom to pass. If their prospectus says they will maintain only 5% cash and remain fully invested but they are sitting on 20%-25% cash due to current conditions then they want to put that cash back into the market, even if it is just overnight, to "cook" their books. They can factually show that as of June-30th they had only 5% cash and a portfolio of blue chip companies. All this cash being "stashed" in the market over the last three days prompted the rebound off of Wednesday's lows. The Russell also helped boost the markets over the last few days as speculators took positions in the new stocks in order to sell to funds at a higher price at the close. In many cases it did not work since they ended up selling them back into another shorting opportunity instead. While there was some nice gains at the close in these stocks, many of them had already sold off due to no pre-close bounce. There was just no real buying demand and most of these stocks close with only minor gains for the day. Just look at a one-minute chart of PFCB or JBLU to see what I mean about the close. The broader markets rolled over just below resistance and closed near the lows of the day. The Dow gave back -110 points from its high. This was not the way to close out a week with multiple bullish events driving volume. The holiday shortened week ahead will begin with the ISM report on Monday and end with the nonfarm payrolls for June on Friday. The volume is expected to be very light, probably half of this weeks average volume or less. This is the last real week for earnings warnings and those companies trying to slip in unnoticed may be waiting for the holiday confusion. The markets will probably be knocked around by program trading like a tennis ball at Wimbledon on the light volume. It was reported today that program trading accounted for 45% of the NYSE volume last week. This is an all time high and shows not only the strength of the programs but the absence of any retail trading. It may not be that program trading has exploded but retail trading has disappeared. It should be noted that program trading is just that, "trading". It is not buy and hold institutional investors deciding that stocks look like bargains today. To qualify as a program trade it must contain at least 15 stocks and have a value over one million dollars. Resistance targets for next week are 1485 on the Nasdaq, 500 on the OEX, 1000 for the SPX and 9400 for the Dow. Since we tested all those levels and failed on Friday's strong volume I doubt we will break them next week. It would be very bullish if we did. Probably more important is the initial support levels of 9100 for the Dow, 1420 for the Nasdaq, 480 on the OEX and 970 on the SPX. This is where the rubber meets the road. If those levels hold then maybe the summer rally fantasy becomes a reality. If they break, again, then we are looking at not just a retest of the Sept lows but an entirely new leg down. Helping the bearish view this weekend is the cover story from Barrons. They are making a point that the market is not going to recover from these lows anytime soon and it could be years before a positive market returns. Great, just what we need. A reader emailed me Friday and said we were at a bottom. Seems he was at a casino and the dealers were talking about how bad the market was and there was no hope of a recovery in stocks. This is the opposite of the several different stories about calling market tops because the cab driver, shoeshine boy and waitresses were all giving hot stock tips. The ultimate contrarian indicator. Unfortunately these indicators are not instant or timely and simply reflect the abundance of sentiment at the time in question. We all know the current sentiment is lousy. Any stock TV program or the finance section of the newspaper will poison your mind with the various disasters of the day. Until some positive news begins to develop I think the markets will continue to test new lows until they just can't push them down any farther. There are still quite a few stocks with prices that exceed historical valuations by a wide margin. This is not the signs of a bottom. Remember, volume is the weapon of the bulls. We have strong volume this week and could not break the first line of resistance. Very weak volume next week favors the bears. Be prepared! Enter Very Passively, Exit Very Aggressively! Jim Brown Editor Editors note: On Thursday we posted the first "guest writer" article in the Traders Corner. It was about using Bollinger bands in long term trading by Surya Kavuri. Surya has another article about the NDX in the Sunday Traders Corner. I also received several other inquiries by some interested traders. We will be posting articles from them soon. If you feel you have a specific trading style, technique, indicator, market view or anything that would benefit our readers, please email me and lets give everyone the benefit of your experience. Everybody has a different view of the same market and how to profit from it. We will review it and publish the best ones in the newsletter. They don't need to be pretty or professional, just well thought out with enough documentation to prove your case. If you are a successful trader in this market then others want to know your secrets! Email jim@OptionInvestor.com ************************************************ Seminar update: Confirmed speakers now include: ************************************************ John Bollinger, Creator of the Bollinger bands Jon Najarian, Dr "J" from the CBOE, President Mercury Trading Robin Dayne, Profiled as "The Traders Coach" on 20/20 and CNBC Steven Price, Options Instructor, Market maker at CBOE Jeffery Verdon, Trading and Tax law specialist Leigh Stevens, Chief Market Strategist, Option Investor Jeff Bailey, Mr Point and Figure himself! Others will be posted as we get closer. Sign up now at the discounted price" http://www.OptionInvestor.com/seminar/fall2002/ ******************** INDEX TRADER SUMMARY ******************** CROSSCURRENTS by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - A lot of crosscurrents this past week battered the markets and it was a real roller coaster ride. We started the week on a down note, a definite spillover from the week before, but rallied early in the session on Monday. A steep decline to new lows after the WorldCom shock, followed on Tuesday into Wednesday. A double bottom low set up in mid-week and portfolio window dressing and short-covering took us up strongly in the close of the week. The net result of a strong recovery move was to give us the most bullish action year to date in terms of a possible low for the year. Typically there is a market bottom in June, often late-June, followed by a summer rally, with a secondary low in Sept/October that may or may not exceed the June low. In candlestick chart terms the strong rebound from a lower low creates the candlestick called a "hammer" (circled), a bottom type candle typically, as in "hammering" out a bottom. S&P 100 Index ($OEX.X) - Weekly chart The larger double bottom and the most important, is apparent on the weekly chart above. Still to go is a move above the dominant long-term downtrend - that may take some time, but should occur this year. Very possible in the summer rally scenario is a move up to the 35 to 45 area, before another decline into a fall low. Time will tell on these predictions. S&P 100 Index ($OEX.X) - Daily/Hourly charts: We see that it is not going to be straight out of the bearish woods here, as the rally ran into selling near the old highs. Expect another sideways to down move into perhaps mid-week again, but I think the 500-505 area will be tested. MARKET MONITOR NOTE (Fri, 6/28): OEX calls bought in OEX 477 area exited per my recommendation to sell when OEX hit 494. My Friday OEX profit-taking objective at 594 came about because I thought it was easily within the upside potential implied by the bullish momentum I was seeing and measured in my hourly work. In fact this objective was simply set as I had the upper envelope line set at 2% before today, which is where the LAST rally topped, relative to the unseen 21-hour moving average. I assumed that the 500 area would have selling going well under it, for example at 497 at a prior swing bottom, now coming back in as resistance. Also, by Friday the hourly oscillators were approaching overbought readings. This alone as been a sure tip off to a corrective rally coming. Nevertheless the weekly action is bullish and I would start to give some attention to riding a couple more of these upswings. There should be another one coming that would give more than the 17/17+ points on the OEX that could have been "easily" garnered on going long Wed., exiting Friday. I like playing the 2-3 day swings in the Indexes. At some time ahead there may be some 2-3 week swings on the upside, but that is still a ways off in my estimation. I would not neglect the short side either and sell the first rally up to the 500-505 area, especially if the hourly stochastics (5 & 21 "lengths") were again registering again in the overbought extreme highs we seen on most recent tops. On the downside, for a bullish case here it's important to see daily closes at and above 480, although we could get some intraday price dips to this area. In fact I suggest call purchases in the 480-485 area, exiting on a break of 475. Trading Strategy Note: I was asked why I had an 476 OEX "stop-out point" on Friday, well under the prior day's 491 close and would risk potentially 15 points before exiting. A good question and the answer is that I normally would not risk giving back all of a profit - but trading strategy is relevant to what objectives you are going for. I also indicated a 494 trade objective on the Market Monitor on Friday. However, if the OEX instead of reaching 494 (which it did) fell back to 485 or even 480, I may have wished to stay long with the conviction that the next upswing will take prices to 500-505, at more significant resistance. I might then revise the trade objective to 500 or leave the objective "open". Of course, I have time premium erosion to deal with also. Is this trumped by the probability of a strong move in the next 2-3 weeks? There are many considerations like this. When the market warrants it according to my analysis, I'll go for a "position" type trade anytime I can and attempt to ride the bigger trend - I had been writing about how I figured the market was putting in an intermediate or major bottom. My strategy then is to stay IN the emerging trend, so I set stops according to where a trend reversal would be indicated. If my trade objective is not met and the market looks like it has topped out, I can exit accordingly rather than get stopped out - but have to see it (the top formation) to know it. I wouldn't necessarily ride an index down 15 points if it did not meet a further 5-point objective, but I set stops where the trend would indicate a larger (not minor) trend reversal. By setting an exit point only where 2-3 day/2-week trend considerations would indicate a significant trend reversal, I have the option of going for an eventual higher objective than I might have projected initially. Ride the trend! For example, a longer-range OEX objective I project is to 525 if OEX closes above 505. If I'm long July or August calls bought when OEX traded at 475 and OEX runs to 495, then drops back 10 points to 485, but then begins a run taking it to 525 over the following 10 days, that is about the only trade I need take that month! If my stop-loss remains at my entry point at 475 for an initial period, this risk strategy is appropriate for the kind of intermediate objective I propose. The more I go in and out and try to capture all the minor price swings WITHIN an intermediate trend, the more I enrich my broker. Given my index option "premium cost" on every in and out, commissions and wear and tear on my psyche - well, my style of trading suits me. It's not necessarily for everyone. There is no ONE way to trade. For example, if you like the "action" of in and out trading, you are going to want to try to capture the smaller price swings. If you don't have a larger view and eyes on the bigger prize, it will "kill" you to see an unrealized gain of 10 points in OEX "fade" away. Dow Index (1/100: $DJX.X) - Daily/Hourly charts: DJX retreated from the red arrow in the resistance area implied by the high end of DJX's downtrend channel on the hourly chart. The key resistance is really 93.6-94.00. 96-97 is major resistance - sell the first rally to this area. Suggest buying in the 90.8-91 area, exiting below 89.5. The Dow continues to have a relatively narrow trading range and trade strictly within its downtrend channel. DJX is fairly predictable - sell in the upper channel area when overbought on the two stochastic models - buy at the low end when both stochastic models are oversold. Use stops always for those occasional shifts in the dominant trend. I anticipate more corrective action and lower prices early in the week - after that the market will tell us what is next. A likely time for a pullback is after 3 up days - we had that in the Nasdaq Composite and Nasdaq 100 indices in the week ending Friday. Nasdaq Composite ($COMPX) Weekly chart The composite has established an important "tentative" double bottom - tentative because a second following week's price range and close will better "confirm" this possible outcome. Nasdaq Composite ($COMPX) Daily/Hourly charts: The Nasdaq Composite continues to trade very predictably within it's hourly downtrend channel. The blue dashed up trendline shows a strong trend up to the top at 1486. Next, if it follows its usual pattern, is to pull back into the middle of the range, which would have COMP back to as low as 1415-1420 intraday. This would a likely buying area. Selling the 1486-1500 area is also suggested. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: MARKET MONITOR NOTE (Fri, 6/28): The QQQ long position from 25.5, reached my trading objective at 26.60 - since QQQ has traded to above 26.60, we are out on this trade. Cancel any liquidating stops at 25.20. 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. 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 5 percent below the 21-hour moving average as calculated after each hourly close. You can find out more about the use of Moving Average Envelopes by reading my Trader's Corner (T.C.) article on the subject by clicking on the T.C. section and scrolling down to the topic. In my next Trader's Corner's article, I'll put in my two cents on Bollinger Bands, with some material from a recent talk John gave to the Market Technician's Association which we both belong to. Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** Editor's Plays ************** Look Out Below I guess you could say my market view was down. (grin) I probably should not profile any calls this weekend. There are so many put opportunities that I had no problem finding a couple that have great possibilities. AYE - Allegheny Energy It appears that the Enron crisis has soured energy trading in general and Merrill Lynch cut AYE to a neutral from a buy on Friday. Merrill said they cut estimates sharply from $3.55 to $2.90 due to weak sales and lower energy trading assumptions. While the companies debt ratings are stable Merrill warned that they would have to issue more equity later this year to maintain this stability. Let's see, falling prices, weak sales, marginal debt and a new offering to dilute shares. Sounds like a recipe for selling to me. The July $25 put is only $1.15 and the August $25 is only $1.80. If the stock is going to drop further on the immediate news the of course the July put would work. However, sometimes it takes awhile for the news to sink in and therefore the August put is probably the better deal. *********************** FLEX - Flextronics A conservative put play would be the July $7.50 put. The contract electronics business is drying up with no demand from the business consumer. Flextronics has 70,000 employees and $13 billion in sales, in good times. Those times are gone and FLEX is having problems finding work. (oversimplified) The company has taken charges to reduce capacity and staff and it the target of numerous shareholder lawsuits. There were rumors of insider trading related to a deal with SoftChain. The CFO of FLEX owns 16% of SoftChain. Things are just not going well for FLEX. The stock seems destined to fall to the $5 level or below. The July $7.50 put at $1.10 looks very attractive considering it is already in the money and the rate of descent is accelerating. The August $5 put at $.45 cents could make a good lottery play but only with pure risk capital. *********************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** Undressing False Positives and Bad Data By James B. Are you surprised that the major averages didn't trade higher into the close of the quarter? You shouldn't be. The Nasdaq composite and the S&P 500 have retested their September lows but the overall picture has not changed and neither has the trend. The 400 point rebound in the Dow Jones Industrials from Wednesday to Friday afternoon changed its bullish percent status from bear confirmed to bull alert. While this looks like good news I strongly urge caution as the index has not broken its current downtrend and it could only serve to suck in bulls before the next drop. Chart of the DJIA (top is daily, bottom is hourly) The VIX and the VXN also showed some movement late this week but it was the wrong way if you're still looking for a cataclysmic event to call a bottom. The VIX has been falling since spiking higher on Wednesday and the VXN fell sharply in Friday's session. The good news, if a rising "fear" index can be called good news, is that both of these volatility gauges are still in a short-term up trend and we may still get some sharp moves higher if the broader market averages continue to fall. New COT data Today's market sentiment report outlines the new COT data and we have some interesting observations. The first of observation or disclaimer we want to bring forward is a potential error in the non-commercials or small traders' long positions for the S&P 500 futures. There is a drastic change that is truly hard to comprehend. We are expecting the COT to publish a correction but in the meantime apply any meaning from the numbers carefully. Throughout the latest COT report we observed strong drops in overall positions for the S&P 500, Nasdaq 100 and the Dow Jones Industrials. The most interesting change in the data we follow was the reversal in the NDX positions. The commercials or professional traders who historically are on the "right" side of the trade switched sides and reversed into a bearish or net short position. Likewise the small trader reversed and went bullish or net long on the NDX. This is probably not good news with the NDX index already trading below its September 2001 lows. Now that the second quarter is over, any window dressing is done and we can look for a little undressing next week. This will only play into the current technical picture, which shows a lot sectors in very similar positions to the DJIA. That is they are all near the top of their descending channels and look like they are ready to roll over. Looking ahead traders should be careful with the upcoming July 4th holiday. The talking heads on T.V. will probably remind the markets of the potential terrorist threat here at home. Combine this with low volume due to traders on holiday and we could get some strong moves. Let's not forget that earnings season is just around the corner once everyone comes back sunburned from their Fourth of July weekend. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 9243 Moving Averages: (Simple) 10-dma: 9368 50-dma: 9836 200-dma: 9816 S&P 500 ($SPX) 52-week High: 1316 52-week Low : 945 Current : 989 Moving Averages: (Simple) 10-dma: 1001 50-dma: 1055 200-dma: 1100 Nasdaq-100 ($NDX) 52-week High: 2071 52-week Low : 979 Current : 1051 Moving Averages: (Simple) 10-dma: 1069 50-dma: 1200 200-dma: 1400 ----------------------------------------------------------------- Market Volatility The VXN made it to pre-9/11 highs near 65 as the Nasdaq composite flirted with the 1400 level. Yet since the strong bounce higher in the index the VXN suffered a large 8% drop in Friday's session. The VIX has also been on a steady uptrend but again, the recent bounce in the markets has the fear factor falling back. CBOE Market Volatility Index (VIX) = 29.28 -0.74 Nasdaq-100 Volatility Index (VXN) = 58.03 -5.10 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.66 475,914 312,242 Equity Only 0.56 392,011 221,403 OEX 0.71 17,532 12,380 QQQ 0.52 34,889 18,307 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 48 + 0 Bull Correction NASDAQ-100 14 + 0 Bear Confirmed DOW 30 + 4 Bull Alert S&P 500 39 + 1 Bear Confirmed S&P 100 36 + 1 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 1.34 10-Day Arms Index 1.41 21-Day Arms Index 1.44 55-Day Arms Index 1.34 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 2089 1047 NASDAQ 2089 1383 New Highs New Lows NYSE 164 89 NASDAQ 200 154 Volume (in millions) NYSE 2,392 NASDAQ 2,471 ----------------------------------------------------------------- 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 We see some very interesting numbers in the latest COT report. The commercials have really reduced their long positions as well as some of their shorts but remain significantly bearish. The biggest change we see is the small-traders or non-commercial numbers. Honestly, we believe this data to be in error and would hesitate to put much stock in it at this time. Hopefully, the COT will catch the mistake and make a correction. Otherwise, small traders have drastically slashed their long positions and made huge reversal. 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%) 06/25/02 378,214 438,775 (60,561) (7.4%) 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% 06/25/02 35,668 46,695 (11,027) (13.4%) - error? (This looks like an error in the data and we'll expect the COT to be reprinting a correction soon.) Most bearish reading of the year: (11,027)- 6/25/02 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 There was a big about face in the Nasdaq futures positions which may be a real clue as to where professionals think the market is going. Commercials slashed their longs which left their overall posture decidedly bearish. Conversely, the small trader slashed positions both long and short (again, this may be an error in the report) but the overall change was a bullish shift in sentiment for the small trader. Historically the commercials are correct so this is bad news for the NDX. 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% 06/25/02 27,238 35,926 (8,688) 13.8% 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% 06/25/02 10,353 8,844 1,509 7.8% 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 The data for the Industrials shows a similar decline in overall positions but the general trend remains the same. Commercials have a bullish outlook compared to a heavy short side for the small trader. 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% 06/25/02 18,016 13,255 4,761 15.2% 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%) 06/25/02 1,846 6,424 (4,578) (55.3%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *************** ASK THE ANALYST *************** Summer Reading By Eric Utley Every summer I put together a list of what I feel is essential reading material for traders and investors. It’s become sort of a tradition. And this summer is not different. Aside from pure joy I receive from reading, I truly believe that the hundreds of books that I’ve read on subjects ranging from corporate finance to trader biographies have in one way or another made me a better trader. There’s so much to the market that I think one could spend a lifetime reading about all that’s involved. But time is unfortunately limited, with all the fly fishing to be done this summer. So I’ve put together just a few of the essentials that I think will be of benefit. I hope you enjoy. Incidentally, several of the titles that I list below are available through the Option Investor bookstore: http://www.OptionInvestor.com/bookstore/index.asp Please send your questions and suggestions to: Contact Support ---------------------------- Bookstore Point & Figure Charting By Tom Dorsey As a trader, I’m primarily concerned with what the price of an asset is going to do in the immediate future. And not much else other than just that: price. The two forces that determine price are supply and demand. Any economist can tell you that. But translating such basic knowledge into profits is a step that most can’t make. Enter point and figure charting. Dorsey’s book is the single most important title in my investment library concerning technical analysis. The book cuts through the noise that so often accompanies most investment texts. What I’ve found most beneficial about Dorsey’s book is that it provides a foundation with which to build a methodology. Put another way, it’s practical. Most other books I’ve read on a method are too heavy on theory, and lack application. Not Dorsey’s. Though he provides the essentials of the theory, the book is heavy on application. Read it if you haven’t already. Pit Bull By Marty Schwartz Pit Bull is not a book that’s going to make you richer. The methods that Schwartz used to make his millions are not as readily employed in today’s market. But Pit Bull is one of those books that offers up some good old motivation and inspiration. Hey, if Schwartz could do it, so can I. That’s the feeling coming away from the book, which chronicles the triumphs of a super trader. Schwartz was, and I believe still is, a full time independent trader. What was most inspiring about his book is that he details how he went through a decade of losing before finding his way. Now that’s what I call motivation. Ten years of losing before finding success. Think about that! Option Volatility & Pricing By Sheldon Natenberg Options are the most difficult asset, for lack of a better term, to successfully trade. And do you know why? If you don’t, you’d better read Natenberg’s bible of options. From what I’ve heard from floor traders who know him, Natenberg isn’t a good trader. That’s just what I’ve heard. That rumor combined with the heavy theory-based trading approach to some of the strategies that he describes in the book turned me off to using the book for making money. Nevertheless, I think Natenberg’s book is one of the best for teaching about the options market. How price is determined, and the variables that go into determining price. If you’re an active options trader, I think it’s a must read. Mind Over Markets By Dalton, Jones, Dalton An old friend of mine who used to run a desk on the Board Of Trade referred this book to me. Appropriately enough, since the Market Profile is a CBOT trademark. Anyway, the book is geared towards futures traders. But it’s principles can be applied to trading stocks and indexes. I think it’s one of the most underrated investment texts out there. This is a book that will make you a better trader! I won’t go into details, because it would take an entire column to review the market profile. Just take my word for it, it’s a great read. Atlas Shrugged By Ayn Rand This is a bit of a different recommendation this summer, but I thought I’d include since I’m re-reading Atlas Shrugged this summer. Atlas Shrugged has been the most influential books in my life. And I think it’s the number one title to read for aspiring traders, and for those already in the game. Ayn Rand was one of the most influential thinkers last century, whose philosophy known as objectivism is laid out for all to read in her novel. ---------------------------- Online Reading Some of my best investment ideas have recently come from online newspapers. Let me share an example. MedImmune (NASDAQ:MEDI) is a biotech concern that bought a firm last year that was developing a flu vaccine that should be inhaled rather than injected. You now how kids hate needles. Anyway, the company was betting on early approval of the drug for this year’s flu season. The market had discounted the early approval given the lofty valuation of the stock. Well, back in late March, talk began to surface that MEDI was running behind schedule because the company was due to make an announcement about the approval of the drug. Things didn’t play out as expected, and the stock tumbled from $44 to where it trades now near relative lows. The New York times ran the story a few days before the tumble In the stock began. Just a few short days after reading the story, I saw MEDI trading at a double top at $44. So I shorted it. The stock went on to generate a bearish price objective of $31, which is the spot where I covered my short about one month later. A nice $13 point trade courtesy of the New York Times. There are all sorts of trades popping up in the columns of America’s newspapers, specifically in the business sections. Think about it, journalists are the best analysts on Wall Street. They have the connections, yet they are pretty much unbiased. No journalist I know has his or her toes in a corporate finance department. So the stuff in the business section is about as good of research you can find. My morning reading each day includes about 20 online newspaper sites around the country. Try it for yourself. ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ************* COMING EVENTS ************* ================================================== Market Watch for the week of July 1st ================================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- MLHR Herman Miller Mon, Jul 1 After the Bell -0.06 SVU Supervalu Mon, Jul 1 After the Bell 0.58 ------------------------- TUESDAY ------------------------------ BMET Biomet Tue, Jul 2 Before the Bell 0.25 IBC Interstate Bakeries Tue, Jul 2 -----N/A----- 0.41 ----------------------- WEDNESDAY ----------------------------- None ------------------------- THURSDAY ----------------------------- None ------------------------- FRIDAY ------------------------------- None ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable STJ St. Jude Medical, Inc. 2:1 06/28 07/01 JILL J. Jill Group 3:2 06/28 07/01 MMC Marsh McLennan Companies 2:1 06/28 07/01 CMC Commercial Metals 2:1 06/28 07/01 FPU Florida Public Utilities 4:3 06/28 07/01 BER W.R. Berkley 3:2 07/02 07/03 COH Coach Inc 2:1 07/03 07/05 SII Smith Inte 2:1 07/05 07/08 THO Thor Industries 2:1 07/05 07/08 MLAN The Midland Company 2:1 07/05 07/08 PROV Provident Financial Hldngs3:2 07/11 07/12 KRB MBNA Corporation 3:2 07/12 07/15 SBCF Seacoast Banking Corp. 3:1 07/12 07/15 -------------------------- Economic Reports This Week -------------------------- With an earnings vacuum this week, investors will have their monocles focused on the stamina of the economy. And it all starts on Monday with Truck/Auto Sales, Construction Spending and the important ISM Index. Wednesday gives us the ISM Services Index and Factory Orders. Friday will offer the market plenty to shout--or scream--about when the employment stats, and unemployment rate, hit the wires an hour before trading begins. The big question: do investors care about any of this anymore? ============================================================== -For- Monday, 07/01/02 ---------------- Auto Sales (NA) Jun Forecast: 6.1M Previous: 5.7M Truck Sales (NA) Jun Forecast: 7.2M Previous: 6.8M ISM Index (DM) Jun Forecast: 55.5 Previous: 55.7 Construction Spndng(DM)May Forecast: 0.3% Previous: 0.2% Tuesday, 07/02/02 ----------------- None Wednesday, 07/03/02 ------------------- Initial Claims (BB) 06/29 Forecast: N/A Previous: 388K ISM Services (DM) Jun Forecast: 58.2 Previous: 60.1 Factory Orders (DM) May Forecast: 0.6% Previous: 0.4% Thursday, 07/04/02 ------------------ None Friday, 07/05/02 ---------------- Nonfarm Payrolls (BB) Jun Forecast: 60K Previous: 41K Unemployment Rate (BB) Jun Forecast: 5.9% Previous: 5.8% Average Workweek (BB) Jun Forecast: 34.3 Previous: 34.2 Hourly Earnings (BB) Jun Forecast: 0.3% Previous: 0.2% Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 06-30-2002 Sunday 2 of 5 ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************** INDEX TRADER GAMEPLANS ********************** THE SECTOR BEAT - Week ending 6/28/02 by Leigh Stevens What was noticeable about the sectors that retreated in the week just ending was the fact of sell pressures in former favorites Defense, Oil Services, Gold, Healthcare and Home construction. Portfolio managers taking some profits off the table by the end of the Quarter, there being a tendency to due some portfolio rebalancing; e.g., taking some profits on your winners and putting some money to work in what you think will be the next "winners". The above sectors were favorites for either being defensive or for plays on the inflationary trends in medical care, the housing boom (especially in such a prolonged bear market), and oil- related services - again, a very defensive play, especially with the volatile mid east powder keg. There is was last week some nibbling on oversold areas like Airlines, financials, internet stocks, oils, transportation and software. The semiconductors, always a key to tech recovery attempts, rebounded some but reversed at first resistance as you can see on the chart in the (Sector) "Highlights" section below. I still like participation in the S&P 600 SMALLCAP VALUE ISHARES (IJS) & RUSSELL 2000 INDEX ISHARES (IWM), with emphasis on S&P600 SmallCap - which continued to advance Friday after a breakout above its daily down trendline. The RUT (Russell 2000 Index) also followed suit, but the iShares lagged perhaps due to some hedging activity - there was a lot of activity in the Russell stock group, relating to the Russell 2000 portfolio rebalancing by managers who run small and mid cap funds. HIGHER ON THE DAY ON Friday - DOWN ON THE DAY on Friday - SECTOR TRADE RECOMMENDATIONS & REVIEW - OPEN/NEW TRADE RECOMMENDATION(S) - Short OIH at 64.00 or more; Stop at 67.2 (Oil Service HOLDR stock) [6/28 High: 63.48; Close: 61.47] Buy HHH at 22.80 or less; Stop at 21.70 (Internet HOLDR stock) [6/28 Low: 23.11; Close: 24.22] OPEN POSITIONS - Long BBH at 79.10 (Biotech HOLDR's Trust stock) Stop: 75.15 TRADE LIQUIDATIONS - NONE SECTOR HIGHLIGHT(S) - Pharmaceutical Index ($DRG.X) - STOCKS: AHP; AMGN; AZN; BMY; FRX; GSK; IVX; JNJ; KG; LLY; MRK; PFE; PHA; SGP Talk about a sector that seems like it is really "depressed", but step back to a larger view and the picture CHANGES, such as is amply illustrated by the Pharmaceutical group, DRG. However when looked at from a multiyear perspective and using the semi-log scale appropriate to a sector that has had such a strong 6-year advance - followed by subsequent years trading in a sideways consolidation. The weekly chart has the look of a rounding top pattern of major proportions. The recent break of the low end of a 4-year trading range suggests weakness for as long as a couple of more years. Ultimate downside potential might be to as low as the 158 area based on this pattern and point and figure downside vertical count considerations. Perhaps time for the drug companies to pay the price of reaping large profits from high prices to U.S. consumers? That is high prices we pay for Rx drugs - relative to the many countries that regulate drug prices paid by the public. The tide may have turned - these things are cyclical - during the years when the drug companies were growing their earnings at high rates it was one of the strongest sectors you could have been in; 1994 through 1998. 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: Nothing has developed yet that suggests any kind of big turnaround to the upside. A close above 400-405, would be needed suggest that a turnaround in the SOX was underway. Above 400-405, major resistance comes into play in the 450 area. The obvious major expectation on the downside for SOX support to come into play again is the area of the Sept. 344 low - at least this has been the pattern with the Nasdaq indices so far and many key stocks as well - they have been digging in at the post-9/11 lows. SOX reversed last week at the first level of significant resistance. The Semiconductor stocks have been either trading sideways like AMAT and/or under continued sell pressure in the case of Intel (INTC). This week should tell the story as to whether support will be found at or above recent lows in SOX or if there may still be a retreat to retest the Sept. low. Based on the action of the individual stocks in the SOX index I think that recent lows may be it for a while. However, even if this is so there will likely come a period of sideways "basing" action in the Index before there is a chance for a move above 400 - at least not without better participation from INTC. UPDATE: 6/28 Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu Week DHI 26.03 0.26 -1.84 0.29 0.00 -0.71 Sideways action QCOM 27.46 0.68 -0.44 0.69 0.38 +1.52 Wait for trigger BA 45.00 0.23 0.13 -0.15 2.08 +2.03 Higher again ESST 17.52 0.40 -1.09 0.96 0.90 +0.80 Entry point AGN 66.75 1.68 -1.04 -0.05 2.03 +3.44 Watch 200-dma SNPS 54.81 -1.26 -0.25 0.60 1.21 +0.42 About 2 breakout PUTS IBM 72.00 0.95 -1.10 1.45 1.85 +3.25 Failed @ resistance ZLC 36.54 0.10 -0.84 -0.72 0.24 -1.61 Lost its shine TDS 60.49 1.25 -2.00 -1.73 -0.02 -2.46 Gap filled EMMS 21.19 -0.03 -3.27 -0.03 0.41 -1.34 Another round? KMI 38.02 0.00 -0.20 -0.93 -0.47 -2.18 No support? EXPE 59.29 -2.87 -3.16 -1.75 -0.71 -8.34 Looking 2 roll LXK 54.40 0.31 -3.33 -0.71 2.60 -0.67 Entry point? MXIM 38.33 1.64 -2.35 1.01 1.36 +1.66 Watch the SOX QLGC 38.10 -1.19 -3.91 -1.25 3.13 -4.39 Failing @ $40 XL 84.70 -0.34 -2.01 -0.30 -3.00 -3.65 Alternate entry? ACS 47.48 -1.48 -3.16 0.45 -1.70 -3.89 Caution urged LLY 56.40 -0.46 -1.16 0.88 1.72 -1.99 New, Looks ugly ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* No Call Play of the Day this week. Put Play of the Day: ******************** LLY - Eli Lilly $56.40 (-1.99 last week) See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ None PUTS ^^^^ None *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 06-30-2002 Sunday 3 of 5 ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** NEW CALL PLAYS ************** None ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ****************** CURRENT CALL PLAYS ****************** AGN – Allergan, Inc. $66.75 (+3.44 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. Methodically walking its way up the charts, AGN has been bucking the trend seen lately in both the Biotechnology and Pharmaceutical sectors. Despite the weakness seen there, shares of AGN actually have been looking strong over the past 6 weeks. After bottoming near the $56 level, the stock has been working its way higher. After encountering its 7-month descending trendline near $65.50 a couple weeks ago, it was time for some consolidation. After a bit of backing and filling, AGN took advantage of the strong market rebound on Thursday and blasted through the descending trendline ($65.25) and kept right on going on Friday, running right up to the 200-dma ($67.37) before pulling back into the close. With the breakout last week, AGN now has support in the $64-65 area and an intraday dip and bounce near there would make for a solid entry ahead of the next leg of the rally. A sharp market-induced dip to the $63 support level can also be used for new entries, but make sure that buying volume is strong on the rebound before entering. Trader's looking to buy the breakout will want to focus on the 200-dma. A volume-backed move through the $67.50 level should clear the way for AGN to head up to test the April highs near $70. For now, keep stops set at $62.25. BUY CALL JUL-65*AGN-GM OI=3785 at $3.30 SL=1.75 BUY CALL JUL-70 AGN-GN OI= 297 at $0.90 SL=0.50 BUY CALL AUG-65 AGN-HM OI= 2 at $4.50 SL=2.75 BUY CALL AUG-70 AGN-HN OI= 372 at $1.90 SL=1.00 Average Daily Volume = 1.44 mln BA – Boeing $45.00 (+2.03 last week) One of the world's major aerospace firms, BA operates in three principal segments: commercial airplanes, military aircraft and missiles, and space and communications. Commercial airplanes operations involves the development, production and marketing of commercial jet aircraft, principally to the commercial airline industry. The Military Aircraft and Missiles division is involved in the research, development, production, modification and support of military aircraft, including transport and attack aircraft. The Space and Communications segment is involved in the research, development, production, modification and support of space systems, rocket engines and battle management systems. Proudly wearing the badge of relative strength, BA had a stellar move out of its recent support zone last week. After solidifying its support in the $42 area, the stock launched higher on Thursday, partially in response to the broad market rebound, and partly as a delayed reaction to the series of recent contract wins. But Friday's action was even more impressive, with the stock opening at the low of the day and closing at the high. Granted, it was only a fractional gain for the day, but by the time the dust settled, BA was up 4.7% for the week. That's quite a bit better than the DOW's 6th consecutive weekly loss, don't you think? But we're not out of the woods just yet, as BA has some formidable resistance looming at the $46 level. Not only is it the site of the March lows and the May highs, but it is also the 50% retracement of the stock's decline from March-April. Early next week the window dressing that took place at the end of the month, will likely turn to window undressing if the market is unable to hold its gains. That should give us a dip back down to support in the $43-44 area or possibly as low as $42. Take advantage of the rebound off that dip to initiate new positions, so long as our $41.50 stop is not violated. Of course it hasn't hurt that the DOW Transports ($TRAN) have had a strong bounce in the past 3 days. Look for a continuation of the rally to confirm that BA still has room to run. In fact, if the $TRAN can blast through the $2800 level it will likely give BA the impetus to scale its own resistance at $46. But for the time being, stick with buying the dips, rather than trying to buy the breakouts. BUY CALL JUL-42 BA-GV OI= 909 at $3.30 SL=1.75 BUY CALL JUL-45*BA-GI OI=3896 at $1.55 SL=0.75 BUY CALL JUL-47 BA-GW OI=1563 at $0.60 SL=0.25 BUY CALL AUG-45 BA-HI OI=3288 at $2.40 SL=1.25 BUY CALL AUG-47 BA-HW OI=2411 at $1.25 SL=0.50 Average Daily Volume = 3.33 mln DHI – D.R. Horton Inc. $26.03 (-0.71 last week) D.R. Horton is a national builder that is engaged primarily in the construction and sale of single-family homes in 39 markets and 23 states in the U.S. The company designs, builds and sells its homes on lots developed by it and on finished lots that it purchases, ready for home construction. DHI also provides title agency and mortgage brokerage services to its homebuyers. It does not retain or service the mortgages that it originates, but sells the mortgages and related servicing rights to investors. Much to the chagrin of the bears, Housing is the one are of the market that just refuses to roll over and die. Take note of the DOW Jones US Home Construction index ($DJUSHB). After being trapped in a descending trend from early May until the middle of June, the index broke above the declining trendline in a big way 2 weeks ago. Driving the positive action was the latest report on the housing market showing that growth remains robust, helped along by the belief that interest rates are unlikely to go higher anytime soon. Shares of DHI got a quick spike off the report, but got hit pretty hard last week with the bears taking profits as the broad market weakened. True to form that turned out to be another quality entry point, as the bulls stepped up to support the stock again just below the $25 level. Although the stock managed to scale the $26 level on Friday, we don't know how much of the buying was related to the end of quarter monkey business, so we'll have to see how the stock behaves next week. From the way things look this weekend, dips to intraday support at $25.50 or $24.75 still look like good points to take an entry, but only after the rebound begins. This still doesn't appear to be a favorable environment for momentum traders, as they should be on the sidelines until DHI clears the $27.50 resistance level, ideally with the $DJUSHB once again pushing to new highs, this time above $400. BUY CALL JUL-25*DHI-GE OI=668 at $1.90 SL=1.00 BUY CALL JUL-30 DHI-GF OI= 74 at $0.25 SL=0.00 BUY CALL AUG-25 DHI-HE OI=292 at $2.45 SL=1.25 BUY CALL AUG-30 DHI-HF OI=283 at $0.60 SL=0.25 Average Daily Volume = 1.54 mln SNPS - Synopsis, Inc. $54.81 (+0.42 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. After 2 months of abuse by the bears, the Semiconductor stocks finally got a bit of a respite in the latter half of the week, partially helped by an oversold bounce and partially by positive comments from Lehman's Dan Niles on select names in the sector. But the positive bias was short-lived, with the Semiconductor sector (SOX.X) giving back a 3% intraday gain to end with a 1.75% loss. Apparently that $405 resistance level was too much for the bulls to contend with ahead of the weekend. Once again demonstrating its relative strength, shares of SNPS closed in the green on Friday. Even though it was only by a margin of 11-cents, that sure beats a loss. Recall that a big part of our excitement about SNPS is the fact that it is one of the few Semiconductor stocks that is trading well above its September lows. After breaking above its descending trendline a couple weeks back, the stock has been building its strength for a bullish run and appears just about ready to take on the $56 resistance level. With volume running strong the past few days and the stock holding near its highs at the close on Friday, all we need is a bit of renewed strength in the chip sector to get the job done. We don't want to target a breakout for new positions just yet, as this clearly isn't the right environment for momentum techniques. Continue using intraday dips to support to initiate new positions. First support is at $53, followed by much stronger arms at the $51-52 level. We are maintaining our stop at $50.50 until the stock manages to scale the $56 level. BUY CALL JUL-55*YPQ-GK OI=1203 at $3.30 SL=1.75 BUY CALL JUL-60 YPQ-GL OI= 850 at $1.25 SL=0.50 BUY CALL AUG-55 YPQ-HK OI= 114 at $4.60 SL=2.75 BUY CALL AUG-60 YPQ-HL OI= 30 at $2.40 SL=1.25 Average Daily Volume = 1.56 mln QCOM - QUALCOMM $27.46 +0.03 (+1.52 this week) QUALCOMM, Inc. is a developer and supplier of code division multiple access (CDMA)-based integrated circuits and system software for wireless voice and data communications and global positioning system (GPS) products. The Company offers complete system solutions, including software and integrated circuits for wireless handsets and infrastructure equipment. This complete system solution approach provides customers with advanced wireless technology, enhanced component integration and interoperability, as well as reduced time to market. QUALCOMM provides integrated circuits and system software to many wireless handset and infrastructure manufacturers. Qualcomm said on Monday that over one million users now have phones with BREW technology and capable of downloading games and entertainment. On Wednesday QCOM and Lucent demonstrated their new 3G UMTS chipset and praised its benefits. Still the stock is having trouble with overhead resistance. QCOM has got to get over that $28 level in order to make any real gains. It closed right on the 10DMA again but could not stay over it. There was good consolidation in the last couple hours of trading. It is basically following the Nasdaq and that may be the writing on the QCOM tombstone soon. Wait for the breakout above $28 before establishing a long call position. BUY CALL JUL-25*AAW-GE OI= 3345 at $3.80 SL=2.50 BUY CALL JUL-30 AAW-GF OI=15715 at $1.15 SL=0.50 BUY CALL AUG-25 AAW-HE OI= 644 at $4.80 SL=3.00 BUY CALL AUG-30 AAW-HF OI= 1713 at $2.10 SL=1.00 Average Daily Volume = 15.2 mln ESST - ESS Technology $17.52 -0.47 (+0.80 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. Play description: 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. 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. ESST guided analysts higher on Monday citing strong sales of DVD players. It raised its 3Q guidance and stood behind the guidance for the current quarter. DVDs have been selling stronger as the price of DVD players comes down. One in every four homes now has a DVD player. Circuit City has said they plan on phasing out videotapes in favor of DVDs. The stock rallied into the close on Thursday but sold off slightly on Friday as Russell 2000 speculators had overbought shares in view of the weaker fund demand. We view the Friday pullback as an entry point and we would buy it down to the $16 level. However we do not expect any rally in ESST unless the Nasdaq turns back positive next week The current stop loss is $15.25. BUY CALL JUL-17*SEQ-GW OI=2643 at $1.60 SL=0.75 BUY CALL JUL-20 SEQ-GD OI=2321 at $0.70 SL=0.25 BUY CALL AUG-17 SEQ-HW OI= 63 at $2.40 SL=1.25 BUY CALL AUG-20 SEQ-HD OI= 134 at $1.35 SL=0.50 Average Daily Volume = 2.85 mln ************* NEW PUT PLAYS ************* LLY - Eli Lilly $56.40 (-1.99 last week) LLY discovers, develops, manufactures and sells Pharmaceutical products targeted at the diagnosis, prevention and treatment of human diseases. The company's best known commercial product is the anti-depressant Prozac, although there are numerous other lesser-known drugs that treat conditions such as Parkinson's disease, diabetes, osteoporosis along with a broad range of antibiotics. The company also conducts research to find products to treat diseases in animals and to increase the efficiency of animal food production. Once viewed as a safe haven, Pharmaceutical stocks have been a favorite target of the bears in recent months in an environment of expiring drug patents and a less compliant FDA leading to rejections of drug applications. Adding to the industry's woes have been a series of manufacturing snafus. The effect can be clearly seen in the chart of the Pharmaceutical index (DRG.X), which broke its very long-term bullish trendline in early April before the slide really accelerated. Since then, the DRG index has taken out every meaningful level of support except for the lows from 1998. In fact the DRG is trading very close to those levels right now and a break below $295 will likely see it make a fairly rapid trip down to the $260 level. With that kind of bearish background, it should come as no surprise that LLY recently broke below its long-term trendline at $65. That got the second leg of the bearish express train rolling, and it didn't take long before the stock was trading below $60. As a side note, it is interesting to note that the last time LLY traded below $60 was when it fell as low as $54 in early 2000. Don’t look now, but we're just about there. Despite the fact that there is more support in the $54 area dating back to the middle of 1997, we have to defer to the PnF chart, and it still says LLY is headed below $50 with a price target of $49. LLY looks like it could be on the cusp of a breakdown under $56 and momentum traders can consider taking a position on a drop below that level. More patient investors will want to look to sell into any oversold rally, targeting new positions on a rollover from resistance first at $58 and then up at $59. A bounce up to the $60 level would be a gift, but highly unlikely in light of the fact that the company warned of the possibility of nonapproval of one of their drug candidates currently under review. Initial stops are set at $60.25. BUY PUT JUL-60 LLY-SL OI=2328 at $4.30 SL=2.75 BUY PUT JUL-55*LLY-SK OI=2169 at $1.50 SL=0.75 Average Daily Volume = 3.45 mln ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 06-30-2002 Sunday 4 of 5 ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************** CURRENT PUT PLAYS ***************** ZLC - Zale $36.54 (-1.61 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. After breaking below the 200 DMA the stock continues to have trouble. It is struggling to get above $37.50 but heavy volume on Friday slammed it at the close. The weaker consumer spending report and lower consumer confidence is prompting investors to dump stocks of high priced retailers. Ironically Kent Gasaway of the Buffalo Small Cap Fund (BUFSX) recommended the stock on Friday saying the older people get they tend to buy more jewelry. That may be fine for long term holders but as you can see by the lowest close in six months that investors were not impressed. Next support is in the $35 area and I would tighten stops as we approach that level. BUY PUT JUL-40*ZLC-SH OI=48 at $3.70 SL=2.50 BUY PUT JUL-35 ZLC-SG OI=46 at $0.65 SL=0.00 BUY PUT AUG-35 ZLC-TG OI=28 at $1.20 SL=0.50 Average Daily Volume = 253 K TDS - Telephone Data Systems $60.49 (-2.46 last week) Telephone and Data Systems, Inc. (TDS) is a diversified telecommunications service company with wireless telephone and wireline telephone operations. TDS conducts substantially all of its wireless operations through United States Cellular Corporation (U.S. Cellular) and substantially all of its wireline telephone operations through its wholly owned subsidiary, TDS Telecommunications Corporation. TDS, U.S. Cellular and TDS Telecom hold various investments in publicly traded companies, the majority of which were the result of sales or trades of non-strategic assets. Minority positions are held in Deutsche Telekom AG, Vodafone plc, Rural Cellular Corporation and VeriSign, Inc. Gap filled! In the Thursday write up we mentioned that you should wait for the gap down to be filled before opening a new position. That gap was filled Friday morning and the stock finished the day with a continuation of the previous down trend. The WCOM disaster and news out of Qwest on Friday continue to pressure the stock. It is now trading at April 1999 lows and there is no close support below $60. Since the stock has already traded under that level this week we would view this bounce as an entry point. BUY PUT JUL-65 TDS-SM OI= 98 at $6.10 SL=4.00 BUY PUT JUL-60*TDS-SL OI=250 at $3.20 SL=1.50 BUY PUT AUG-55 TDS-TK OI= 70 at $2.55 SL=1.25 Average Daily Volume = 244 K EMMS - Emmis Communications $21.19 (-1.34 last week) Emmis Communications Corp. is a diversified media company with radio broadcasting, television broadcasting and magazine publishing operations. The Company operates the sixth largest publicly traded radio portfolio in the United States based on total listeners. The 20 FM radio stations and three AM radio stations the Company operates in the United States serve the nation's three largest radio markets of New York City, Los Angeles and Chicago, as well as Denver, Phoenix, St. Louis, Indianapolis and Terre Haute, Indiana. The 15 television stations the Company operates serve geographically diverse mid-sized markets in the United States as well as the large markets of Portland and Orlando and have a variety of television network affiliations, including five with CBS, five with FOX, three with NBC, one with ABC and one with WB. Most of us should have been stopped out in the strong Friday session when shares of EMMS rallied above our suggested stop of $20.25. Considering the 8% gain, you wouldn't expect us to keep it as a short play. However, given the state of the broader indices and the opportunity to enter a new short on EMMS as it rolls over again, we're going to try for another leg down. Looking at an intraday chart you can see where the rally fizzled at the $22 level on Friday afternoon. Shares might roll over from here but just to be say we'd probably wait for a move under the $20 level before initiating any new put positions. If by chance EMMS continues to rally then we would sit back and wait for a potential rollover at the 200-dma, which happens to be converging with the 10-dma at the $23 level. A rollover from here would look like a entry point for a put play with a tight stop just above $23. We'll move our suggested stop to $23.25. BUY PUT JUL-22*QMJ-SX OI=34 at $4.40 SL=2.20 BUY PUT JUL-20 QMJ-SD OI= 8 at $1.10 SL=0.50 Average Daily Volume = 711 K KMI - Kinder Morgan $38.02 (-2.18 last week) Kinder Morgan, Inc. is an energy storage and transportation company in the United States, operating, either for itself or on behalf of Kinder Morgan Energy Partners, L.P., more than 30,000 miles of natural gas and products pipelines. The Company owns and operates Natural Gas Pipeline Company of America, a major interstate natural gas pipeline system with approximately 10,000 miles of pipelines and associated storage facilities. The Company owns and operates a retail natural gas distribution business serving approximately 233,000 customers in Colorado, Nebraska and Wyoming. The Company constructs, operates and, in some cases, owns natural gas-fired electric generation facilities. The downtrend continues for KMI. There really isn't much change from our stance on Thursday. Only aggressive traders should consider new put plays on these new lows as the better entry point would be to wait for a one to two day bounce higher and watch for shares to stall at resistance. Volume was strong on Thursday's decline and while it could have been a potential reversal in the making, shares continued to drift lower into the weekend. KMI spent most of Friday trying to hand on to support at $38 and the above mentioned aggressive player could look for new entries if it breaks this level. Otherwise, we'll be watching for a move back to the $40 area. Fortunately, the MACD has just rolled back over into a bearish crossover and stochastics, while bearish, could still fall further. BUY PUT JUL-40*KMI-SH OI=1460 at $2.85 SL=1.45 BUY PUT AUG-40 KMI-TH OI=1653 at $3.80 SL=1.95 Average Daily Volume = 743 K EXPE - Expedia $59.29 (-8.34 this week) Expedia, Inc. is a provider of travel-planning services. The Company's global travel marketplace includes direct-to-consumer Websites offering travel-planning services located at Expedia.com, Expedia.co.uk, Expedia.de, Expedia.ca, Expedia.nl and Expedia.it. The Company also provides travel-planning services through Voyages-sncf.com, as part of a joint venture with the state-owned railway group in France. In addition, the Company provides travel-planning services through its telephone call centers and through private label travel Websites through its WWTE business. WWTE is a division of Travelscape, Inc., one of the Company's wholly owned subsidiaries. In February 2002, a controlling stake in the Company was acquired by USA Networks, Inc. I don't know about you, but odds are, I would have been closing my put plays for a profit around noon on Thursday when shares of EXPE began to bounce from almost hitting its 200-dma. This of course was a reaction to the terrible news from PCLN, a competitor of EXPE. Fortunately, the rebound on Thursday afternoon failed to put shares of EXPE back above the $60 level and the any strength on Friday couldn't help the stock either. Actually, it is Friday's rollover action that has us keeping EXPE on the put list. We will aim again for Thursday's lows near $52 but we are going to lower our suggested stop to $65.10. If EXPE manages to rebound higher next week we'll be looking for the $64 to $65 range to offer resistance and another opportunity to initiate new bearish positions. BUY PUT JUL-60 UED-SL OI=1977 at $4.40 SL=2.20 BUY PUT JUL-55 UED-SK OI=2899 at $2.35 SL=1.15 Average Daily Volume = 1.92 mln XL - XL Capital $84.70 (-3.65 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. Shares of XL bounced again of the $82 support level. This is why we have our trigger to initiate put positions on a move below $82. More conservative traders may actually want to wait for a move under the $80 level but this is one time where we don't expect the psychological round number to put up much resistance once shares breakdown. If XL continues to move away from us, more aggressive traders might consider targeting put positions as the stock bounces against current overhead resistance near $89.00. If this looks good to you, consider a tight stop on the stock just above $90 or the 200-dma. Longer-term technical indicators like the 50-dma crossing (down) through the 200-dma are not a good sign for investors and shorter-term traders will also note the MACD just rolled into another bearish crossover a couple of days ago. BUY PUT JUL-85*XL-SQ OI=287 at $1.70 SL=0.85 BUY PUT JUL-80 XL-SP OI=401 at $0.80 SL=0.00 Average Daily Volume = 871 K ACS - Affiliated Computer Services $47.48 (-3.89 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. Yesterday we mentioned that a rollover or failed rally at the $48 level might be a good play to initiate new put positions. During Friday's session we did see $48 act as resistance and shares of ACS fell back from their highs but the lack follow through by the bears has us a bit cautious. It still looks like a good low risk entry point if your stop is $48.25 but we'd probably take a step back to see how shares react on Monday before pulling the trigger. Otherwise, a move below the $44 level looks to be an easier trigger point. BUY PUT JUL-45*ACS-SI OI=5558 at $1.85 SL=0.90 BUY PUT AUG-45 ACS-TI OI= 259 at $2.70 SL=1.35 Average Daily Volume = 1.01 mln IBM - International Bus. Machines $72.00 (+3.25 last week) International Business Machines uses advanced information technology to provide customer solutions. The company provides value to its customers through a variety of solutions including technologies, systems, products, services, software and financing. IBM's three hardware product segments are comprised of Technology, Personal Systems and Enterprise Systems. Other major operations consist of a Global Services segment, a Software segment, a Global Financing segment and an Enterprise Investments segment. After rebounding off its lows on Wednesday, IBM has recovered a lot of ground and the close just below $72 on Thursday was looking like a pretty good entry point. But apparently the bulls weren't done, or maybe it was end of quarter window dressing. Whatever the cause, IBM quickly moved through our stop on Friday morning, with the stock actually moving above $73.50 in late afternoon trade. But the gains were unsustainable and for those who were quick on the trigger, they got an unusually good entry point into the play as IBM fell back to unchanged on the day. We've got lots of catalysts for our play next week, beginning with the window-undressing that is likely starting on Monday. And then we have the increasing likelihood that Big Blue will issue a warning for the quarter. The broad markets have now gone a long ways towards relieving the oversold condition that existed Wednesday morning, and look susceptible to a return to the lows from last week. That slide will drive IBM back down to test its lows from last week (near $66) enroute to its bearish price target of $60. Use weakness near current levels to initiate new positions or else wait for price to drop back under intraday support at $70.75 before jumping in. We are maintaining our stop at $72.50. A close above that level will leave us no choice but to send our IBM play packing. BUY PUT JUL-70*IBM-SN OI=35247 at $2.55 SL=1.25 BUY PUT JUL-65 IBM-SM OI=24192 at $1.25 SL=0.50 Average Daily Volume = 9.17 mln LXK – Lexmark International $54.40 (-0.67 last week) Wrapping its arms around the entire life-cycle of printers, LXK develops and manufactures a broad range of laser, inkjet and dot matrix printers for the office and home markets. The company is also the exclusive source for new print cartridges for the laser and inkjet printers it manufactures. Additionally, LXK provides supplies for IBM printers and offers after-market laser cartridges for the large installed base of a range of laser printers sold by other manufacturers. As the broad markets managed to extend their rebound early on Friday, shares of LXK went along for the ride, trading as high as $55.50 before the fear of darkness began to set in, driving the stock down more than a dollar below the intraday highs at the close. Despite the fact that LXK managed to close back above the 200-dma, it is clear from the day's price action that the resistance near $56 is still firmly intact. One key factor in our bearish stance on LXK is Hewlett-Packard's recent announcement of a new line of printers, which will very likely launch a price war between the major printer manufacturers. That development won't benefit either company, as it will lead to thinner margins and reduced profits and investors will be quick to sniff out that sort of bearish development. The recent breakdown under the $58 support level generated a fresh triple-bottom sell signal and a price target of $38. Failed intraday rallies in the $55-56 area should continue to make for solid entry points, with stops remaining at $56.50. Traders looking to trade a breakdown will want to keep a watch on the $52 level. Once the bears break below that level, it is a pretty safe bet that they'll close the gap down to $51.35. The real breakdown will come with a trade under Wednesday's intraday low of $50.25. BUY PUT JUL-55*LXK-SK OI=1906 at $3.20 SL=1.50 BUY PUT JUL-50 LXK-SJ OI=1553 at $1.35 SL=0.75 Average Daily Volume = 1.31 mln MXIM – Maxim Integrated Products $38.33 (+1.66 last week) MXIM designs, develops, manufactures and markets a broad range of linear and mixed-signal integrated circuits, commonly referred to as analog circuits. The company also provides a range of high-frequency design processes and capabilities that can be used in custom design. MXIM's objective is to develop and market both proprietary and industry-standard analog integrated circuits that meet the increasingly stringent quality standards demanded by customers. Following the solid 2-day rally in Semiconductors on Wednesday and Thursday, it may have looked like our put play on MXIM might be in trouble. But a quick look at the daily chart this weekend shows that the brief rebound appears to be over. After moving up to just kiss the $40 resistance level (providing us with a near-perfect entry point), MXIM followed the Semiconductor index (SOX.X) lower throughout the afternoon, ending very near the low of the day. While the trading action late last week was likely colored by the end-of-quarter window dressing, that activity should have had a bullish, not a bearish bias. No matter how you slice it, with MXIM rolling over at resistance and the SOX rolling over at its own resistance ($400), the bears look like they are flexing their muscle again. We'll continue to use failed intraday rallies near the $40 level to initiate new positions, keeping stops in place at $40.50. Traders looking to enter on a breakdown will want to hold their fire until MXIM falls back under $37, or better yet breaks below last week's lows at $34.22. BUY PUT JUL-40 XIQ-SH OI=2883 at $3.80 SL=2.25 BUY PUT JUL-35*XIQ-SG OI=1514 at $1.70 SL=0.75 Average Daily Volume = 6.80 mln QLGC – QLogic Corporation $38.10 (-4.39 last week) Somebody has to make the equipment that lets your computer talk to all its peripheral equipment, and QLGC does it well. A leading designer and supplier of semiconductor and board-level input/output (I/O) management products, QLGC has been providing SCSI-based connectivity solutions to this market sector for over 12 years. QLGC's I/O products provide a high performance interface between computer systems and their attached data storage peripherals, such as hard disk and tape drives, removable disk drives and RAID (redundant array of independent disks) subsystems. The company is also the market share leader in Fibre Channel host bus adapters, a market segment that is receiving tremendous attention from investors. As has been the pattern over the past several weeks, the rebound off the lows on Wednesday was short-lived. Although QLGC had a very strong rebound off its lows near $35, that rebound came to an end in the middle of the day on Friday. The stock rallied right to the $40 resistance level first thing in the morning, before returning to its bearish ways of the first half o the week. By the closing bell, QLGC was down more than 3%, coming to rest just above important support at $37.50. There just doesn't appear to be enough conviction for the bulls to hold their ground with such a lofty valuation. With negative analyst comments last week directed at the Storage sector, that is just one more blow that QLGC has to absorb. Deferring to the laws of supply and demand, the PnF chart is pointing the ways significantly lower, with a bearish price target of $29. Intraday rallies near the $39-40 level would make for very attractive entries on the rollover, although we may have to settle for a drop below support to trigger our entry into the play. On a breakdown, we want to wait for QLGC to drop below the $37.50 level, re-entering the gap left on Thursday. That will give us a clear signal that the stock is headed back to close the gap down to $36 and likely had substantially lower. Keep stops in place at $42.50. BUY PUT JUL-40*QLC-SH OI=5320 at $4.50 SL=2.25 BUY PUT JUL-35 QLC-SG OI=3513 at $2.25 SL=1.00 Average Daily Volume = 10.5 mln ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***** LEAPS ***** Back to the September Lows By Mark Phillips mphillips@OptionInvestor.com But no capitulation yet. I've lost count of the number of times I've stated my conviction that the broad markets needed to test their September lows before we would see another meaningful rally. Well, the S&P and NASDAQ indices got there last week, helped along by WCOM's admission of accounting fraud. Unfortunately, just when all the ingredients were present for a blowoff in volatility and a breakdown to new lows, buyers appeared for no apparent reason to lift the markets off of their lows. Any number of explanations can be offered for the rebound from it being just the latest oversold rebound to end-of-quarter window dressing. Well, nothing material has changed in the markets and I suspect that next week will provide more downside, as the windows get undressed just as quickly as they got dressed. I know what you're thinking. The VIX actually ran as high as 35.99 on Wednesday when the DOW was down as low as 8926. Isn't that a blowoff of Volatility? Well normally it could be, but apparently too many investors were expecting just that and it became a self-fulfilling prophecy. Look how quickly it relaxed on the rebound. The fear dissipated far too quickly for my tastes. Despite the fact that the DOW closed negative for the sixth week in a row and the S&P500 was essentially unchanged for the week, the VIX closed at 29.28, down significantly from the prior week's close at 31.94. Simply put, the wall of worry that had been building suddenly vanished. Probably one of the key factors to the rebound off the lows was due to the fact that the NASDAQ-100 tracking stock (QQQ) reached its bearish price target of $25 and that could have led to some of the short-covering. That rebound off the lows satisfied our entry target for our QQQ Watch List play and we are dutifully taking a position this weekend. But I am highly suspicious that it could be taken out on the next downward leg. If you are playing this one, keep it on a short leash. That's what we're doing, setting our stop just below last week's lows. I don't know what the catalyst will be to give us that final downward leg before we have the next tradable rally. Maybe IBM will finally warn for the current quarter. Maybe it will be a fresh wave of weakness in the dollar. And maybe it will be another corporate scandal -- seems like we are having a couple a week lately, with WCOM and XRX being the poster children last week. It could even be in the geopolitical arena with tensions high in several corners of the globe. I still harbor concerns of another terrorist attack, but really hope those fears are unfounded. Those are the type of issues that work in the bears favor over the near term. The only thing the bulls have going for them are hopes that the economy is really improving and prosperity is about to break out all over. Nothing would make me happier, but my job isn't to tell you what I hope will happen. My job is to try to paint a realistic picture of what I see as the potential risks and rewards in the current marketplace. With the losses we have recently seen throughout the broad markets we are nearing a point where we could have a strong rebound, but we need a catalyst to get it done. The upcoming earnings period isn't likely to be it unless some high profile corporate leaders tell us in their conference calls how they are seeing growth in end market demand for their products and services. I don't know about you, but I won't be holding my breath waiting for that one. In perusing some Bullish Percent charts on Stockcharts.com tonight, I noticed further weakness that backs up my expectations for more weakness ahead. The NASDAQ-100, S&P500, and S&P100 are all bear confirmed and heading south in a hurry. Only the DOW has seen enough of a reversal to go back into Bull Alert. Will the DOW lead the rest of the market out of its doldrums again? Probably, but I have serious doubts that it will be able to do so from current levels. At a minimum, I expect the DOW to retest the 9000 level in the week ahead. If it manages to hold, then maybe the broad market has hope. Otherwise, look out below. On that cheery note, let's take a look at our plays. Portfolio: MSFT - While MSFT is still trapped under the $56 resistance level, last week's action was actually pretty positive. The stock managed to rebound from the $51 level on Wednesday and ended the week with nearly a $2 gain. That looks like relative strength to me! If the broad market is going to recover from current levels, I'm expecting MSFT to be key to that recovery. For those still looking for an entry into the play, repeated dips near the $51 level still look attractive so long as the rebounds continue to come on robust volume. XOM - Well now, its about time! While the rest of the market languished throughout last week, XOM actually saw some very positive action the past 2 days, pushing above both its 50-dma and 200-dma on strong volume. I especially like the picture painted by the weekly chart, with the Stochastics once again pointing solidly northward. Of course, we don't want to get too excited just yet, as Friday's action, which took XOM right to the $41 resistance level, could have been due to the EOQ window dressing. Until the stock can decisively push through this level and close there on a weekly basis, we'll keep our stops set down at $38.50. PG - So much for that relative strength! I hope some of you took my advice to lock in some gains on PG following the prior week's strong gains. Monday's drop below the middle of the ascending channel ushered in 4 days of wild trade, with PG touching the lower channel line, rebounding strongly and then ending up back there at the close on Friday. So is it another entry point, or a warning that the good times are about to end? I honestly don't know, but I can say that I don't like what I see on the weekly chart, as it shows the stock continuing to weaken. Looking at the chart pattern, I can make either a bullish or a bearish case. In favor of the bears, last week's trading looks awfully similar to what we saw from WMT just before it broke down out of its ascending channel at the end of March. Looking at the chart through bullish lenses, I see a pattern very similar to late January, as the stock experienced several days of volatile trade before charging higher for the next several weeks. I can't honestly say that I would initiate new positions here, and for that reason, you may want to consider tightening stops to just below last Tuesday's $89 closing low. In the Portfolio, we're still going to give it some room to move, keeping our stop set at $86. QQQ - You may think I'm out of my gourd here, but I decided to take the entry provided by the QQQ last week. I still have a bearish view on Technology in general. But numerous indicators are pointing to this area nearing a tradable bottom. As we spoke about in the initial writeup, my $25 target was predicated on the price target from the PnF chart. It has yet to give us a fresh buy signal, so we are probably a bit premature. Until we see some strength start to build, this needs to be viewed as a higher risk play. We are mitigating our risk by placing a very tight stop for a LEAP play at $24, just below last week's intraday lows. Watch List: WMT - I really tried to get excited about taking a position in WMT last Wednesday, as it rebounded from the $54 level. But the truth is that I just couldn't do it. The choppy intraday trade just didn't look healthy at all, and the reward for my reluctance came when I watched the stock fall apart on Friday on rather heavy volume. Looking at the PnF chart this weekend, I noticed something else disturbing. While my ideal entry was to look for a dip and bounce in the $51-52 area, if that were too happen, it would complete a bearish triangle breakdown and have us looking significantly lower for an actual bottom in the stock, possibly into the $44-46 area. That's not a risk I'm willing to take right now, so I'm putting WMT on HOLD this weekend. BRCM - How low can it go? I'm not yet seeing any significant signs of improvement in the Semiconductor sector, as the SOX was turned back from the $405 resistance level on Friday. And even the rebound earlier in the week couldn't get the bulls interested in the stock for more than a wee bit of short covering on Wednesday. Sure the stock is cheap by historical standards, but it just isn't behaving well. With the stock now trading below its September lows, let's leave it alone until the bulls can get interested again. In reviewing the PnF chart, the current bearish count gives us a price target of $11. I'm leaving the entry target in place, but keep in mind that we only want to take a position on a volume-backed rally through the $20 level. INTC - Lower and lower the chip stocks go. Where they'll stop, nobody knows. My bet is for the SOX to find a tradable bottom near the $340 level, and judging by the recent action in INTC, that action in the SOX could find INTC trading near the $16 level. At that level, I think we have a pretty solid risk-reward ratio, as we can set a tight stop at $15.50. Lower the entry target to $16-17, but wait for the bounce before playing. BBH - Is a decent bounce too much to ask for? The Biotechs have been so beaten down in recent months that the bulls are hesitant to really do any significant buying. And that keeps us from getting a decent entry. I'm seeing a bit of bullish Stochastics divergence on the weekly chart, so that entry point could be closer than we think. Continue to watch for a failed rally in the $96-98 area, but I think we have some time to wait with the weekly Stochastics just starting their upward move. For such a volatile week, I must say that I didn't much like the action. What was a nearly ideal setup to wash out the weak hands and let us get on with the business of having the summer rally, was defeated by the EOQ window dressing and the ever-present and more dominant mini-hedge funds. Did you notice the statistic on Friday that last month program trading accounted for 45% of all trading on the NYSE. No wonder the daily price action often looks so crazy! Looking into my crystal ball, I'm looking for a capitulation low in the fairly near future. The VIX will be my guide as to when that actually occurs. If you missed my recent articles on the subject, here are the links for your convenience: Getting Ready to Change Gears Gearing Up For MOCO Should the high-VIX scenario fail to pan out over the next few weeks, then I fear we will muddle our way lower throughout the summer, posting a series of lower highs and lower lows as we continue to ride down the descending channels in each of the major indices. I don't think I have to tell you that scenario is not one that I relish! But with that as a possibility, I'll continue to try to find quality plays that are outperforming the broad market. Finding its way onto the Watch List this weekend is Aerospace giant, Boeing (NYSE:BA). Take a look at the daily chart with a retracement going back to the September lows and I think you can see why I like it. Take note that all of the plays currently in our Portfolio are showing gains this week. Let's see if we can keep it that way! Whatever trades you take, keep them on a short leash. It's a safe bet that there are plenty of surprises in store for the remainder of the summer. Have a safe and sane 4th of July! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: MSFT 05/13/02 '03 $ 55 MSQ-AK $ 5.90 $ 6.70 +13.56% $48 '04 $ 55 LMF-AK $10.20 $11.80 +15.68% $48 XOM 05/22/02 '03 $ 40 XOM-AH $ 3.00 $ 3.30 +10.00% $38.50 '04 $ 40 LXO-AH $ 5.10 $ 5.30 + 3.92% $38.50 PG 05/30/02 '03 $ 95 PG -AS $ 3.70 $ 4.50 +21.62% $86 '04 $ 95 KBJ-AS $ 9.00 $10.20 +13.33% $86 QQQ 06/26/02 '03 $ 28 OZC-AB $ 2.45 $ 2.70 +10.20% $24 '04 $ 28 LRI-AJ $ 4.50 $ 4.90 + 8.89% $24 Puts: None LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: BRCM 10/28/01 $18-20 JAN-2003 $ 25 OGJ-AE CC JAN-2003 $ 20 ORD-AD JAN-2004 $ 25 LGJ-AE CC JAN-2004 $ 20 LGJ-AD WMT 03/31/02 HOLD JAN-2003 $ 55 VWT-AK CC JAN-2003 $ 50 VWT-AJ JAN-2004 $ 55 LWT-AK CC JAN-2004 $ 50 LWT-AJ INTC 06/16/02 $16-17 JAN-2003 $ 20 NQ -AD CC JAN-2003 $ 15 NQ -AC JAN-2004 $ 20 LNL-AD CC JAN-2004 $ 15 LNL-AC BA 06/30/02 $43, $42 JAN-2003 $ 45 BA -AI CC JAN-2003 $ 40 BA -AH JAN-2004 $ 45 LBO-AI CC JAN-2004 $ 40 LBO-AH PUTS: BBH 06/09/02 $96-98 JAN-2003 $90 GBZ-MR JAN-2004 $90 KOV-MR JAN-2005 $90 XBB-MR New Portfolio Plays QQQ - NASDAQ-100 Trust $25.45 ** Call Play ** It should come as no surprise that taking this position makes me nervous, as I don't have a lot of faith that the bottom put in place last week has good odds of holding on a retest. But I think the NASDAQ is very close to a tradable bottom. We were targeting the $25 level, as that was the site of the PnF price target, and it is a testament to the utility of that charting method that it predicted how far the QQQ would fall, all the way back in early May. Despite my trepidations, due to the possibility that we are catching a falling knife, there is a possibility that the lows from last week were a successful double bottom (sometimes the second low can undercut the first low and still be considered a double bottom) and I don't want to let it go. For those of you playing along at home, I think the prudent approach would be to initiate half positions near current levels and add to that position on a successful retest of last week's lows. There are still a lot of things that could go wrong as we head into earnings season over the next couple weeks and I think it is a safe bet that we'll get another chance at an entry. Another bounce from the $25 level would be ideal, but I'm not ruling out a dip as low as $23 before we see the sort of rebound that propels the NASDAQ higher to any significant degree. I want to give this position some room to work in our favor, so I'm starting out with our stop set at $22.50, just below the secondary entry target. As the trade begins to work in our favor, I'll use the PnF chart again, this time to help us determine an upside objective. BUY LEAP JAN-2003 $28 OZC-AB $2.45 BUY LEAP JAN-2004 $28 LRI-AJ $4.50 New Watchlist Plays BA - Boeing Company $45.00 **Call Play** One of the few U.S. Aircraft manufacturers that managed to navigate the minefield of the so-called peace dividend in the early 1990's, BA has built itself into a strong and flexible defense and aerospace conglomerate. As proof that the company is doing something right, BA has been announcing contract wins and the need to increase production over the past couple weeks. Now that is encouraging! Just last week, the company announced it needed to boost production capacity to meet the needs of no-frills carriers in 2004. That came on the heels of Monday's news that a Boeing-led team won a $2 billion battlefield radio contract from the U.S. Army. There are other deals in the fairly recent past, but you get the idea. BA's business appears to be growing, despite fears that the economy could be headed for a double dip. The price chart bears out the company's strength too. Note that the 28% retracement of the rally off the September lows is $42, and except for some brief dips below that level it has held as support since the end of April. The rash of positive news in recent weeks and the fact that the bears couldn't break the stock below support led to a nice surge in the stock as the end of the quarter drew to a close. Part of that surge may have been due to window dressing, and that coupled with a good chance for broad market weakness in the early part of the week has us looking for another dip near support for initiating new position. I like the $43 level as an entry point, although a drop back to the $42 level would be even better. The only thing that would cause us concern is if current support were to give way and BA traded below its 200-dma, currently at $40.83. Given the tenuous broad-market environment, let's start out with a fairly liberal stop at $40. BUY LEAP JAN-2003 $45 BA -AI BUY LEAP JAN-2003 $40 BA -AH For Covered Call BUY LEAP JAN-2004 $45 LBO-AI BUY LEAP JAN-2004 $40 LBO-AH For Covered Call Drops None ************** TRADERS CORNER ************** A bottomless pit called the Nasdaq-100 by Surya Kavuri We all know that near-term future of NDX is looking quite bleak right now. All the rallies have been accompanied by low volume and traders are using these half-hearted rallies to either close long positions or open fresh short-positions. Every important sector for NDX is getting hammered – Semiconductors, Software, Telecom, Wireless, Biotechs. Action towards Friday close did not point to the possibility of this abating in the near-term. And I cannot find a single person to stand up and say something good about the NDX. Current trend is still down. It has become very easy to find positions to short. It is getting easier and easier to find an old high-flier and buy puts on it. It reminds me of how easy it was to buy calls and make money back in 1999. It is alarming to the contrarian in me when people, who never shorted in their life, routinely talk about shorting. Whether we are long or short, it is a good idea to occasionally evaluate the current trend for likely changes. In other words, are there any chances of finding the elusive bottom on the NDX? Before we tackle this issue, I would like to focus on the eternal tussle between the "commercials" and "non-commercials" as defined By the COT – The Commitments of Traders Reports. Anyone who has been around OIN is quite familiar with COT reports. Commercials represent the "smart" money where as "non-commercials" represent the remaining masses. I object to this classification, largely because I am a non-commercial and I would like to think I am smart too. I am told that the rest of my compatriots empathize with my feelings. But I digress. For this article, it suffices to know that trading patterns of these two groups is recorded and distributed by the Commodity Futures Trading Commission. CFTC tracks the long and short positions of these two groups. In this article, we will refer to the net positions i.e., the difference in the size of long and short positions. We will compare the net positions of these two groups and make some observations. Following the major pullback of the markets in the fall of 1997, non-commercials decided to go net short for most of 1998, as shown in the chart below. After all, there was the looming danger of the Asian Contagion (a phrase coined those days to refer to the ailing Asian economies) and it made sense to short before this disease found everyone. Commercials, oblivious to such stark fundamentals, had a banner year, having been on the opposite side – net bullish for most of the year. Chart of Net Positions in NDX Contracts (01/98 - 03/99) After the horrid fall of 1998, when the whole Asian and the Russian economies threatened to collapse, non-commercials knew that the end of the world was near. After all, this whole Internet bubble looked tenuous during the fall of 1998 and it had only one way to go - down. The doom of Y2K was just around the corner. If there was ever a time when the imminent collapse of the markets could be predicted, this had to be it. Out of the blue, Greenspan surprises everyone, once again, and markets rally from the doldrums into the dawn of 1999. Non- commercials knew that this had to be the mother of all shorting opportunities. Never in history had signs aligned themselves this well. Y2K doomsday was nearing, barely a year away. There was a good chance of Y2K throwing the whole world into a horrible recession. Even if it fizzled out, what about all the Y2K related businesses that sprung up? (I can list half a dozen of these specialist companies but Nasdaq chose not to list them). Heck, worst case, just the fear of Y2K ought to kill the markets pretty soon. There was no way for 1999 to be a good year for markets. Octobers have been horrible in 1997 and 1998. That sentiment along with the Y2K problem looming large in front ought to put the lights out. As per this game plan, based on impeccable logic, non-commercials went short and stayed that way for the rest of 1999. Commercials could not think straight. They knew it couldn't be that simple. They went against basic common sense, went net bullish, and made a fortune in 1999. Chart of Net Positions in NDX Contracts (12/98 - 03/00) Both 1998 and 1999 were years where commercials diverged from the non-commercials. Both those years, markets moved big in the direction of the commercials. Finally the doomsday comes to pass. The year 2000 arrives in the most anti-climactic way possible. Did the commercials have some inside information on this? Chart of Net Positions in NDX Contracts (01/00 - 12/00) Commercials went bearish in the first week of April 2000 and stayed Bearish to neutral for the rest of the year. Non- commercials, on the other hand, had been tired of being beaten up for trying to short Nasdaq-100 throughout 1999. Now that Nasdaq took a big dip after a long time, perhaps this was their chance to go long. That about explains what non-commercials must have thought as they went bullish in March 2000, for the first time since January 1999. Now that they are in, they decide to stay bullish for the remaining year, waiting for the big rally to come back and carry them. The logic was irrefutable – Y2K is past. Internet companies were much bigger than media companies and were ready to gobble them up. Steve Chase of AOL made a public statement on how AOL would soon surpass Microsoft in market cap. Clearly, the Internet had arrived and was there to stay. Bottom falls out of the Technology market in the fourth quarter as John Chambers, CEO of Cisco, reaffirms the guidance saying that he sees no reason to change guidance. Non-commercials find reassurance in his words and stay put. As 2001 came, there came the huge welcome rally in January. Greenspan acknowledged and started the first of a very long string of interest rate cuts. Non-commercials were not going to get it wrong this time. They knew the cardinal rule of all – never fight the Fed. Year 2001 turns out to be another year of extreme divergence between commercials and non-commercials, as commercials go short and have another banner year. Cisco’s John Chambers comes out in January, barely a month from his previous appearance, and coins the new phrase that would haunt the media and markets for months – "lack of visibility". Chalk that one down for another banner year for commercials. By now, we all see a repeating pattern – what happens as these two groups repeatedly diverged, a recurrent theme of the story. Let us take a look at the full picture covering Jan 1998 through June 2002. Chart of Net Positions in NDX Contracts (01/98 - 06/02) What is most striking about this? Throughout 1999 and 2001 commercials and non-commercials significantly diverged. In 1999, commercials were bullish and non-commercials were bearish. In 2001, commercials were bearish and non-commercials were bullish. Both turned out to be stellar years in favor of commercials. Clearly, divergence between these two groups was the key turning point in the markets. Now we need a way to highlight this divergence. One way to emphasize divergence between commercials and non-commercials is to analyze net-bias, the difference between the net positions of commercials and non-commercials. If commercials are net negative and non-commercials are net positive, as they were for a good part of 2001, then net-bias will show this extreme divergence by reaching extreme negative values. After reaching extreme negative levels in 2001, net-bias has been moving towards the zero line. Chart of the divergence between Commercials vs. Non-Commercials If the net-bias indicator is right, it is saying that commercials are currently not diverging from non-commercials. The 12-week MA shows that, this time, after a long time, commercials are again moving towards a bullish posture. Since the divergence is no longer there, we know that it will show-up in near future. When it does, it could be another long-drawn directional pull for the commercials. We can see such a situation around June-July 2001. The BIG question is, will this incipient divergence continue to extreme levels aligning itself with another massive rally in favor of commercials ? It will be worth watching for the next several weeks to seek which way the divergence will go. Count on commercials to figure it out and diverge again indicating the next major direction in the market. Time alone can tell. Perhaps, we can use other TA tools to guess which direction net-bias could move. In the meantime, it is interesting to observe that open interest has been steadily rising – reaffirming the commitments of players involved to their respective positions. Spikes in open interest happen around expiration. Chart of overall open interest from 1998 to Present Let us take a look at the Weekly chart of NDX. Going back to June to September 2000 on the chart, we can see the divergence between MACD and price action. Looks like that divergence portended the ominous drop that followed. Fast forwarding to current conditions on the weekly chart, can you see the divergence between MACD and price action between last September and now. Weekly Chart of NDX with MACD divergence Notice the following: (1) In 2000, around June to September time frame, divergence between commercials and non-commercials began. This corresponds to the divergence between price and MACD on the weekly chart at the same time (shown in the chart). Could the current MACD divergence be predictive of a similar divergence between commercials and non-commercials ? (2) Commercials were most negative in April 2001. That also happens to be the bottom on the weekly MACD for NDX. MACD has been slowly improving since it bottomed in April 2001. If this continues, the odds of MACD crossing above zero keep improving. That is also bullish. This scenario is likely, barring any major breakdown in NDX over the next four months from current levels. NDX broke the 1063 support last week – this took NDX past 1998 October crash. Ouch! After the psychological support at 1000, the next major support is not until 935 (Jan 98 bottom) to the 925 (bottom of 1997 October crash). If we break through that level, the next major support is the spring 1997 bottom at 780. At these levels, we are completely discounting the positive effects of 1996 Telecom deregulation, ERP, CRM, and other digitization productivity improvements, the Internet, broadband, and wireless revolutions. Chalk that one down for irrational apathy! Call me an optimistic but I do not see this happening. May be NDX is in the process of putting in a final bottom here. If this is the case, and NDX moves up to reasonable levels from here, I would expect to see MACD divergence and net-bias to point towards a long-term rally. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 06-30-2002 Sunday 5 of 5 ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************* COVERED CALLS ************* Options 101: Guidelines For Beginning Traders By Mark Wnetrzak New subscribers often ask for suggestions on how they should get started in the options market and what approach they should use to be successful in the long run. The decision to trade options on a regular basis requires serious consideration before a commitment can be made. Option trading is similar to an occupation or a career; it requires much more effort and dedication than a hobby. In fact the very nature of trading, as opposed to long-term investing, will prevent the majority of participants from devoting the time necessary to succeed, due to their regular jobs and responsibilities. With proper portfolio administration, investments can be left unattended for weeks but in contrast, some option positions need to monitored, evaluated, and adjusted almost continuously. Those who are considering the possibility of option trading as a principal vocation should determine if they can earn enough money after the cost of doing business to justify the endeavor. In short, does the potential profit justify the time needed to become successful? There are a number of elements necessary to be successful in the options market. Knowledge, ability and a suitable personality are among the common traits exhibited by experienced traders and as a group, most conform to the same basic plan. They use sound and sensible methods for trading options; implementing strategies that work best for each particular situation. They acquire the proper tools for accurate analysis of potential candidates and construct positions based on the appropriate market outlook and risk/reward attitude of their portfolio. Professionals traders also utilize various mechanical systems and exit strategies to manage their positions. Setting up specific rules and targets before a position is initiated will help control emotions and improve consistency with exit decisions. Of course, opening a new position is easier because you can choose from a variety of candidates and you don't have to buy unless you are completely satisfied. Successful traders will search through charts for the perfect opportunity, waiting for the best combination of bullish technical indicators and favorable market conditions. They study historical pricing patterns and perform extensive due-diligence until the number of reasons to buy becomes overwhelming. In all cases, the choice to trade is yours to make and the timing in new positions is not a constraint or limitation. However, the entry transaction is particularly important and it deserves your best analysis and judgment. In buying strategies, the option or issue should be one you want to own and the price must be technically favorable, with minimal downside risk. A timely entry requires a thorough knowledge of charting techniques and market trends and the entire process is something you must completely understand because a successful exit is by and large the product of a proper entry. One of the most critical conditions for success which new traders often overlook is the importance of market selection. In most cases, option buying strategies work best in issues with high volatility; the rate of change on a daily basis. Of course, all markets can provide an opportunity for trading but those with low intra-day movement usually do not offer enough profit potential to justify the risk of the position. Gauging volatility in a market allows a trader to estimate potential returns and determine the correct methodology and approach for a particular trade. However, it is also important to identify situations that have acceptable price activity; that which can generate a reasonable profit with minimum capital exposure. The market must be somewhat predictable as opposed to one which exhibits extremely violent swings and the best conditions will be accompanied by vigorous trading volume in the underlying along with robust liquidity in its options. An individual's personality plays an important and crucial role in the ability to profit in the options market. The reality of trading is that you need to have an insightful understanding of your character and emotional traits in order to identify personal strengths and weaknesses. We all have favorable and detrimental qualities and like everything else in life, the key to success is exploiting your positive attributes rather than trying to change your personality. For example, traders who find it difficult to make timely decisions might use strategies that require very few adjustments. Those that have trouble exiting a losing position should consider using a protective stop-loss, to ensure that a bad trade is not exacerbated by one's natural reluctance to delay the proper resolution. Another common personality trait among new traders is the desire to be perfect; to not have any losing trades. Unfortunately, the very nature of the market guarantees that it is unpredictable and a trader who can not learn to live with losing plays (and learn from them) will eventually endure the setbacks he was trying so hard to avoid. The cycle often continues to the point where, having relinquished his initiative, the trader is forever relegated to lost opportunities. These are just a few of the unwanted characteristics that can plague your trading career and make achieving success in the options market one of the most difficult tasks you will ever undertake. Trade Wisely! SUMMARY OF PREVIOUS CANDIDATES ***** Note: Margin not used in calculations. Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield REV 4.96 4.95 JUL 5.00 0.45 $ 0.44 10.6% IPXL 8.01 7.49 JUL 7.50 1.10 $ 0.58 6.1% HPLA 13.95 15.06 JUL 12.50 2.40 *$ 0.95 6.0% NCEN 31.85 34.97 JUL 30.00 3.40 *$ 1.55 5.9% COB 5.35 6.00 JUL 5.00 0.70 *$ 0.35 5.5% CANI 11.26 11.50 JUL 10.00 1.85 *$ 0.59 4.5% MCAF 14.26 14.64 JUL 12.50 2.25 *$ 0.49 4.4% ABFS 25.48 25.48 JUL 25.00 1.45 *$ 0.97 4.4% MCDT 8.99 8.90 JUL 7.50 1.90 *$ 0.41 4.2% MIR 8.70 7.30 JUL 7.50 1.60 $ 0.20 3.1% JBHT 31.05 29.52 JUL 30.00 2.15 $ 0.62 2.3% PETM 17.50 16.04 JUL 17.50 0.80 $ -0.66 0.0% *$ = Stock price is above the sold striking price. Comments: An interesting week to say the least! End of quarter manipulations, a Russell Index rebalancing, a bit of fear with the Fourth of July terrorist threats, WorldCom (NASDAQ:WCOM) and now Xerox (NYSE:XRX). Should we be encouraged at how well the major averages held up or worry that they will move lower after the over-sold bounce? Yes, we're at a key moment! Next week should offer some more clues. The July covered-call portfolio has so far weathered the storm. PETsMART (NASDAQ:PETM) dropped drastically after French retailer Carrefour SA (F.CAR) said Wednesday that it plans to sell its 9.9% stake in U.S. pet food company. We will see if the stock can move back above its 50-dma next week. Other stocks on our early exit watch-list include Revlon (NYSE:REV) - what's up with Friday's reversal; Mirant (NYSE:MIR) - no lower; and J.B. Hunt Transport Services (NASDAQ:JBHT) - another worrisome reversal on Friday? NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield DRIV 9.19 AUG 7.50 DQI HU 2.25 38 6.94 49 5.0% EXTR 10.09 JUL 10.00 EXJ GB 1.00 2660 9.09 21 14.5% FBR 12.73 JUL 12.50 FBR GV 0.75 15 11.98 21 6.3% MANH 32.16 JUL 30.00 MQR GF 3.20 1100 28.96 21 5.2% MCDT 8.90 JUL 7.50 DXZ GU 1.75 4140 7.15 21 7.1% QSFT 14.53 JUL 12.50 QUD GV 2.40 173 12.13 21 4.4% ZIXI 5.48 AUG 5.00 HQU HA 1.20 2591 4.28 49 10.4% Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield EXTR 10.09 JUL 10.00 EXJ GB 1.00 2660 9.09 21 14.5% ZIXI 5.48 AUG 5.00 HQU HA 1.20 2591 4.28 49 10.4% MCDT 8.90 JUL 7.50 DXZ GU 1.75 4140 7.15 21 7.1% FBR 12.73 JUL 12.50 FBR GV 0.75 15 11.98 21 6.3% MANH 32.16 JUL 30.00 MQR GF 3.20 1100 28.96 21 5.2% DRIV 9.19 AUG 7.50 DQI HU 2.25 38 6.94 49 5.0% QSFT 14.53 JUL 12.50 QUD GV 2.40 173 12.13 21 4.4% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** DRIV - Digital River $9.19 *** On The Mend *** Digital River (NASDAQ:DRIV) is a provider of electronic commerce outsourcing solutions. As an application service provider, the company enables its clients to access its proprietary electronic commerce system over the Internet. The company's technology plat- form allows it to provide a suite of electronic commerce services, including Web commerce development and hosting, transaction processing, fraud screening, digital delivery, integration to physical fulfillment and customer service. Digital River also provides analytical marketing and merchandising services to assist clients in increasing Web page view traffic to, and sales through, their Web commerce systems. Prudential recently raised its rating on Digital River to a "buy" with a $10 price target. Analysts believe the company's second quarter earnings may be higher than expected and raised their forecast to $0.26. We simply favor the bullish move above the May high on heavy volume, which suggests further upside potential. AUG 7.50 DQI HU LB=2.25 OI=38 CB=6.94 DE=49 TY=5.0% ***** EXTR - Extreme Networks $10.09 *** Change Of Character? *** Extreme Networks (NASDAQ:EXTR) is a provider of network infra- structure equipment for business applications and services. The company delivers high-performance application and services infra- structure for enterprise, service provider and metropolitan area networks (MANs)-based on technology that combines high performance, intelligence and a low cost of ownership. The company's family of Summit stackable, BlackDiamond and Alpine chassis switches share the same consistent hardware, software and management architecture, enabling businesses to build a network infrastructure that is simple, easy to manage and scalable to meet the demands of growing businesses. Analysts believe that Extreme appears poised to meet Wall Street's consensus fiscal fourth-quarter estimates. The company recently won a new contract to provide network infra- structure and upgrade the broadband connection at the Virginia Hospital Center-Arlington. We favor the strong technical support area at $10 and the move through the long-term downtrend line (two-year chart), which suggests a positive change of character. JUL 10.00 EXJ GB LB=1.00 OI=2660 CB=9.09 DE=21 TY=14.5% ***** FBR - Friedman, Billings, Ramsey $12.73 *** Two-Year High! *** Friedman, Billings, Ramsey Group (NYSE:FBR) is a financial holding company for businesses that provide various products and services. The company serves the investment banking and brokerage industry primarily through Friedman, Billings, Ramsey & Co., its principal registered broker-dealer subsidiary, and, in the United Kingdom, through Friedman, Billings, Ramsey International, its European subsidiary. Online brokerage and securities distribution services are conducted through FBR Investment Services, a registered broker subsidiary. The company serves the specialized asset management sector through four registered investment adviser subsidiaries, and FBR National Bank & Trust provides transfer agency, custody, shareholder services and mutual fund accounting for mutual funds. Shares of FBR are trading at a new 2-year high and the strong Stage II rally is showing no signs of stopping. Investors who want to "own" this stock can establish a discounted position in the issue with this position. JUL 12.50 FBR GV LB=0.75 OI=15 CB=11.98 DE=21 TY=6.3% ***** MANH - Manhattan Associates $32.16 *** Bracing For A Rally *** Manhattan Associates (NASDAQ:MANH) is a global provider of tech- nology-based solutions to improve the effectiveness of and the efficiencies within the extended supply chain. The company's solutions, which consist of software, services and hardware, enhance distribution efficiencies through the real-time integr- ation of extended supply chain constituents, including manu- facturers, distributors, retailers, suppliers, transportation providers and consumers. Manhattan Associates' software provides solutions for the three principal elements of extended supply chain execution: collaboration, execution and optimization. The company recently announced several new contracts which should bode well for future earnings. The stock has now moved above the mid-June high and is testing the May high. Traders can speculate on the near-term performance of the issue with this conservative position. JUL 30.00 MQR GF LB=3.20 OI=1100 CB=28.96 DE=21 TY=5.2% ***** MCDT - McDATA $8.90 *** Bottom Fishing! *** McDATA (NASDAQ:MCDT) is a provider of open-storage networking solutions and provides highly available, scalable and centrally managed storage area networks (SANs) that address enterprise-wide storage problems. The company's core-to-edge enterprise solutions consist of hardware products, software products and professional services. Its SAN solutions improve the reliability as well as the availability of data, simplify the management of SANs and reduce the total cost of ownership. In May, McData reaffirmed its second quarter 2002 guidance as the company continues to anticipate that revenue for the second quarter will be roughly comparable to its $64.5 million first quarter revenue results. McDATA was recently upgraded by First Albany from a "neutral" to a "buy" with a price target of $11.25. We simply favor the stock's recent move back above its 30-dma as McData forges a Stage I base. A reasonable entry for those who wish to speculate on the company's future. Earnings are due in mid July. JUL 7.50 DXZ GU LB=1.75 OI=4140 CB=7.15 DE=21 TY=7.1% ***** QSFT - Quest Software $14.53 *** More Bottom-Fishing! *** Quest Software (NASDAQ:QSFT) is a developer and vendor of applic- ation and database management software products. The company also provides support and maintenance services for its products, as well as post-sale consulting services. Quest's products improve the quality of service provided by its customers' key software applications. The company's application management products support the packaged applications from many of vendors, including SAP (NYSE:SAP), Siebel (NASDAQ:SEBL), PeopleSoft (NASDAQ:PSFT) and Oracle (NASDAQ:ORCL). Quest Software appears to have made a successful test of the September low with the stock hitting a new high for June on Friday. Reasonable short-term speculation on a Stage I stock that is demonstrating increasing technical strength. JUL 12.50 QUD GV LB=2.40 OI=173 CB=12.13 DE=21 TY=4.4% ***** ZIXI - ZixIt $5.48 *** Cheap Speculation! *** ZixIt (NASDAQ:ZIXI) is a global provider of secure content delivery and management (CDM) solutions and services that enable enterprises to enhance their current e-mail networks and enterprise applications to securely send and receive electronic communications. ZixIt's e-messaging solutions provide cost-effective and easy-to-deploy solutions that ensure high levels of security for corporate and other electronic messages. The company has four primary product offerings: ZixVPM (virtual private messenger), ZixMail, ZixAuditor and ZixBlast. The recent technicals suggest ZIXI may be ready to break above the long-term base near $5 and investors looking for a conservative basis in a low cost stock should consider this play. AUG 5.00 HQU HA LB=1.20 OI=2591 CB=4.28 DE=49 TY=10.4% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield ACF 28.05 JUL 25.00 ACF GE 4.60 586 23.45 21 9.6% JBL 21.11 JUL 20.00 JBL GD 2.05 1228 19.06 21 7.1% WGRD 5.14 AUG 5.00 RUH HA 0.65 0 4.49 49 7.1% ORB 7.97 JUL 7.50 ORB GU 0.75 513 7.22 21 5.6% COCO 33.89 JUL 32.50 UCS GZ 2.60 60 31.29 21 5.6% ODSY 36.25 JUL 35.00 UPE GG 2.45 28 33.80 21 5.1% WBSN 25.57 JUL 22.50 DQH GX 3.80 71 21.77 21 4.9% NTIQ 22.63 JUL 20.00 CDJ GD 3.20 75 19.43 21 4.2% ***************** NAKED PUT SECTION ***************** Trading Strategies: Q&A On Exercise And Assignment By Ray Cummins Today's question concerns the potential for early assignment of "in-the-money" Put options. Attn: Naked-Puts Editor Subject: Early Assignment Of ITM Options Greetings, I am a bit new to option trading and although I understand the strategy of selling puts for credits, one thing that worries me is having the stock "put" into my account unexpectedly. Since my broker's collateral requirement is less than I would need to actually buy the incoming stock, there may be a situation where I am required to send some additional cash before the "assigned" stock is sold and that's not something I look forward to. If a put option goes in-the-money, what are the chances of it being exercised before I can buy it back? Thanks, PO Regarding the early assignment of (short) options: In most cases, the probability of being "exercised/assigned" is relatively low and only when you are short in a position with no extrinsic value does the chance of an unwanted assignment become a serious concern. When you sell an option, as an opening transaction, you are the Seller or Writer. Writers are obligated to buy the underlying interest at the strike price (with a Put) or sell the underlying interest at the strike price (with a Call) if the contract is exercised. With American Style options, the instrument can be exercised on any trading day prior to the expiry date. The last day to exercise an American-style option is usually the third Friday of the month in which the contract expires (expiration Friday). The option exchanges have a cut-off time of 5:30 P.M., Eastern Standard Time, for receiving an exercise notice. However, most brokerage firms have an earlier cut-off time that may affect when you receive a notice of assignment. When an option writer receives an exercise notice that obligates him to buy the underlying security at the specified strike price, he can simply buy the stock or initiate an offsetting transaction such as purchasing another Put option (and exercising it) or by shorting the underlying. Due to pricing disparities, there may be an advantage to one of these (or other) alternate "covering" strategies. As the expiration date nears and the sold (short) Put becomes further in-the-money, there is a greater risk of having the stock "put" to you. It can, and sometimes does, happen prior to expiration, but the actual percentage of early assignments is statistically very low. If there is a strong move in the stock in the right direction, you might consider repurchasing the Put. The strategy of selling (and eventually repurchasing) puts works very well with deep-ITM options, because they have low Delta and it performs much like a "long" stock position. Of course, that also frees your portfolio collateral for additional plays with greater (relative) profit potential and eliminates the risk of early assignment. Also, if you have a short Put position which is near the price of the underlying stock and it is approaching expiration, you should consider rolling the position out to a future date, where there is a lower risk of early assignment, due to the additional time premium (extrinsic value) in the option. The term "rolling" means that an existing option position is liquidated and a similar position is established to replace it. If the replacement position differs from the original position with respect to only the exercise price, the position is said to have been "rolled up" or "rolled down". If the only difference between the positions was the expiration month, you've "rolled out" to a longer-term position. The Options Industry Council, a non-profit association created to educate the investing public and brokers about the benefits and risks of exchange-traded options, has distributed a number of interesting facts concerning the topic of early assignment. The Options Clearing Corporation is the largest option-clearing organization in the world for financial derivatives instruments and it operating under the jurisdiction of the Securities and Exchange Commission (SEC). The OCC is the issuer and registered clearing facility for all U.S. exchange-listed securities options. To ensure fairness in the distribution of equity and index option assignments, The Options Clearing Corporation utilizes a random procedure to assign exercise notices to the accounts maintained with OCC by each Clearing Member. The assigned firm must then use an exchange approved method (usually a random process or the "first-in, first-out" method) to allocate those exercise notices to accounts which are short the options. With that in mind, here are some general guidelines concerning the early assignment of short option positions: Surprisingly, only 10-15% (on average) of equity options are exercised and the percentage hasn't varied much over the years. That means option exercises are not very common. The majority of option exercises (and the corresponding assignments) take place when the option approaches expiration. It usually doesn't make sense to exercise an option which has any time premium (extrinsic value) remaining because you could sell it in the open market for a higher price. Since most options retain at least some time value premium until a few days before their expiration date, the probability of early assignment is small for anything other than front-month positions. In general terms, a Put which goes in-the-money is more likely to be exercised than a Call (in similar circumstances) because the trader who exercises a Put uses it to sell his shares and receive cash. A person exercising a Call option uses it to buy shares and must pay cash. Traders are more likely to exercise options when they can receive cash sooner, as opposed to situation with Calls, where exercise means you have to pay cash sooner. However, the simple fact is, there is no absolute method to predict when you will be assigned on a short option position; it can happen any day the market is open for trading. Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule: Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a "buy-to-close" STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS CANDIDATES ***** Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield CLHB 13.52 11.76 JUL 10.00 0.40 *$ 0.40 14.0% CANI 11.07 11.50 JUL 10.00 0.50 *$ 0.50 11.3% YHOO 15.49 14.76 JUL 12.50 0.30 *$ 0.30 9.3% SIE 19.20 22.35 JUL 17.50 0.65 *$ 0.65 8.5% LNCR 30.71 32.30 JUL 27.50 0.70 *$ 0.70 7.8% FBR 10.65 12.73 JUL 10.00 0.35 *$ 0.35 7.7% CACI 36.51 38.19 JUL 32.50 0.80 *$ 0.80 7.6% APN 10.85 12.40 JUL 10.00 0.25 *$ 0.25 7.3% MOVI 20.18 21.12 JUL 17.50 0.35 *$ 0.35 6.6% SWFT 21.50 23.30 JUL 20.00 0.55 *$ 0.55 6.2% TALX 18.42 18.96 JUL 15.00 0.30 *$ 0.30 6.1% SCIO 28.94 30.61 JUL 25.00 0.55 *$ 0.55 5.8% ATTC 31.25 31.79 JUL 30.00 0.80 *$ 0.80 5.8% SWFT 22.65 23.30 JUL 20.00 0.35 *$ 0.35 5.6% SKX 22.10 21.61 JUL 17.50 0.30 *$ 0.30 5.5% YCC 26.74 27.09 JUL 25.00 0.55 *$ 0.55 5.0% DG 18.50 19.03 JUL 17.50 0.30 *$ 0.30 4.9% *$ = Stock price is above the sold striking price. Comments: Friday's bullish activity boosted a number of positions to favorable closing prices and if the market can stabilize near this range, we should be able to achieve profitability in the majority of portfolio plays. Of course, we still expect many stocks to test their recent lows, so prudent money management remains a priority. The only issue on the "early-exit" watch-list is Clean Harbors (NASDAQ:CLHB). NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield ASYT 20.35 JUL 17.50 QQY SY 0.35 87 17.15 21 9.0% CANI 11.50 JUL 10.00 CDU SB 0.35 37 9.65 21 14.7% COCO 33.89 JUL 30.00 UCS SF 0.60 62 29.40 21 8.5% IBC 28.88 JUL 25.00 IBC SE 0.35 163 24.65 21 6.3% JDAS 28.26 JUL 22.50 QAH SX 0.50 532 22.00 21 11.8% SIE 22.35 JUL 20.00 SIE SD 0.35 200 19.65 21 7.3% YELL 32.40 JUL 30.00 YUX SF 0.55 604 29.45 21 7.2% Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield CANI 11.50 JUL 10.00 CDU SB 0.35 37 9.65 21 14.7% JDAS 28.26 JUL 22.50 QAH SX 0.50 532 22.00 21 11.8% ASYT 20.35 JUL 17.50 QQY SY 0.35 87 17.15 21 9.0% COCO 33.89 JUL 30.00 UCS SF 0.60 62 29.40 21 8.5% SIE 22.35 JUL 20.00 SIE SD 0.35 200 19.65 21 7.3% YELL 32.40 JUL 30.00 YUX SF 0.55 604 29.45 21 7.2% IBC 28.88 JUL 25.00 IBC SE 0.35 163 24.65 21 6.3% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** ASYT - Asyst Technologies $20.35 *** Trading Range? *** Asyst Technologies (NASDAQ:ASYT) is a provider of integrated automation systems for the semiconductor manufacturing industry. The company designs automation systems that enable semiconductor manufacturers to increase their manufacturing productivity and protect their investment in silicon wafers during the manufacture of integrated circuits. The company offers isolation systems, work-in-process materials management, substrate-handling robotics, automated transport and loading systems, and unique connectivity automation software. The company has incorporated a number of technologies from these areas to create its Plus-Portal System for original equipment manufacturers. Asyst has been in a relatively stable trading range (near $17) since early this year and now the issue appears to be trying to break out of the sideways pattern. Traders can speculate conservatively on the outcome of the recent rally with this position. JUL 17.50 QQY SY LB=0.35 OI=87 CB=17.15 DE=21 TY=9.0% ***** CANI - Carreker $11.50 *** New 2002 High! *** Carreker (NASDAQ:CANI) is a provider of integrated consulting and software solutions that enable banks to identify and implement e-finance solutions, increase their revenues, reduce their costs and enhance their delivery of customer services. The company's offerings fall into four groups: Revenue Enhancement, which enable banks to improve workflows, internal operational processes and customer pricing structures; PaymentSolutions, which address the needs of a critical function of banks, the processing of payments made by one party to another; Enterprise Solutions, which provides conversion, consolidation and integration consulting services and products on a bank-wide basis; and CashSolutions, which optimizes the inventory management of a bank's cash on hand. CANI rallied in early June after reporting revenues for the 1st quarter of $37 million, a 33% increase from a year ago, along with an 87% rise in operating income. The bullish "break-out" on heavy volume is very favorable and now the issue has hit a new closing high for year. This position offers conservative traders a great entry point in the issue. JUL 10.00 CDU SB LB=0.35 OI=37 CB=9.65 DE=21 TY=14.7% ***** COCO - Corinthian Colleges $33.89 *** All-Time High! *** Corinthian Colleges (NASDAQ:COCO) is a private, for-profit, post- secondary education company, with thousands of students enrolled in its programs. The company currently operates 56 colleges in 20 states, including 17 in California and nine in Florida, and serves the segment of the population seeking to acquire career-oriented education. The company offers a variety of master's, bachelor's and associate's degrees and diploma programs through two operating divisions. The company's Corinthian Schools division operates 35 diploma-granting schools with programs primarily in the healthcare, electronics and information technology fields, and seeks to provide its students a solid base of training for a variety of entry-level positions. The company's Rhodes Colleges subsidiary operates 21 degree-granting colleges, and offers curricula principally in the business, healthcare, information technology and criminal justice areas. COCO shares traded at a new, all-time high Friday and the recent heavy volume suggests the bullish trend will continue in the near term. JUL 30.00 UCS SF LB=0.60 OI=62 CB=29.40 DE=21 TY=8.5% ***** IBC - Interstate Bakeries $28.88 *** Earnings Due! *** Interstate Bakeries (NYSE:IBC) is a baker and distributor of fresh bakery products in the United States. The company produces, sells, distributes and markets a wide range of breads, rolls, snack cakes, donuts, sweet goods and related products. These products are sold under a number of national brand names, such as Wonder, Hostess and Home Pride, as well as regional brand names, including Butternut, Dolly Madison, Drake's and Merita. Based on independent publicly available market data, Wonder (white) bread and Home Pride (wheat) bread are the number one and two selling branded breads sold in the United States. Interstate is set to report earnings next week and traders must be speculating about the results as the premiums in IBC's options are slightly inflated. Investors who believe the upcoming announcement will be favorable can establish a low risk cost basis in the issue with this position. JUL 25.00 IBC SE LB=0.35 OI=163 CB=24.65 DE=21 TY=6.3% ***** JDAS - JDA Software Group $28.26 *** On The Rebound! *** JDA Software Group (NASDAQ:JDAS) is a provider of sophisticated software solutions designed specifically to address the demand and supply chain management, business process, decision support, e-commerce, inventory optimization and collaborative planning and forecasting requirements of the retail industry and its suppliers. The company's solutions enable its customers to collect, manage, organize and analyze information throughout their retail enterprise, and to interact with suppliers and customers over the Internet at multiple levels within their organization. JDA's customers include retail, manufacturing and wholesale organizations and the company's software solutions business is enhanced and supported by its retail specific professional services. JDA Software's stock has been "on the rebound" since the company announced it has formed a strategic relationship with Microsoft, to jointly develop and market one of Microsoft's first NET-enabled suites of applications for the retail, wholesale and consumer packaged goods industries. The upward move has been supported by heavy volume and the issue appear to be back in a bullish trend. JUL 22.50 QAH SX LB=0.50 OI=532 CB=22.00 DE=21 TY=11.8% ***** SIE - Sierra Health Services $22.35 *** Own This One! *** Sierra Health Services (NYSE:SIE) is a health care organization that provides and administers the delivery of comprehensive health care and workers' compensation programs with an emphasis on quality care and cost management. The company's primary types of health care coverage are HMO plans, HMO Point of Service (POS) plans, and indemnity plans, which include a preferred provider organization option. The POS products allow members to choose one of the many coverage options when medical services are required instead of one plan for the entire year. Shares of Sierra Health Services rallied in late April after the company posted first-quarter results that were well ahead of Wall Street's expectations and Friday, the stock traded at a new, all-time high. The health care services provider has raised its guidance for the rest of the year and investors can establish a conservative cost basis in a popular issue in a strong industry group with this position. JUL 20.00 SIE SD LB=0.35 OI=200 CB=19.65 DE=21 TY=7.3% ***** YELL - Yellow Corporation $32.40 *** Hot Sector! *** Yellow Corporation (NASDAQ:YELL) provides international, national and regional less-than-truckload, truckload and non-asset-based transportation services through its three primary operating units, Yellow Transportation, SCS Transportation, and Meridian IQ, and captive technology company, Yellow Technologies. The company's primary focus is the movement of goods and materials for business customers internationally, nationally and regionally. The company also has broadened its focus to include transportation management and logistics consulting services. Freight haulers have been very popular in recent weeks and their share values reflect that fact with many issues trading at long-term highs. YELL is one of those stocks, having closed Friday's session at a new, all-time high and investors who think the rally will continue can profit from that outcome with this position. JUL 30.00 YUX SF LB=0.55 OI=604 CB=29.45 DE=21 TY=7.2% ***** ***************** SUPPLEMENTAL NAKED-PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield METHA 12.77 JUL 12.50 QME SV 0.60 0 11.90 21 16.0% RETK 24.30 JUL 20.00 QRD SD 0.55 2480 19.45 21 13.3% WBSN 25.57 JUL 20.00 DQH SD 0.40 61 19.60 21 10.5% JBL 21.11 JUL 17.50 JBL SW 0.35 1294 17.15 21 9.8% RMCI 26.30 JUL 22.50 UHU SX 0.45 67 22.05 21 9.1% SLAB 27.06 JUL 22.50 QFJ SX 0.35 266 22.15 21 7.7% CACI 38.19 JUL 35.00 KFQ SG 0.65 136 34.35 21 7.4% DZTK 16.96 JUL 15.00 QDZ SC 0.25 205 14.75 21 7.1% USPI 30.98 JUL 27.50 QPJ SY 0.45 10 27.05 21 7.0% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Fizzled Rally Marks The End Of An Abysmal Quarter! By Ray Cummins ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, June 28 Stocks ended mixed Friday despite favorable economic data and an end-of-quarter buying spree among professional money managers. The Dow closed with a 24 point loss to end at 9,245 amid weakness in drug and retail shares while the NASDAQ edged 5 points higher to 1,464 as investors shopped for bargains in the downtrodden tech group. General Electric (NYSE:GE), Procter & Gamble (NYSE:PG), Walt Disney (NYSE:DIS), Wal-Mart (NYSE:WMT) and Hewlett-Packard (NYSE:HPQ) were among the worst blue-chip performers but Internet, hardware and networking issues helped the technology index remain in the black. In the broad market, Standard & Poor's 500 Index ended almost unchanged as traders scooped up airline, cyclical, biotechnology and financial shares while unloading pharmaceutical, retail, gold and consumer stocks. Trading volume came in at 1.23 billion on the Big Board and at 1.29 billion on the NASDAQ. The breadth of the market was positive, with advancing issues doubling declining stocks 2 to 1 on the NYSE and 4 to 3 on the technology exchange. Bonds recorded small losses as stocks enjoyed an upside bias. The 10-year Treasury note slipped 2/32 to yield 4.83% while the 30-year government bond was down 3/32 to yield 5.52%. On the fund flow front, Trim Tabs estimated that stock funds had outflows of $9 billion over the week ending June 26 compared with outflows of $300 million in the prior week. Equity funds that invest only in U.S. stocks had outflows of $7 billion versus outflows of $1.6 billion in the prior week. Bond funds had inflows of $1.2 million compared with outflows of $400 million the prior week. Last week's new plays (positions/opening prices/strategy): Goldman Sachs (NYSE:GS) JUL60P/80C $0.10 credit synthetic KLA-Tencor (NSDQ:KLAC) SEP30P/60C $0.00 credit synthetic Qlogic (NSDQ:QLGC) JUL35P/50C $0.50 debit synthetic HCA Inc. (NYSE:HCA) JUL45P/47P $0.40 credit bull-put Cephalon (NSDQ:CEPH) JUL60C/55C $0.55 credit bear-call Philip Mor. (NYSE:MO) JUL60C/55C $0.20 credit bear-call United Tech. (NYSE:UTX) JUL75C/70C $0.65 credit bear-call The recent volatility in the market helped traders achieve some excellent opening credits in our new combination positions. The bearish spreads in United Technologies (NYSE:UTX) and Cephalon (NASDAQ:CEPH) were both available near the suggested prices and Philip Morris (NYSE:MO) traded just as expected, falling almost $4 during Monday's session. The downward activity prevented a favorable entry in the spread, but it was good to see the issue reacting correctly with regard to the technical indications. The bullish play in HCA Incorporated (NYSE:HCA) was available at the target credit however the "safe-haven" stocks in the health care group slumped in opposition with the broad-market rally. The issue is at a key moment and further downside movement may be a catalyst for an early-exit from the spread. The synthetic positions were also an active group and of the three candidates, the big winner was Qlogic (NASDAQ:QLGC) with a potential profit of up to $250 per contract in less than one week. Although the entry debit was slightly higher than expected, the sell-off on Wednesday (to $34.68) provided a substantial short-term profit in the bearish play. Portfolio Activity The second quarter of 2002 ended without much fanfare Friday even after Xerox (NYSE:XRX) unveiled a slew of accounting disparities and the U.S. Capitol was evacuated due to smoke in the building. A rebalancing of various indices also exacerbated the potential for volatility, as did the quarterly "window-dressing" by fund managers, but the major equity averages moved through expiration day in a relatively stable manner. Investors have been somewhat subdued this week, in spite of the recent extreme gyrations, and that condition is very understandable considering that the broad market's losses over the past six months have been the worst in 30 years. Fortunately, our portfolio has been well balanced in its outlook, offering both bullish and bearish positions to the newsletter's diverse group of readers. As we progress towards the July options expiration, there are a few issues that warrant close attention with regard to the large swings in stock prices. Among the bearish credit-spread plays, United Technologies (NYSE:UTX) has recovered from recent selling pressure and should be monitored on a more frequent basis as it approaches a test of resistance near $70. Some of the bullish candidates are also in jeopardy and the most obvious suspect in this group is Autozone (NYSE:AZO). The issue is at a key moment and further downside activity should be seen as a potential exit signal. Ambac Financial Group (NYSE:ABK) and Oxford Health Plan (NYSE:OHP) are consolidating near recent support areas and should be monitored for indications of additional selling activity. In the straddles portfolio, traders in the Mini-NDX (CBOE:MNX) play should have closed the bearish portion of the position when the issue moved below $100, thus paying for the entire straddle and achieving a 30%-40% gain. The JUL-$120 Put is still worth more than the original debit in the play, so consider taking profits in that position and plan to supplement your gains as the index recovers in the coming sessions. It is interesting that the new straddle in SEI Investments (NASDAQ:SEIC) has retained its value, even though the issue has remained in a relatively small range. The reason, of course, is the implied volatility in its option premiums has increased slightly over the past few sessions. One stock that was very active on Friday was Advanta (NASDAQ:ADVNB). The issue slumped to a low near $10, offering a break-even exit in the bearish position of the neutral-outlook play. The stock may continue to move lower in the coming week, so be prepared to lock-in profits as it tests support near $9. The credit-strangle in Cephalon (NASDAQ:CEPH) is within the maximum profit envelope but a break below long-term support at $40 would suggest an early exit or adjustment. Also, our speculative bullish play in Oracle (NASDAQ:ORCL) has performed better than expected, even with the recent sell-off in technology shares and traders should establish a target exit debit in order to close the position on any future upside activity. Questions & comments on spreads/combos to Contact Support ****************************************************************** - SPECULATION PLAYS - These positions are based on recent increased activity in the stock and/or its underlying options. All of these plays offer favorable risk-reward potential but they must also be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ****************************************************************** CTSH - Cognizant Technology $53.75 *** On The Move! *** Cognizant Technology Solutions (NASDAQ:CTSH) delivers full life cycle solutions to complex software development and maintenance problems that companies face as they transition to e-business. These information technology (IT) services are delivered through the use of a seamless on-site and offshore consulting project team. The company's solutions include application development and integration, application management and re-engineering services. The company's customers include ACNielsen Corporation, ADP, Incorporated, Brinker International, Incorporated, Computer Sciences Corporation, The Dun & Bradstreet Corporation, First Data Corporation, IMS Health Incorporated, Metropolitan Life Insurance Company, Nielsen Media Research, Incorporated, PNC Bank and Royal & SunAlliance USA. Shares of Cognizant Technology have been "on the move" in recent sessions after a new "buy" rating was issued on the company by analysts at Janney Montgomery Scott. The upgrade is based on the company's upwardly revised outlook, in which it says second quarter revenues well rise in excess of 10% over first quarter levels. The CFO noted that, "Business is tracking quite nicely and will substantially outperform current guidance in terms of revenue." Indeed, that is great news for the company's earnings and investors applauded the announcement with a heavy-volume buying spree. Traders who believe the rally will continue can attempt to profit from that outcome with this speculative play. Note: Target a lower debit in the position initially, to allow for a brief consolidation from the recent upside activity. PLAY (very speculative - bullish/synthetic position): BUY CALL JUL-60 UPU-GL OI=38 A=$0.85 SELL PUT JUL-45 UPU-SI OI=122 B=$0.45 INITIAL NET DEBIT TARGET=$0.20-$0.25 TARGET PROFIT=$0.50-$0.75 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $1,325 per contract. ****************************************************************** ATK - Alliant Techsystems $63.80 *** Rolling Over? *** Alliant Techsystems (NYSE:ATK) conducts business through three industry segments: Aerospace, Conventional Munitions and Defense Systems. Within these segments, Alliant has four business lanes: Propulsion and Composites, each of which falls within Alliant's Aerospace segment; Conventional Munitions, which corresponds to the company's Conventional Munitions segment; and the Precision Capabilities group, which corresponds to the company's Defense Systems segment. In fiscal 2001, the company moved its missile products business, Alliant Missile Products Company LLC, to its Aerospace segment and sold its infrared decoy flare business, Alliant Kilgore Flares Company. Additionally, in March 2001 the Company sold the secure electronics product line of Alliant Integrated Defense Company LLC. There is little news to explain why the share value of this $2 billion aerospace company with leading positions in propulsion, munitions, and precision capabilities has slumped in opposition to the rally in defense-related issues. The sell-off started early in the week and even a presentation by the chief financial officer to the Wachovia Securities Equity Conference failed to produce a rally in the issue. Now the stock is mired below a recent trading range and if the selling pressure continues, the stock could easily retreat to lows near $50. Traders who agree with a potentially bearish outlook for the issue can speculate on its future activity with this synthetic (short) position. PLAY (very speculative - bearish/synthetic position): BUY PUT AUG-50 AAM-TJ OI=15 A=$0.60 SELL CALL AUG-75 ATK-HO OI=50 B=$0.70 INITIAL NET CREDIT TARGET=$0.20-$0.30 TARGET PROFIT=$0.75-$1.50 Note: Using options, the position is similar to being short the stock. The collateral requirement for the sold (short) call is approximately $1,500 per contract. ****************************************************************** CACI - CACI International $38.19 *** Premium Selling! *** CACI International (NASDAQ:CACI) is a holding company and its operations are conducted through wholly owned subsidiaries located in the United States and Europe. The company delivers information technology and communications solutions to clients through four major areas of expertise or lines of business: systems integration, managed networks, document technology and basic engineering services. The company's markets are domestic and international, and they include various agencies of foreign governments, major corporations and state and local governments. The demand for CACI International's services in large measure is created by the increasingly complex network, data systems and information environment in which governments and businesses operate, and by the need to stay current with new technology while increasing productivity and performance. CACI International was recently awarded a $163 million contract to provide information and technology support to the Space and Naval Warfare Systems Command Systems Center in Virginia. The company's primary role under the five-year contract, which has one base year and four option years, is to implement the Naval Tactical Command Support System software developed by the SSC, aboard Naval vessels and shore activities around the world. The award substantially increased the overall scope and value of CACI's software and systems integration support with the Navy and the announcement has helped CACI return to a previous trading range near $40. However, the technical resistance at that price should restrict the issue's upside movement in the short-term, allowing the sold option in this bullish position to expire (or be repurchased at a small cost) before the stock moves higher. The goal is for the issue to consolidate for a brief period and then eventually climb above the long options' strike price, thus producing a positive return in the play. Remember, if the short option is "in-the-money" at expiration, you will have to buy it back to preserve the long-term position. PLAY (speculative - bullish/calendar spread): BUY CALL AUG-42.50 KFQ-HA OI=14 A=$1.15 SELL CALL JUL-42.50 KFQ-GA OI=7 B=$0.35 INITIAL NET DEBIT TARGET=$0.70-$0.75 TARGET PROFIT=25% ****************************************************************** - CREDIT SPREADS - These plays are based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit in these positions may also be higher than other plays in the same strategy based on disparities in option pricing. Current news and market sentiment will have an effect on these issues so review each play individually and make your own decision about the future outcome of the position. ****************************************************************** AVE - Aventis $70.43 *** Revenge Play! *** Aventis (NYSE:AVE) is engaged in the discovery and development of pharmaceutical products. Aventis offers a range of patented prescription drugs to treat patients with serious diseases in a number of therapeutic areas, including respiratory and allergy, cardiology and thrombosis, oncology and diabetes. The company also is engaged in the areas of human vaccines and therapeutic proteins. Aventis' businesses include Aventis Pharma, Aventis Pasteur, Aventis Behring, Aventis CropScience and Aventis Animal Nutrition. PLAY (conservative - bullish/credit spread): BUY PUT JUL-60 AVE-SL OI=736 A=$0.35 SELL PUT JUL-65 AVE-SM OI=4995 B=$0.75 INITIAL NET CREDIT TARGET=$0.45-$0.50 PROFIT(max)=9% ****************************************************************** EBAY - eBay Inc. $61.62 *** Up-trend Intact! *** eBay (NASDAQ:EBAY) is a Web-based community in which buyers and sellers are brought together to browse, buy and sell items such as collectibles, automobiles, high-end or premium art items, jewelry, consumer electronics and a host of practical and other miscellaneous items. The eBay trading platform is an automated, topically arranged service that supports an auction format in which sellers list items for sale and buyers bid on items of interest, and a fixed-price format in which sellers and buyers trade items at a fixed price established by sellers. Through its wholly owned and partially owned subsidiaries and affiliates, the Company operated online trading platforms directed towards the United States, Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Singapore, South Korea, Spain, Sweden, Switzerland and also the United Kingdom. PLAY (conservative - bullish/credit spread): BUY PUT JUL-50 QXB-SJ OI=10519 A=$0.55 SELL PUT JUL-55 QXB-SK OI=7061 B=$1.10 INITIAL NET CREDIT TARGET=$0.60-$0.70 PROFIT(max)=14% ****************************************************************** JILL - The J. Jill Group $39.95 *** 3-for-2 Split Coming! *** The J. Jill Group (NASDAQ:JILL) is a specialty retail seller of women's apparel, accessories and footwear, and markets its many products through catalogs, retail stores and its e-commerce Website. The company has two major business segments, direct and retail. The direct segment markets merchandise through catalogs and an e-commerce Website. The retail segment markets merchandise through retail stores. Emphasizing natural fibers, neutral, muted color palettes and details, J. Jill merchandise ranges from relaxed career wear to sophisticated casual weekend wear. Almost all of the company's merchandise is private label. The company's in-house product development team designs most of its private label offerings, and most styles are not available in other catalogs or retail stores. PLAY (less conservative - bullish/credit spread): BUY PUT JUL-30 JUI-SF OI=10 A=$0.25 SELL PUT JUL-35 JUI-SG OI=9 B=$0.85 INITIAL NET CREDIT TARGET=$0.65-$0.70 PROFIT(max)=15% ****************************************************************** TIN - Temple Inland $57.86 *** Safe-Haven Sector! *** Temple-Inland (NYSE:TIN) is a holding company that conducts all of its major operations through its subsidiaries. Its principal subsidiaries include Inland Paperboard and Packaging, Inland Forest Products Corporation, Temple-Inland Financial Services, Guaranty Bank and Guaranty Residential Lending. The business of Temple-Inland is divided among three groups: the Paper Group, which manufactures corrugated packaging products, the Building Products Group, which manufactures a range of building products and manages the Company's forest resources of approximately 2.1 million acres of timberland in Texas, Louisiana, Georgia, and Alabama, and the Financial Services Group, which consists of savings and mortgage banking, real estate and insurance brokerage activities. PLAY (very conservative - bullish/credit spread): BUY PUT JUL-50 TIN-SJ OI=0 A=$0.25 SELL PUT JUL-55 TIN-SK OI=410 B=$0.60 INITIAL NET CREDIT TARGET=$0.40-$0.45 PROFIT(max)=8% ****************************************************************** XL - XL Capital $84.70 *** Trending Lower! *** XL Capital (NYSE:XL), 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 insurance coverages for commercial customers and 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. Premiums written vary by jurisdiction principally due to local market conditions and legal requirements. PLAY (conservative - bearish/credit spread): BUY CALL JUL-95 XL-GS OI=290 A=$0.25 SELL CALL JUL-90 XL-GR OI=772 B=$0.75 INITIAL NET CREDIT TARGET=$0.55-$0.60 PROFIT(max)=12% ****************************************************************** ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** MARKET POSTURE ************** To be brief, it doesn't look good. 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