The Option Investor Newsletter Thursday 07-11-2002 Copyright 2002, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 07-11-2002 High Low Volume Advance/Decline DJIA 8801.53 - 11.97 8854.90 8605.34 2.06 bln 1131/1879 NASDAQ 1374.43 + 28.43 1375.58 1323.59 2.26 bln 1469/2017 S&P 100 462.92 + 4.23 464.06 448.92 Totals 2600/3896 S&P 500 928.44 + 6.90 929.16 900.94 RUS 2000 416.68 - 3.10 419.78 408.19 DJ TRANS 2504.58 - 42.58 2548.97 2546.44 VIX 38.55 - 0.47 41.64 38.55 VXN 68.60 + 3.38 70.47 66.31 Total UpVol 2,709.1M Total DnVol 1,683.1M 52wk Highs 97 52wk Lows 722 TRIN 0.51 PUT/CALL .89 ************************************************************* Shorts Are in Trouble! Is the headline you were looking for? I hope so because Friday's opening could be a shorts nightmare. Typically a severe decline like we had this week ends dramatically with a final negative news event. Sometimes when things appear they cannot get any worse a positive event appears to jerk bears back to reality, if only for a couple days. That positive event came after the close today and S&P futures jumped to +7 and Nasdaq futures gained +20. Still a lot of darkness before morning trading begins but the prospects are encouraging. Chart of the Nasdaq Chart of the Dow Helping the rebound during the day was a rumor that Dan Niles was going to upgrade Intel and there was another rumor that they would pre-announce tonight. This powered the semiconductor sector to a +6.85% gain and it came within three points of filling the Tuesday morning gap down. It also helped produce a double bottom bounce off support at 345. Half of the rumors were true. Dan Niles did make some positive comments about Intel but also said the expectations still need to come down. They did not pre-announce after the close and with earnings on Tuesday most traders doubted that rumor anyway. Not everything started off positive with SAP warning that they would miss 2002 earnings due to heavy cancellations by customers. SAP is a major competitor to ORCL, PSFT, SEBL and MSFT and analysts see the warning as a leading indicator for the PSFT and SEBL earnings to come. Oracle affirmed estimates yesterday but warned that visibility was still very bad. The CFO said he believed the worst was over but he had no proof that things were getting any better. He said he had no better visibility than he did six months ago. They also said business in Europe was slowing. Not very encouraging. Another software vendor fell on hard times when NET warned that the 3Q would be less than expected. The stock dropped -3.25 (-18%) after management cut revenue estimates by up to 10%. One broker cut his rating to a rare "sell" due to a lack of growth and weak results. The company is being investigated by the SEC for accounting problems in 2000 after the company restated lower results for 1998-2000. Several analysts voiced concerns that Symantec was taking market share. SYMC still dropped -1.09 on the news but finished well off the $30.50 low at $32.86. I have kept you in suspense long enough. The big news after the close came from two companies, DELL and JNPR. Dell, which had just affirmed earnings estimates last week, came out again and said they would now beat estimates by a penny on stronger than expected revenue. They said market share gains and improving profit margins would boost their earnings. A real surprise after last weeks inline affirmation. Dell jumped to $25.40 in after hours after closing at 23.91. The announcement also boosted Intel who supplies the chips for Dell computers. INTC jumped nearly $1 to $19.07 in after hours. This is good news for the sector despite the fact that it represents no growth in overall PC sales. Just more share for Dell. Also announcing after the close was JNPR who beat analyst's estimates by a penny despite a drop in sales to telecoms. JNPR also raised guidance for the next quarter. Suddenly the network sector does not look so bleak despite news from SONS tonight that their sales would be flat next quarter. JNPR jumped nearly $1 in after hours to $8.05. While these two events may seem less than exciting, tech investors will be glad to get any good news no matter how slight. The severely shorted tech sector has not seen much positive news and after the drop this week it was ripe for a short covering rally. Relatively speaking the Nasdaq had resisted the drop better than the other indexes but still hit five year lows today of 1323. That severely oversold condition was crying for some event to release the spring. Now, the bad news, it won't last. The Dell news is company specific and does not represent any greater PC demand overall. There may be an opening bounce as shorts cover on the news but this should be viewed as a new entry point for a short position. The JNPR news was nice but they also had no real growth news for the sector. Remember, we have three major earnings events next week. Intel on Tuesday, IBM on Wednesday and MSFT on Thursday. Where Dell may be gaining market share from HPQ and Gateway, Intel supplies chips to everyone and will be the true measure of demand. It is widely expected that INTC will guide lower on Tuesday. IBM is the elephant in the closet. They have so many problems that the odds are good several will appear on Wednesday. They have said they will disclose more information and the attempt to soften the blow this week with the restatement for the sale of their disk drive business was the first try. It is widely expected they will miss earnings and guide lower. MSFT is the only major tech that is expected to provide an earnings surprise or at least not guide lower. This is not an environment for a continued tech rally. Economically we will be challenged on Friday with Retail Sales and the next installment of the Consumer Sentiment. The forecast for sales is an optimistic +0.6% and for consumer sentiment to be flat at 92.2. Remember, sentiment is driven in some part by the market and I can't imagine how it could surprise to the upside. The best we can expect is for it to remain flat to only slightly down and not blunt the short covering rally at the open. While I would applaud a strongly positive day tomorrow my longer term view is still lower lows ahead. There are just too many problems. The possibility of a second recessionary dip is strong and the new accounting rules are going to be a killer. What I mean by that is the fear of prosecution for misstating your financials. Beginning August 14th the 945 largest corporations will have to certify on pain of criminal prosecution the truth of their financials. They will have to disclose everything that could be material in any way. Many companies have skeletons in the closet and those bones are beginning to rattle. Every CEO has seen pictures of other CEOs on TV recently and they do not want to play musical chairs in front of a congressional committee or worse a criminal judge. You can bet that before they put their signature on that affidavit they will grill everyone who prepared the statements about every possible entry. The buck has stopped at the CEO level but the stock prices have farther to go. The odds of more companies disclosing embarrassing details and stocks reacting negatively are very high. Late news tonight said that Sullivan (WCOM CFO) has now told congress that Ebbers knew for a year that the numbers were fraudulent. If this is true then expect a high profile criminal proceeding very soon. The prosecutors will want to move fast to strike fear into the corporate community. The Dow hit a low of 8605 (-204) before rebounding today. That low was -804 points below Monday's high. Think about that for a minute. -804 points! The rebound from these lows was nice but nowhere near the V bottom rocket you would have expected from extremely oversold conditions. While the other indexes finished positive the Dow fell short. Despite the heavy up volume and over two billion shares traded on the NYSE, declines still beat advancers 19:11. Many analysts claim the current decline is nearing 1929 proportions. We may not have had a "capitulation event" yet but we are seeing capitulation by breadth as new lows across all exchanges swamped new highs 722:97. Will we get a short covering rally at the open? Futures are pointing to that possibility but the consumer sentiment could crush that hope before the bell. Should the rally occur you should not expect it to be the ONE we are looking for. Trade it but don't marry it! Enter Very Passively, Exit Very Aggressively! Jim Brown Editor ******************** INDEX TRADER SUMMARY ******************** BIG VOLUME, BIG BOUNCE BACK by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - The Dow average, which was leading the market down on heavy volume - in a switch, Nasdaq held up the best! - rebounded on a positive pre-announcement by Kodak (EK - +11%). A climb in tech bellwether Intel (INTC) also helped considerably (+8.5%). There were rumors that the company would make a positive announcement, such as one raising their guidance on earnings - like many, if not most, of these floor rumors, it was unfounded at least as of this writing. I suggested buying OEX calls (with wrong chart published for a while due to a glitch) under 455, with a suggested exit/stop point at 449.50, which I thought was well "out of the way" - WRONG! The low was 448.82 and the close 462.9. If the market is oversold enough and there is a good technical projection for where the market is getting "extreme" - even in a down market like this - then one philosophy is to make the cost of a call the amount risked. This assumes that you don't over- leverage and commit an excessive amount of your trading capital to any one position. On the other hand, our guiding principle is to adhere to risk parameters that will protect the greatest number of our readers, so sometimes the result is that you are right on the market direction or on an expected reversal, but your risk-control guidelines take you out on a final dip or flip. So it goes! S&P 100 (OEX) Index - Daily/Hourly charts: My suggested stop at 449.50 was a good guess for the approximate low as it turned out. Those with long call positions, at 455 or under or at whatever price you are in at - a suggested exit point is at 455, just below some near-support. The OEX should keep going or the rally gets a bit suspect. There is plenty of "room" on the upside in terms of the broad hourly channel as seen above. The move to a new low, followed by an upside reversal on good volume is suggesting that the rally will carry further. However, if the OEX gets up to resistance that starts around 480 up to 483, AND whenever the longer hourly stochastic gets up to an overbought reading again - take any call profits and RUN! S&P 500 (SPX) Index - Hourly chart: I had my ONE lower hourly channel line, which is a line parallel to the upper trendline, drawn though the most number of lows rather than the absolute lowest low - WRONG! - sometimes this technique is what "works" EXCEPT when the market gets real extreme in a move. If so, you want the lower boundary line touching the LOWEST most extreme low, which offered the best outcome here. "Pulling" the lower parallel trendline down to the prior "extreme" low at 982 - the one that "stuck out" as a kind of "panic" low - then intersected the area of the lows today. Sometimes, for comparison, I will draw two trendlines (forming a buy/sell "zone") on one end or the other of my channels, which is again the case in the way I have the SPX chart above. I suggested the 916 area - stop at 912 - as the potential buy area for SPX in last night's commentary. However, it is often the case that an index gets somehow "pulled" to the even 100/1000 levels as if by a magnet - this concept worked well today as SPX got within a hair's breadth of 900! Dow Index (1/100: $DJX.X) - Daily/Hourly charts: It looks like resistance will first come into play around two prior lows at 88.9-89.3. If this hurdle is cleared, then there is not really technical resistance until around 91, then 91.7 at the top of the channel. Support is anticipated at 86-86.5. KEY NASDAQ STOCKS INFLUENCING QQQ DIRECTION - What has kept me bullish or at least tempered my bearishness lately is by taking a "bottoms up" approach of always staying focused on "key" Nasdaq stocks, at least on a technical basis. MSFT (Microsoft) - got back to its 50-day moving average today at 52.92 - now MSFT needs a close above this level and then above 55.5 to get something going to the upside. Thing the stock is forming a bottom, so my best guess on upcoming earnings is that they will be perceived as at least "OK", if not bullishly. INTC (Intel) - Minor upside reversal today - needs follow through to above resistance in the 18.8 to 19.5 price zone. CSCO (Cisco systems) - Also had minor upside reversal today - key overhead resistance now looks like 14.3, then 14.9. QCOM (Qualcomm) - Marking time. Could be bottoming, but stock looks like to will "follow" the others, rather than lead. ORCL (Oracle) - Most bullish looking of the Nas 100 that I follow - move above $10 suggests a move to around 12. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: I suggested that "I'd feel 'safe' buying at 22 or on an upside reversal that pierced the hourly down trendline." I did buy that breakout or actually a bit under it, per my suggestion on the Market Monitor today when the Q's were trading at 23.90. I am inclined to treat this as a "trade" only and exit at 25.5, at the top of hourly downtrend channel. Let the stock break out above this resistance without me. I would rather short the rally at some point or buy the next dip than surrender a profit, at least in this market climate. Or, if I want to stay long I'll buy ORCL or MSFT on a further breakout if I want to play the tech darlings. Support is anticipated in the 23.5-24.0 area; then down around 22 if there is another sharp break. Above 25.5, resistance levels are at the prior highs at 26.5-26.8. Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** **************** MARKET SENTIMENT **************** Rally Ho or Downward We Go? By Eric Utley The market shocked most with its recovery from the abyss during the day’s session. But maybe the signs were on the wall, at least for the ramp in technology shares. We’ve had the Nasdaq-100 Bullish Percent ($BPNDX) in bull alert for quite a while now, and that position finally led to some upside in today’s session on what was a mix of frantic short covering with a little bargain buying mixed in. As it often does, the Nasdaq leads the market as it is the most volatile of the major averages. So the early signs of a rally in tech shares may be a sign of things to come elsewhere in the market. Elsewhere, the market is getting increasingly oversold. The bullish percent readings for the S&P 500 ($BPSPX) and the S&P 100 ($BPOEX) are quickly approaching last fall’s lows, but are not quite there yet. What I’m wondering is why the internals of the market by way of the bullish percent figures have not yet taken out their September lows, but several of the major market averages already have, including the SPX, OEX, and NDX. The Dow Jones Industrial Average ($INDU) is the only one of the majors that has not yet broken below its September lows. Speaking of the Dow, its bullish percent reversed back into a bear confirmed condition during today’s session after the indicator shed two stocks. I didn’t check to see which stocks went on sell signal in the Dow in the last two days, but judging by the way the financials, industrials, and health care sectors have been trading, it wouldn’t be too hard to spot the new sell signals among Dow components. The sector scorecard was all about technology during today’s session. All eight of the major technology sectors that I track finished well into positive territory. The Disk Drive Index (DDX.X) was the laggard of the group with its measly 0.39 percent gain, which was a blip compared to the 6.85 percent pop in the Semiconductor Index (SOX.X). If this market is going to rally, it’s going to be led higher by technology. Not that I’m a cheerleader for the new economy, or wishing that it was 1999 again. Rather, the indicators I follow are lined up for a run in tech shares, possibly followed by upside movement in the other recently beaten down segments of the market. Finally, I leave you with a question: Why did the Nasdaq-100 Volatility Index (VXN.X) finish 5.18 percent higher when the NDX finished 4.06 higher? Don’t know? Fair enough. The answer: skepticism. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 8801 Moving Averages: (Simple) 10-dma: 9105 50-dma: 9683 200-dma: 9823 S&P 500 ($SPX) 52-week High: 1316 52-week Low : 901 Current : 927 Moving Averages: (Simple) 10-dma: 962 50-dma: 1033 200-dma: 1098 Nasdaq-100 ($NDX) 52-week High: 2071 52-week Low : 946 Current : 998 Moving Averages: (Simple) 10-dma: 1008 50-dma: 1151 200-dma: 1391 Semiconductor ($SOX) The SOX was the best performing sector on the day, leading technology higher throughout the session. The SOX gained a very impressive 6.85 percent on the day. Leading the way to the upside included shares of Xilinx (NASDAQ:XLNX), Cree (NASDAQ:CREE), NVIDIA (NASDAQ:NVDA), Broadcom (NASDAQ:BRCM), and Applied Materials (NASDAQ:AMAT). 52-week High: 657 52-week Low : 344 Current : 372 Moving Averages: (Simple) 10-dma: 371 50-dma: 451 200-dma: 510 Gold ($XAU) The correlation continues! Stocks higher, gold lower. The XAU was the worst performing sector on the day with its 3.57 percent drop. Leading the way to the downside included Gold Fields (NYSE:GFI), Meridian Gold (NYSE:MDG), Harmony Gold (NASDAQ:HGMCY), Anglogold (NYSE:AU), and Agnico Mines (NYSE:AEM). 52-week High: 89 52-week Low : 49 Current : 75 Moving Averages: (Simple) 10-dma: 74 50-dma: 79 200-dma: 65 ----------------------------------------------------------------- Market Volatility The VIX traded above 40 today! But get this, it only finished the day fractionally lower. Even better, the VXN finished the day higher. There may be something to this rally after all. CBOE Market Volatility Index (VIX) - 38.55 –0.47 Nasdaq-100 Volatility Index (VXN) - 68.60 +3.38 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.89 746,418 663,198 Equity Only 0.73 560,152 408,730 OEX 0.84 54,863 45,878 QQQ 0.58 78,078 45,479 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 41 - 3 Bull Correction NASDAQ-100 15 + 2 Bull Alert DOW 23 - 7 Bear Confirmed S&P 500 26 - 5 Bear Confirmed S&P 100 23 - 5 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 1.31 10-Day Arms Index 1.42 21-Day Arms Index 1.43 55-Day Arms Index 1.40 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 1293 1960 NASDAQ 1455 2001 New Highs New Lows NYSE 39 326 NASDAQ 15 266 Volume (in millions) NYSE 2,083 NASDAQ 2,297 ----------------------------------------------------------------- Commitments Of Traders Report: 06/25/02 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 Commercial interests added back about 10,000 contracts to their net bearish position. Small traders dropped a number of longs and a smaller number of shorts for a reduction in their net bullish position by more than 20,000 contracts. Commercials Long Short Net % Of OI 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 06/11/02 174,357 69,464 104,893 43.0% 06/18/02 181,178 88,517 92,661 34.3% 06/25/02 134,380 62,792 71,588 36.3% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 The roles reversed. Commercials went decidedly short, while Small Traders went decidedly long. Commercials Long Short Net % of OI 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) - 3/13/02 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 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 14,749 7,570 7,179 32.2% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 8,460 - 3/13/02 DOW JONES INDUSTRIAL Dow commercials dropped about 2,000 of their net long position. Small traders eased into a bullish position. Commercials Long Short Net % of OI 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 06/11/02 7,500 9,925 (2,425) (13.9%) 06/18/02 5,379 11,813 (6,434) (37.2%) 06/25/02 6,414 6,597 183 1.40% 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 $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********************** INDEX TRADER GAME PLANS *********************** THE SECTOR BEAT - 7/11 by Leigh Stevens In a "reversal" type day, possible sector upside reversals were seen - or, at least rebounds or "continuation" type moves of a "trading" nature in: The Cyclical Index ($CYC.X), the Bank Index ($BKX.X), Brokers ($XBD.X), the Defense sector ($DFI.X) - after meeting my downside objective at 565 and then some (540 low) - in the High Tech Index ($MSH.X), Networking ($NWX.X), the Drugs ($DRB.X), Semiconductors ($SOX.X) - see SOX CHART below - Utilities ($UTY.X) and Wireless ($YLS.X). UP THE MOST on Thursday - DOWN THE MOST on Thursday - SECTOR TRADE RECOMMENDATIONS & REVIEW - NEW TRADE RECOMMENDATION(S) - Buy IJS at 81.60 or less (S&P 600 Small Cap Value fund iShares) Stop: 79.50 I think that we have finally retraced enough to get down into a buying area again in the small cap sector. IJS got down to the lower end of its price channel and has nearly retraced 62% of the prior, Sept. - May advance. The price gap lower today, IF it is followed by a move up, looks like it may be an "exhaustion" type gap that sometimes signals the end of a correction. Time will tell on this. OPEN TRADE REC(S) - NONE OPEN POSITIONS - Long HHH at 21.50 (Internet HOLDR's) Stop: 20.00 Long SMH at 28.30 (Semiconductor HOLDR's) Stop: 27.00 NOTE: "SQUEAKED" THROUGH THIS ONE! Low was 27.05 - close at 29.43. TRADE LIQUIDATIONS - Exited SWH on our 26.00 stop; versus a 27.40 entry (Software HOLDR's) SWH closed at 26.74, so disappointing to get kicked out on stop. Still see upside potential back up to 29 area SPECIFIC SECTOR HIGHLIGHT(S) - Semiconductor Sector Index ($SOX.X) STOCKS: AMAT; AMD; CMOS; CREE; IDTI; INTC; KLAC; LLTC; LSCC; LSI; MOT; MU; NSM; NVDA; NVLS; PMCS; RMBS; TER; TXN; XLNX The rebound, twice now, from the area of the Sept 344 low is bullish and suggests the possibility that the SOX could rally up to overhead resistance around 400. Stay tuned! 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 ************************************************************** 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. 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The Option Investor Newsletter Thursday 07-11-2002 Copyright 2002, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** MO $44.00 –1.17 (-2.21) The inside day set up that we had detected in MO earlier in the week turned out to a be a breakdown instead of a breakout. Hopefully the inside day offered adequate downside protection with a tight stop. If not, look to exit open plays on an signs of strength in tomorrow’s session. PUTS: ***** CAM $46.05 –1.07 (-3.98) CAM offered the quick one day drop that we were looking for in today’s session, which saw the stock finish lower by more than 2 percent. With the 200-dma approaching below from the $45 level, we’re ready to take our gains out of this play and put them into a more productive set-up. Look to book profits on any downside movement in tomorrow’s session. CAH $51.90 -0.62 (-7.25) In what turned out to be one of the most volatile trading sessions in recent memory, shares of CAH gave us a wild ride as well. The early morning low at $48.50 turned out to be the low of the day and after dropping back to the $49.25 level in the middle of the day, the stock moved up for the remainder of the day on the back of a recovering broader market. So is this the bottom? We don't think so, but after the solid gains we've accrued, this looks like a good point to harvest those gains. We're dropping CAH tonight, so use any morning weakness to exit at a better level. LLL $44.45 +0.25 (-6.57) Now that was an impressive rebound! After dropping slightly below the $41 level early in the day, LLL began a gradual recovery that lasted right up to the final 2 hours of the day. That's when the short-covering really got going and strong buying volume propelled the stock to close at the high of the day. Given the strong rebound off the lows and the fact that our PnF price target ($43) has been achieved, this looks like a good point to harvest gains. There could be another dip ahead of the weekend, but we would want to use it to take an exit at a more favorable level, rather than initiating new positions. We're closing the LLL play tonight, while we can still chalk it up as an unqualified winner. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu ESST 17.88 0.31 -0.79 -1.09 1.48 Ready to rock higher MSFT 52.90 -1.98 0.29 -0.97 0.66 Higher relative low MO 44.00 1.19 -0.71 -1.52 -1.17 Dropped, broken day INTU 47.48 -2.36 -0.63 -0.24 1.32 Rebound from support NVDA 19.93 0.66 -0.96 -0.51 1.84 Poised at resistance ORCL 9.42 -0.74 0.08 -0.42 0.44 Climbing its way up MMM 121.40 -0.72 -1.15 -4.00 -2.60 New, ready to rebound EMC 8.15 -0.17 0.25 0.13 0.35 Pent up demand OMC 49.39 2.78 -0.56 -0.38 2.77 Corporate reassurance PUTS LXK 49.02 1.17 -1.91 -3.12 0.88 Fresh relative low XL 78.20 -0.12 -2.11 -2.02 0.45 Still going down LLY 49.70 1.47 -2.11 -1.80 1.52 Waiting for entry CAM 46.05 -1.71 0.04 -1.24 -1.07 Dropped, 200-dma LLL 44.45 -1.70 -2.35 -2.50 0.25 Dropped, take gains CAH 51.90 -0.16 -5.66 -0.16 -0.62 Dropped, book profits AMGN 34.48 -1.84 -1.33 -2.40 1.95 Dead cat bounce LM 42.83 0.17 -1.95 -2.23 0.36 Ready to rollover MRK 44.28 -1.05 -2.06 -2.18 0.71 Short covering pop RE 50.35 -1.16 -2.54 -1.84 1.09 Bounced from $48 PHCC 18.22 -1.32 -0.25 -0.81 -1.48 New, unhealthy ************************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 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** ESST $17.88 +1.48 (-0.09) We continue to believe that ESST could sine in this market environment if only the Nasdaq could find its legs for a rally, which is what looks like could be getting underway after today’s big reversal off the bottom. ESST has earnings momentum in its favor, and to a smaller extent the stock has price momentum since rebounding from relative lows back in early May. The 9 percent rebound in today’s session was proof of our belief. Now all we need is some follow through in the Nasdaq tomorrow. Look for ESST to rebound back above the $18 level, and look for a breakout above short term highs at the $18.80 level, which could lead to a quick trip up to the $20 level. INTU $47.48 +1.32 (-2.61) INTU held the $46 support level near the ascending support line that we wrote about during Tuesday’s update. The stock held that level again in today’s trading, but this time, INTU rebounded with gusto from that mark to finish the day solidly higher on the rebound in the broader technology sector. Given this stock’s relative strength, any follow through on the part of the Nasdaq should result in a breakout above relative highs in INTU. The stock has some mild congestion in between current levels and the $48.50 mark. If that resistance zone is cleared, then INTU should make its way back up to the $50 level for the ultimate breakout to new yearly highs. Aggressive traders can look to get in ahead of a breakout with a clearing of the short term resistance zone. Otherwise look for a pullback down into the $46 support level. NVDA $19.93 +1.84 (+1.03) The semiconductor sector came back to life in a big way during today’s session, leading the Nasdaq and the broader market for that matter higher. NVDA was one of the star performers in all of the semiconductor group as the stock gained more than 10 percent on the day. Entries taken from the support of the curling 10-dma should be sitting pretty after today’s rally, as further upside is likely in tomorrow’s session. What we’ll be watching very closely for is a breakout above short term resistance at the $20 level which has capped off NVDA’s rally attempts in the last five sessions. The stock has plenty of room to run to the upside if only it can clear the short term congestion between its current levels and the $20 mark. Institutional investors may once again start warming up to the stock if it can claw its way back above the psychologically and technically significant $20 level. Confirm any such breakout attempt with heavy volume. In terms of price confirmation, look for the stock to take out Monday’s high at the $20.24 mark by trading above the $20.50 level. ORCL $9.42 +0.44 (-0.63) It seems that ORCL’s pattern of relatively higher lows is going to hold once again as the stock rebounded from its ascending support line in today’s session. Connecting the lows from early June through today’s intraday low at the $8.71 level, traders can see the ascending support line that has held during each one of ORCL’s brief pullbacks. The stock appears to be under institutional accumulation as the buyer makes his or her presence known through the support line. That buying pressure should continue lifting ORCL into the coming sessions so long as the broader market doesn’t rollover. Look for the stock to climb back above its short term highs just above the $9.75 level in tomorrow’s session. Confirm such upside directional move with a breakout above the $10 level. MSFT $52.90 +0.66 (-1.95) What looked like another day of carnage for the broad market did an abrupt about face in the middle of the lunchtime lull. The rise off the lows was volatile, but it was encouraging to see the pattern of higher lows throughout the afternoon. MSFT once again performed well after the early decline, posting a solid intraday double-bottom near $51.40 by midday. While the late afternoon volatility dragged MSFT down to the $51.50 in the final hour, in the end the bulls prevailed by closing the day out at the highs. One day does not make a rally, but you can see from the daily chart that MSFT has been building a series of higher lows since early May, and just maybe this time we'll get to see MSFT push through that stubborn resistance at the $56 level. While earnings season is just kicking off this week, MSFT won't be doing its song and dance until next Thursday. That gives us one more week to play. Dips near support at $51-52 are still buyable, so long as our $50.50 stop isn't violated. ************** NEW CALL PLAYS ************** MMM – Minnesota Mining and Mfg. $121.40 -2.60 (-8.47 this week) Commonly known as the maker of the ubiquitous, adhesive-backed Post-It Notes, MMM is also a leading manufacturer of a variety of industrial, consumer, and medical products. Reflective sheeting on highway signs, respirators, spill-control sorbents, and Thinsulate brand insulations are just some of the company's industrial products. MMM also makes microbiology products, making it easier for food processors to test for the microbiological quality of food. The indiscriminate selling that has hit the broad market so hard this week has even started to hit some of the stronger old-economy stocks and that is good news for those who are looking for a bargain. With the DOW closing at October 2001 levels yesterday, and falling another 200 points from there this morning, it was certainly encouraging to see the bulls step up to the plate this afternoon and drag the market back from the abyss. Shares of MMM have been holding up far better than most of the DOW components over the past few months. In fact it was only last week that the stock was flirting with a breakout over the $130 resistance level. What is impressive about that is that the stock's all-time high is $130.60. But then the selling party that has defined this week got moving and at its low this morning, MMM was trading just barely above the $120 level. Can you say entry point? That's right, the broad market selling appears to have dragged MMM down further than is reasonable, especially in light of the fact that the company actually raised its earnings guidance last Monday. And with the company set to report its quarterly earnings on July 22nd, it appears there is just enough time for a quick bullish trade ahead of the announcement. The $120 level has served as strong support on the last two dips, and that allows us to mitigate our risk with a fairly tight stop at $119. Another dip back near the $120 level would make for an ideal entry on the rebound. Of course, MMM clearly has some overhead resistance to deal with now, with the first obstacle at $124, the top of today's downward gap. More cautious traders may want to wait for the stock to move through that level before initiating new positions. BUY CALL JUL-120 MMM-GD OI=3693 at $4.00 SL=2.50 BUY CALL JUL-125 MMM-GE OI=4131 at $1.35 SL=0.75 BUY CALL AUG-120 MMM-HD OI= 88 at $6.50 SL=4.50 BUY CALL AUG-125*MMM-HE OI= 427 at $3.90 SL=2.50 BUY CALL AUG-130 MMM-HF OI=1403 at $1.95 SL=1.00 Average Daily Volume = 1.82 mln EMC - E M C Corp $8.15 +0.35 (+0.56 for the week) EMC Corporation is the world leader in networked information storage, information management software and the provider of information storage infrastructure. Major customers include the world's largest banks and financial services firms, manufacturers, telecommunications providers, airlines, transportation companies, Internet providers, retailers, educational institutions, pharmaceutical companies and regional and national government agencies. (Source: company website) Thursday July 11, 2002 EMC has been riding an upward trend line from a low of approximately $6 for the last couple of weeks. Bulls are probably encouraged that shares have actually been setting a series of higher lows from its late June bottom while the broader markets have been setting new relative lows. The tech sector has been a pretty tough place to go long but any relative strength, like we see in EMC, could draw the attention of investors and managers looking for a place to put cash. The recent article out today (July 11th) regarding Goldman Sach's IT spending survey didn't do much to revive the second half recovery theory but the survey did reveal EMC was seeing pent up demand despite the IT spending drought. This news could have played a part in EMC's breakout over the crucial $8.00 level of resistance, which has formed a ceiling since early May. EMC's next significant resistance level appears to be in the $10 range (about $9.65 to $10, a strong psychological target for traders). However, the $9.00 mark might offer some round number resistance and traders looking for an entry point will also want to keep an eye on the $8.50 level. Traders can set an upside entry point above $8 and the OI newsletter feels that today's close at $8.15 qualifies as an entry point. Traders should note that volume was pretty strong today at 25.9 million versus the average of just 16 million. This looks a lot like short covering and odds are EMC could see a continuation of any short covering now that it has broken the $8 level. In recent news, EMC recently announced a major expansion of its professional services portfolio through a pact with Accenture. It will expand into the consulting business by offering Open, Platform Independent Storage Consulting Services through its new Information Solutions Consulting Group. Pacific Crest today reaffirmed their buy rating. We will suggest a stop at $7.58, near today's lows, which will avoid a trendline break to the downside. We will probably exit the play between $9.60 and $10.00 if the opportunity presents itself. Please note that EMC is expected to announce earnings Thursday, July 18th before the opening bell. Therefore we will close the play on the Tuesday or Wednesday before earnings. Plan your exits! BUY CALL AUG- 7.50 EMC-HU OI=8571 at $1.15 SL=0.50 BUY CALL AUG-10.00 EMC-HB OI=3643 at $0.20 SL=0.00 BUY CALL OCT- 7.50*EMC-JU OI=8204 at $1.55 SL=0.75 BUY CALL OCT-10.00 EMC-JB OI=9364 at $0.60 SL=0.00 Average Daily Volume = 16.6 mln OMC - Omnicom Group Inc $49.39 +2.77 (+4.61 for the week) Omnicom is a leading global marketing and corporate communications company. Omnicom's branded networks and numerous specialty firms provide advertising, strategic media planning and buying, direct and promotional marketing, public relations and other specialty communications services to over 5,000 clients in more than 100 countries. (Source: company press release) Omnicom has been in a very strong uptrend since the beginning of the month. It has held up well the past couple of weeks in spite of the market sell off and it has maintained itself above its 10 dma. Looking at the last three to four weeks the stock appears to be putting in a decent attempt at a bottom and most of the technicals have reversed. The MACD, Stochastics and RSI are all rebounding strongly. It would be natural to suspect this is just another dead cat bounce but the strength and length of the bounce is encouraging. OMC rode today's rebound to a level just under resistance of $50 and created a bullish engulfing candlestick to further inspire fear in the bear camp. To the upside, a break above $50 would provide an entry point for traders, as it would both break resistance and overcome a psychological barrier. To that end, the OI newsletter will use the $50.00 mark as our entry point. Once OMC trades there we'll consider ourselves long. More conservative traders may want to look for a little bit more confirmation of the breakout and use $50.11 or $50.26 as trigger points. Omnicom has recently been beaten down due to the very popular "accounting concerns." On Monday it addressed these worries with a 48 page "investor presentation" on its website, to reassure investors regarding its acquisitions policies, accounting practices and cash flow. This has helped fuel a recovery from its recent low at the end of June below $40. Also on investors minds may have been a WSJ interview with Aegis CEO Douglas Flynn, forecasting a 1.5% growth in U.S. advertising spending this year, which was in contrast to earlier forecasts of a decline. This was followed by Fitch Ratings' affirmation of Omnicom's 'A' rating on senior unsecured debt and 'F1' commercial paper rating. Fitch also commented in their press release on Omnicom's demonstrated ability to attract new clients and its excess free cash flow after expenditures, earn out payments and dividends, which provide financial flexibility to the company. On a trading note, some investors might consider us a bit late to the game since we're going long a stock that has just made a two- week 25% advance. Normally we would agree. However, OMC is still incredibly oversold from its pre-accounting concerns level of $85. A 50% retracement from $85 to the late June low of $36.50 would put the rebound in OMC near $60. A move over the $50 mark could be just the spark bulls need to ride a short- covering fueled rally up to its next level of resistance. Initially, we would place a stop below OMC's recent $46 support level, where shares bounced this morning. At $45.90, we're still within 10% of our entry price. Short-term traders may want to consider a tighter stop and a tighter profit target close to $55. We plan to exit the play on any move above $58.50. BUY CALL AUG-50 OMC-HJ OI=2576 at $4.40 SL=2.20 BUY CALL AUG-55*OMC-HK OI= 535 at $2.15 SL=1.00 BUY CALL OCT-50 OMC-JJ OI= 190 at $7.00 SL=5.00 BUY CALL OCT-55 OMC-JK OI= 456 at $4.40 SL=2.50 Average Daily Volume = 3.62 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 ************************************************************** ******************* PLAY UPDATES - PUTS ******************* XL $78.20 +0.45 (-3.80) XL traced another relative low in its descending trend during today’s session before being brought back to life by the recovery rebound in the broader market. The stock is still very weak, and if anything, we view the rebound in today’s session as a potential path to another favorable entry into new put plays. But in the meantime, we’d actually like to see a little bit more upside movement before pulling the trigger. So if you have open positions and are holding onto gains in XL, it may be a good move to look to book profits on a pullback in tomorrow’s session, or at least set a protective upside stop to conserve any profits accrued up through this point in the play. In terms of resistance that we favor using for an entry point, we like the idea of another failed rally at and subsequent rollover from the downward sloping 10-dma which finished today’s session at the $81.29 mark. LM $42.83 +0.36 (-3.75) The weak brokerage sector got a bit of relief in today’s session from the rebound in the broader market. The lift caught up with LM who was struggling earlier in the session near fresh relative lows in the two month long downward trend. The stock reached as low as the $41.40 level during the early going, which may have been enough for quick and profitable put play for those who were early to enter the play during yesterday’s session. The stock looks like it could stage a small relief rally over the next two or three sessions, which should keep traders out of entering new positions until LM gets a little closer to resistance. We would favor taking new put plays from a rollover between the $44 and $45 levels which, by that time, should be reinforced by the downward sloping 10-dma. MRK $44.28 +0.71 (-4.58) Even the beaten down drug stocks got a small reprieve from their selling thanks to the rebound in the technology segment of the market. MRK was no exception. The stock popped higher during the day’s session on relatively active volume as the shorts who have been riding this stock lower for the last several months decided to take some gains off of the table. But the buying in MRK today was most likely no more than routine short covering in a trend that appears to be far from over. The stock is still very fundamentally and technically weak. And unless there are some positive developments concerning the launch of its Medco IPO, the stock is most likely to remain under pressure. Look for new entry points near resistance closer to the $47 level, or watch for a rollover from current levels. Confirm direction in the Drug Sector Index (DRG.X) before entering new plays. RE $50.35 +1.09 (-4.45) RE’s trend of relatively lower lows from this week continued into today’s session as the stock reached an intraday low at the $48.01 level, from which it rebound into the close of trading. Still, we liked the quick move down to the $48 level in the last three days that hopefully offered traders a very quick and profitable trade to the downside. From here, it would not be out of the ordinary for the stock to continue slightly higher before resuming its downward trend. The intraday high traced during yesterday’s session at the $51.20 could be a spot to start looking for new entries into put plays if the sellers return in the next session or two. If the stock clears that short term resistance level, however, it could potentially trade up to the 10- dma, which is closer to the $53 mark. But we’d gladly take a rollover from that level as well. AMGN $34.48 +1.95 (-3.59) Even with a nearly 6% rebound today, the Biotechnology index (BTK.X) didn't even manage to erase Wednesday's losses, much less break out of the persistent downtrend. Once again mirroring the BTK, AMGN caught a 6% updraft off of the $32.25 support level as the broad market recovered. But even with that strong recovery, AMGN couldn't even reach the $35 level, where it opened for trade yesterday. The only item that supports a bullish case is that AMGN's volume today was particularly strong at 50% above the ADV. But that doesn't rule out that all of today's action was simple short-covering. We continue to view rallies as entry opportunities, especially given the lack of a positive catalyst in the Biotech space. A rollover near the $35 level may make for a decent entry, but a rollover near $36-37 would be even better. Just keep in mind that our stop is now set at $37. LLY $49.70 +1.52 (-2.55) After the carnage we've seen in the Pharmaceutical sector (DRG.X) in the past 2 months, today's 1.8% gain is small consolation to investors in that area of the market. The DRG sector was clearly not leading on the rebound, but lifted by the rising tide of the afternoon bounce in the broader market. Hitting a fresh 4-year low near $260 this morning, the DRG index did manage to recover its steep morning loss and close in positive territory and that is something. But it seems like nothing more than short-covering, as conditions in the industry haven't shown any signs of improvement. LLY was just one of many Drug stocks that tagged fresh multi-year lows this morning, and given the 25% decline in the past 2 weeks, it should come as no surprise that we got a bit of an oversold bounce. It looks to be setting us up for another attractive entry, and a rollover in the vicinity of $50 or even $51 can be used for initiating new positions. LLY will likely follow the lead of the DRG index, so make sure that the index is rolling over as well before taking a position. Recall that last night we tightened our stop to $51.10, and a close above that level will bring this play to an end. Take the entry if it appears, but don't force it. LXK $49.02 +0.88 (-3.28) Just like the rest of the market, shares of LXK went on a roller-coaster ride on Thursday. Heading down at the open, the stock bottomed at $46.50 in the middle of the day before recovering on the back of the broad market to actually close with a gain. Apparently the $49 level is still acting as resistance. Although it could give way tomorrow if the broad market continues its fledgling rally attempt. Keeping us bearish on shares of LXK is the fact that there is no indication of demand growth, a fact borne out by DELL's comments tonight after the close. DELL guided higher for Q2 due to continued market share gains in the midst of weak overall demand. The price chart of LXK certainly bears that out with its long series of lower highs and lower lows. The first test of resistance will come at $50.75 and then at $51.50, which is the current level of our stop. Take advantage of weakness near resistance to initiate new positions, but make sure to pull the plug if the bulls succeed in rallying through our stop. A close over that level will have us dropping the play in short order. ************* NEW PUT PLAYS ************* PHCC – Priority Healthcare $18.22 –1.48 (-3.85 this week) Priority Healthcare Corporation (PHC) is a national distributor of specialty pharmaceuticals and related medical supplies to the alternate site healthcare market, and is a provider of patient- specific, self-administered biopharmaceuticals and disease treatment programs to individuals with chronic diseases. The Company sells over 3,500 SKUs (stock-keeping units) of specialty pharmaceuticals and medical supplies to outpatient renal care centers and office-based physicians in oncology and other physician specialty markets. PHC offers value-added services to meet the specific needs of these markets by shipping refrigerated pharmaceuticals overnight in special packaging to maintain appropriate temperatures, offering automated order entry services and offering customized distribution for group accounts. The not-too-long-ago favored health care sector has quickly fallen out of favor. The bulls have given up hope for even the health care sector, which speaks of just how weak this market has become. The biotechnology stocks were the first to take it on the chin in the health care space, followed by the major pharmaceutical makers. Most recently, the health maintenance organization shares have fallen under heavy selling pressure, which has spread into other segments of the broader health care market including the distributors of drugs. Indeed, major firms in this space have come under increased amounts of scrutiny and pressure from the legal and market front. PHCC has been no exception as the stock is one of the weakest among the major distributors. The stock fell from its recent consolidation in the last two days on heavy declining volume as it broke down below the psychologically significant $20 level, which most likely triggered a whole new round of institutional selling during today’s session. Add to that the prospect of margin calls and pouncing short sellers, and PHCC’s short path of least resistance appears to be to the downside. Momentum traders can enter new put plays on follow through to the downside in tomorrow’s session. If on the other hand the stock snaps back on a relief rally start looking for rollovers from the $20 level, which should now serve as resistance. Our stop is initially in place at the $21.25 level. BUY PUT JUL-20*UHP-SD OI=0 at $2.05 SL=1.05 BUY PUT AUG-17 UHP-TW OI=0 at $1.35 SL=0.75 Average Daily Volume = 393 K ************************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 ************************************************************** ********** 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 Thursday 07-11-2002 Copyright 2002, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. ********************** PLAY OF THE DAY - CALL ********************** NVDA – NVIDIA $19.93 +1.84 (+1.03 this week) NVIDIA Corporation designs, develops and markets graphics and media communication processors and related software for personal computers (PCs), workstations and digital entertainment platforms. The Company provides an architecturally compatible top-to-bottom family of performance 3-D graphics processors and graphics processing units (GPUs) that set the standard for performance, quality and features for a broad range of desktop PCs. They range from professional workstations to low-cost PCs and mobile PCs, and from performance laptops to thin-and-light notebooks. NVIDIA's 3-D graphics processors are used for a wide variety of applications, including games, digital image editing, business productivity, the Internet and industrial design. Most Recent Update The semiconductor sector came back to life in a big way during today’s session, leading the Nasdaq and the broader market for that matter higher. NVDA was one of the star performers in all of the semiconductor group as the stock gained more than 10 percent on the day. Entries taken from the support of the curling 10-dma should be sitting pretty after today’s rally, as further upside is likely in tomorrow’s session. What we’ll be watching very closely for is a breakout above short term resistance at the $20 level which has capped off NVDA’s rally attempts in the last five sessions. The stock has plenty of room to run to the upside if only it can clear the short term congestion between its current levels and the $20 mark. Institutional investors may once again start warming up to the stock if it can claw its way back above the psychologically and technically significant $20 level. Confirm any such breakout attempt with heavy volume. In terms of price confirmation, look for the stock to take out Monday’s high at the $20.24 mark by trading above the $20.50 level. Comments The chip sector is back in favor after today’s rally that was led by the SOX. The group as a whole gained nearly 7 percent for the day. One of the stocks that really stuck out with its strength was NVDA. Fortunately it’s also on the OI call play list. The stock finished today’s session poised for a major short term breakout above resistance. Look for that move in tomorrow’s session with an advance first past the $20 level followed by confirmation above the $20.50 mark. BUY CALL JUL-17 UVA-GW OI=2466 at $3.00 SL=1.50 BUY CALL JUL-20*UVA-GD OI=5261 at $1.35 SL=0.75 BUY CALL AUG-17 UVA-HW OI=2408 at $4.20 SL=2.00 BUY CALL AUG-20 UVA-HD OI=1791 at $2.75 SL=1.75 Average Daily Volume = 11.2 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 ************************************************************** ************** TRADERS CORNER ************** BOLLINGER BANDS By Leigh Stevens lstevens@OptionInvestor.com I don’t make as much use of this variation for setting upper and lower trading bands, but I do look at them for the unique information they provide. Fellow technician John Bollinger invented the Bollinger band envelope variation. My reservations about their use is that it is hard to pinpoint a specific buying or selling area, as these bands expand or contract according to market volatility. This is both, I suppose, the technique’s strength and weakness. Bollinger Bands (BB) combine a centered moving average, which is part of the indicator but is usually NOT shown. BB basically combine the moving average envelope technique with a measurement of current and recent price volatility to determine the optimal placement of the upper and lower lines. The PURPOSE of the BB indicator is basically the same as moving average envelopes: Are prices high or low on a relative basis? Just as with (moving average) envelopes, two bands – the convention is to call these lines “bands” to distinguish from the fixed percentage envelope technique – are placed above and below a centered moving average, which is often set or "defaults" (by the charting software) to 20-days. However, unlike lines that are a fixed percent above or below the moving average, Bollinger bands are plotted two standard deviations above and below the average. The charts below offer examples for a stock (INTC) that was in a stable trend and another (QCOM) following it that is of a more volatile period of wide-ranging price swings. In the former, the bands are of a relatively narrow width and in the later significantly wider apart at least during a top-building process. Bollinger Bands: in a more "stable" (narrow range) trend - Bollinger Bands: in a more wide-ranging (volatile) trend - Standard deviation describes how prices are arrayed around an average value. One standard deviation is a set of values that contains close to 70% of the price fluctuations that occur above and below the moving average used in the Bollinger band calculation. 95% of the fluctuations will occur within two standard deviations of the moving average in question. Since each Bollinger bands is placed at a fluctuating line that is equal to two standard deviations, 95% of all price action will theoretically occur within the upper and lower lines. Each band represents therefore, implied support or resistance. Price swings are unlikely to be sustained above or below these lines for long. Because of how they are constructed, Bollinger bands expand or contract in order to adjust to market volatility or the degree of movement in the price swings that are developing at any given time. If prices are fluctuating in a relatively narrow price range, this is a situation of low (price) volatility. If the bands are relatively narrow, the market is experiencing lower price volatility or narrower price swings and the lines will intersect at upper and lower points that will tend to mark the extremes (highs and lows) for these quieter market conditions. If prices are experiencing wide-ranging price movement, the bands expand to reflect the higher volatility that exists. If the bands are wide and you can usually quickly see this visually in the pattern of price activity, the market is experiencing higher volatility – the lines then suggest where an extreme will be reached based on a more volatile and stronger recent price trend. As with envelope lines, they can be used on everything from intraday to daily to weekly charts, although the most common use is with daily charts. MORE IDEAS: FROM A TALK WITH JOHN BOLLINGER - John spoke at the Market Technicians Association, which we both belong to, and a major theme of this talk (February 2002) related to the "diversity" of people's use of his indicator. For example: MARKETS - Boli bands are being used in all markets, ranging from stocks, index options, index futures, commodities, currencies, etc. TIME FRAMES - Ranging from years, quarters, months, weeks, days, hours, minutes and with "tick" charts. DIVERSITY - This BB indicator is being used to detect the beginning and end of trends, to highlight the potential for reversals, to assess "continuation" patterns, to identify overbought/oversold conditions and to place stops. CHART PATTERN IDENTIFICATION - John cited an increasing use of his indicator in helping spot or clarify chart patterns. For example, a Head & Shoulder's top or bottom has a typical Bollinger Band "signature", or a pattern for the Bands that is similar, but slightly different than the actual H&S pattern. The help in defining a pattern can be seen in the chart above, where the Bands made an even better "definition" of something that looked like and a Head and two peaks that looked even more like "shoulders" - well, the right one has a bit of a "spike" to it. But there was especially good definition of the Head. HOW CAN BOLLINGER BANDS DO SO MANY THINGS? - Well, for one thing they are a "tool", not a "system". Tools, as is well known, can be employed in different ways and the ability to use them skillfully varies quite a bit - my use of woodworking tools will not produce finished cabinets, but my brother can do that with the same tools. For another thing, Bollinger bands are highly adaptive as it is volatility that drives the width of the bands. This means that they can be deployed successfully in many different types or phases of markets. As an interest in volatility has grown, using Boli bands is an easy way to include volatility in the trading decision process. NOT WELL KNOWN - John's defaults were derived from studies of the U.S. stock market using daily data over a period of many years. The default length for the moving average is 20 periods or "bars". The default for the bandwidth is two standard deviations. John makes greatest use of the Bands on daily or weekly charts. Sometimes he uses them on hourly charts for trade execution, or on monthly charts to gain a long-term perspective. BEST USE - By definition, prices are "high" (on a relative basis) at the upper band and "low" at the lower band. Armed with this information, you can compare price action to the action of the BB indicator to help you arrive at trading decisions. If prices are high and the indicator confirms this, you have a "confirmed" high. If prices are high and the indicator fails to confirm this, you have an "unconfirmed" high, which is suggesting that the stock or index has more "room" on the upside. John indicated that this use or purpose was the goal he had in mind when he developed his trading tool. KEEP IN MIND - 1. As with moving average envelops, prices can and do "walk" up or down the Bollinger Bands. 2. The average used was designed to best detect the "intermediate" trend; e.g., 2-3 weeks or longer. 3. Unlike moving average envelopes, at least the way I use them, closes above or below the Bollinger Bands can be "continuation" signals rather than "reversal" type signals. 4. If the (centered) moving average is lengthened, the number of standard deviations needs to be increased; e.g., from 2 at 20 periods, to 2.1 at 50 periods. Likewise, if the average is shortened, the number of standard deviations should be reduced; e.g., from 2 at 20 periods to 1.9 at 10 periods. 5. The moving average used is a "simple" moving average because a simple moving average is used in the standard deviation process, so the same type of average is "logically" consistent. 6. A "touch" to the upper or lower line is just that - a tag or touch. These are NOT, in and of themselves, a buy or sell "signal" ************************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 ************************************************************** *********** OPTIONS 101 *********** Another Newsflash! Buzz Lynn buzz@OptionInvestor.com Dateline OIN, Left Coast, Great Scott reporting: This just in - new scientific data studies, which began in early-May, reveal proof of global warming. Yes, it's true. Seems that daily high temperatures recorded over the last 70 days have become successively higher. Having reached a high in Redding, California of 118 degrees yesterday, scientists were alarmed at the stellar rise, which led them to conclude that global warming (at least on the Left Coast) is definitely here. In an effort to give time to citizens to prepare, the scientific community has pushed the alarm bell to warn us that life will never be the same if the current trend keeps up, especially in the coming weeks. While it isn't clear what has caused the rise in temperature, one researcher with HEAT (Humans Escaping Ascending Temperatures), who wished to remain anonymous, cast the blame squarely on rich people. When queried further about the exhaustive research undertaken to arrive at this conclusion, he explained, "Plumes of exceptionally hot air are constantly expelled into the atmosphere from running air-conditioners. This incredibly hot air is ever- increasing and causes atmospheric temperatures to rise, which feeds on itself and requires offices, cars and homes to use even more air-conditioning - a vicious cycle. Clearly, the largest users of air-conditioners are rich people, as they tend to work in offices, have larger homes, drive SUVs, and thus can most afford it. Our only hope is that the stock market continues to tank and makes them feel not quite so rich. Perhaps then they will use their cooling units less, which will avert this pending global disaster." Judging from current conditions, nobody is quite sure how long this will go on. But according to the same HEAT researchers, if the trend continues, we could see temperatures "approaching 212 degrees by late December". He added, "Expect human beings to spontaneously combust starting in early-March, 2003." That's it for now. Back to you, Buzz Great Scott, thanks for that startling report! Excuse me while I remove my tongue, previously firmly-planted in my cheek. Did I mention it was hot? 108 degrees in Reno yesterday, a new record I believe. Anyway, the above was a microcosm example of technical trends running amuck. As it applies to the market, there are a bucket of bears out there right now that see nothing but a fertile stream for biting dead fish stocks (tech), and a bucket of bulls too who still believe in the "buy and hold" theory. Trouble is, they are both on the wrong side of the trade. The other trouble is that they are probably one in the same people. Being right depends on your time line. Let me quickly explain. Without going into much detail since I know our fearless Rocket Scientist and LEAPS editor, Mark Phillips will soon cover this in great detail, there are long term trends and short term trends, otherwise known as secular and cyclical trends, respectively. I believe that markets are bearish for the long term (secular) and nearing bullish for the near-term (cyclical) market - exactly the opposite from what most investors currently believe. And while the short-term looks currently bearish to many, I would suggest that the markets might be readying for a bullish reversal that could last longer than the standard 1-day rally we've become accustomed to. Yes, I'm still building an ark. But I'm also happy to grow some grain between storms. Hear me out on this, as we revisit one of my favorite "smart guys", Ken Fisher. For those that don't know him, he is the founder of Fisher Investments in Woodside, California and manages $12 bln in investor capital, which has doubled from $6 bln over the last two years. Some of that is from earnings, but mostly from new inflows far as I can tell. Anyway, he is also one of the longest-running Forbes Magazine columnists, and son of legendary investor, Phil Fisher. He is not a market timer, per se, but his track record is, nonetheless, really good. This is a guy I pay attention too. There's more. Ever hear of The Great Humiliator? That's Fisher's definition of the market, which states that the market's job is to humiliate and embarrass as many people as possible. In a strong sense, he is a contrarian. So, anyone interested in what he thinks constitutes a bottom? Me too. Fisher breaks this down into three segments: Sentiment, Fundamentals, Technicals, plus other stuff nobody looks at. For starters under sentiment, he lists the "Time Magazine Indicator". That's where Time and other major news publications start spouting, "Death of Equities", "Why Stocks Eat the Green Burrito and Suck Canal Water", or other such widely-disseminated and negative headlines. According to Fisher, Time has a nearly perfect contrarian record of calling pivot points. Next, folks just plain give up on the market and don't want to own stocks. Few will be asking, "Is this a bottom yet?" They will already be already convinced that it is. This is accompanied by analysts shifting to the bearish side, which they really haven't done yet. One other item falls under the sentiment heading according to Fisher. People lose faith in the Fed. Don't laugh. Not many have yet. There is still a belief that Greenspan has the ability to see around corners. Fisher explains that having believed from the start that interest rate cuts can shut down the bear, bottoms are formed when most folks believe that further cuts can't help. Fundamentally (my favorite), Fisher looks for a major brokerage, bank, or other financial institution failure. Maybe some insurance companies are looking weak right now, but no major failures yet. Bankruptcies are a completely different matter. Enron and K-Mart can certainly lay claim here. But Fisher bets that it happens to at least one major industrial company too. It could also be a segment of the market or certain class of securities that default too, like a major muni-bond issuer. By the way, taken a look at the utility index lately? Trouble on the horizon there - prices say so. Furthermore, every industry and sector will fall in value. When the ones that have tended to perform well during a bear market finally lose steam too and can no longer claim "the last holdout" status (because there are no more holdouts), that offers the sense of a bottom. What else? Bearish mutual funds will be all the rage. Earnings forecasts will fall and there will be no visibility. Bear market forecasters will figure prevalent in the news, which I presume is why current noted bear, Bill Fleckenstein, notes something to the effect that a bottom would be reached when CNBC goes off the air (!) Debt spreads will widen as junk bonds are treated like a bad case of leprosy - shunned. Auto sales should fall (happening now) and unemployment should increase by at least 1% from its pre- recession low (hit that and then some). Technical items are few, but widely available to watch. At least one 90% down volume day will occur, the VIX will spike, and the oscillators will peg near the 0 line (on a scale of 1-100) in oversold. Just a couple of other things that really don't fall into any of the above categories: 1. Fundamentals actually mean something and are sought in extensive research, then factored into the price. Speculation is unheard of. 2. Positive factors will be widely ignored. 3. Finally, when we are ridiculed for suggesting the future will be better in a few years, that will be the bottom. Interesting, huh? I thought so too. We are "there", or approaching "there" on a quite a few different data points. But are we truly "there" yet? I don’t' think so. But we could possibly be getting closer to a cyclical bottom, though I think the secular part has a long way to go. After all, CNBC is still on the air (big grin), fundamentals like P/E ratios still mostly stink, and people still hang on to Greenspan's every word. One other thing - it is important to point out, as does Fisher, that not all indicators need to be present to indicate bullishness, nor is a single data point indicative of a market turnaround. Still the lesson is helpful. Let's put the lesson to good use as the cyclical traders move into super-bear mode, which would perhaps ready us for actually bullish trading. Hey, we can dream can't we? Make a great weekend for yourselves! ************ MARKET WATCH ************ Are the bulls ready to run? Or will stocks roll again? To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/071102.asp ************** MARKET POSTURE ************** It’s been a busy two days. Get your levels in order! To Read The Rest of The OptionInvestor.com Market Posture Click Here http://www.OptionInvestor.com/marketposture/071102.asp ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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