The Option Investor Newsletter Tuesday 07-16-2002 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) ************************************************************ 07-16-2002 High Low Volume Advance/Decline DJIA 8473.11 -166.10 8635.66 8406.45 2.11 bln 1211/1881 NASDAQ 1375.26 - 7.40 1407.59 1364.88 2.37 bln 1699/1766 S&P 100 448.81 - 8.36 457.90 446.70 Totals 2910/3647 S&P 500 900.94 - 16.99 918.65 897.13 RUS 2000 407.27 - 1.81 413.48 404.74 DJ TRANS 2434.10 + .30 2643.15 2652.64 VIX 42.05 + 2.75 42.85 39.95 VXN 67.94 + 0.09 69.38 66.57 Total UpVol 1,659.3M Total DnVol 3,011.8M 52wk Highs 65 52wk Lows 407 TRIN 1.10 PUT/CALL .76 ************************************************************* Intel Misses Estimates But Nobody Cares! The king of the chip sector, Dow component and Nasdaq big cap missed estimates by two cents and announced they were cutting another -4,000 jobs due to lowered expectations. INTC traded UP in after hours. Traders stood around the office in shock as we watched the time and sales roll across the screen. Simply amazing! The master spin-doctor of all time appeared to be CEO Craig Barrett. He spun the tale of a tough quarter and tough times ahead into a story about reducing costs and gaining market share despite a weak economy. Investors bought it and the market dodged a bullet. Chart of the Dow Chart of the Nasdaq Chart of the S&P The markets started the day off with economic numbers that were better than expected with Industrial Production soaring to +0.8% and Capacity Utilization growing slightly to 76.1%. Excellent numbers on the surface but the markets had something else on their mind. Greenspan took center stage at 10:AM with his state of the economy testimony. Traders were taking no chances for more bad news and the Dow sold off more than -200 points before the speech started. Greenspan made numerous references to an expanding economy despite the apparent slowness. This helped put traders more at ease and the markets came back to positive territory by midday. It was not to be however and they sold off again on worries of more corporate accounting problems and fear of Intel earnings. That fear obviously priced in significant bad news. When the bad news was announced there was no frantic sell off. Intel countered that they did not miss and instead hit their own lowered estimates. (spin) The -4,000 job cuts, drop in capex spending and reduced margins were just adjustments to help the company run smoother. Isn't that always the case? CFO Andy Bryant was cornered on CNBC and forced to admit that he "had no idea when/if a recovery would come in the PC sector". His answer was "we will keep reducing costs and protecting capacity until a recovery appears". He also admitted the estimates going forward depended on some recovery to prior sales levels. Don't hold your breath Andy! Motorola also announced after the close and posted the largest net loss ever. Their loss including charges for the 2Q was -$2.3 billion or -$1.02 a share. Excluding the charges which included everything but the company dog the company made a profit of two cents compared with an expected loss of four cents. Granted this is a bogus number since they can't write off a couple billion every quarter. The company posted sales losses in almost every division of -25% to -47% but managed to generate positive cash flow of about $520 million. Good job if they can keep it up! The chip unit posted a net loss of -$1.3 billion. PC news was flowing after the bell with Apple Computer posting earnings inline with their lowered guidance but they warned again for the current quarter. The company said consumer demand in the current back to school quarter was weak and demand in Europe and Japan was especially weak. Surely this weakness has not ignored Intel or IBM either. Remember, Andy Grove at Intel said their 3Q estimates were based on a possible uptick in sales for the back to school quarter. Maybe I am just too bearish but am I the only one that sees the indicators of a bad 3Q around every corner? Even the non-tech sectors are complaining. Caterpillar warned this morning that earnings for the second half would be less than expected due to a weaker than expected economic rebound that failed to boost capital spending. They said field agents continued to quote prices but nobody wanted to commit any money until the economy recovered and their own business picked up. Whirlpool said that its quarterly earnings rose about 20% but that full year estimates might be below analyst estimates for the full year. The problem is falling housing starts and they expect second half sales to be flat to +2%. Maytag also lowered guidance for the 2H on Monday with lowered sales expectations. Home product supplier Home Depot affirmed estimates this week but also said there was pressure on sales in May/June. We picked their competitor Lowes as a put play tonight due to falling sales in the sector and rumors about decreasing sales. One analyst in the office was in Home Depot over the weekend and was talking to an employee about the lack of customers. The employee said sales had fallen off -25% in the last month and there were simply no customers. When I was in HD two weeks ago there were clerks standing around everywhere in groups just waiting for somebody to ask for help. While this is pure speculation since I have no seasonal trend basis to compare this with it just seems like retail is grinding to a halt. Seasonal trends like back to school computer sales at the wholesale level confirm this and Maytag and Whirpool may be the leading indicators for the home sector. Housing starts for June are due out tomorrow morning. Several pension funds have filed suite against several banks including JP Morgan Chase to recover $318 million they lost in WCOM bonds in the weeks before the company disclosed the accounting fraud. This is the first of many such actions which will be taken by WCOM creditors hoping to find some deep pockets. JPM fought off liquidity rumors this morning to regain ground at midday but ended down -1.58 at the close. While I expect they have disclaimers three feet thick when selling corporate bonds this should point out that we are a long way from out of the WCOM woods. There will be losses surfacing on corporate balance sheets for months to come. Trading tomorrow is going to be exciting. Exciting in that we have no clue what traders are thinking but it appears they are ignoring bad news. You can't tell that by the -166 point Dow drop to 8472 but you can by the only -7 point Nasdaq loss. If everybody thought Intel would warn then why has the Nasdaq been the strongest index for a week? You can't tell me we all expected Intel to miss by two cents. Still the stock finished higher in after hours. I guess you would call it a relief that they did not paint a picture of gloom and doom like many of the current analysts. In my mind it was a good case of spin control but maybe retail investors have not thought this out. Also, according to Greenspan the biggest problem facing the markets is the accounting scandals still to come. If the ones we have seen recently are not bad enough then what is in front of us? The market dropped before his speech because they were afraid of what he was going to say. I don't know what they feared but his "irrational exuberance" speech still ranks up in the top five of all time and it was given when the Dow was at 6300. If they expected an "irrational pessimism" speech today they were disappointed. He agreed things were bad in the market but improving slightly in the economy. It was not the cheerleader speech many had hoped for. This means tomorrow the markets will be left to chew on the Intel spin and the prospect that IBM will make a bigger splash after the close. Fortunately for my sanity I see that the futures are dropping at 8:30 so maybe I am not the only one that saw a cockroach disguised as a butterfly. It was a major earnings miss and lowered guidance! Deal with it! I suspect also that the overseas markets will see our -166 point Dow drop and the Intel miss and not be bashful about selling off overnight. Of course that is just one traders opinion! Enter Very Passively, Exit Aggressively! Jim Brown Editor ******************** INDEX TRADER SUMMARY ******************** NEW RHYTHM TRADING ACTIVITY AND OUTLOOK - The volatility goes up, up, up and the market comes down, down, down. Well, per the chart at bottom, volatility is one of the strong trends around. If VIX was a stock I would buy it! See the VIX/VXN charts below. Also, see at bottom an example of how the Moving Average Envelopes Study can yield some dandy back and forth trading opportunities in "bellwether" stocks (e.g., ORCL), particularly with combined with the same "length" stochastic study. Love these market swings - so many trading opportunities, so little time! The market today traded about as I would have expected, technically, with the S&P and Dow going back down to support – making more of a "round trip" move, whereas Nasdaq gave back a percentage of its last run up - retracements were between 50 and 62%. With Intel reporting after the close tonight and being shy by 2 cents in earnings (9 vs. 11), we can assume that Nasdaq may well resume its weakness, maybe starting again to trade more in line with the S&P and Dow. The initial after-hours trade saw the stock stay fairly steady - no big sell off - but tomorrow is a new day! You know when a market is fully oversold - it stops trading sharply DOWN on disappointing or "bad" news. Art Cashin (my old PaineWebber colleague) on CNBC keeps talking about the how every rally "fails" (reverses) at the down trendlines. I talk about that too - only I draw my trendlines in TradeStation and Q-Charts, not on the back of cocktail napkins. Actually, using matchbooks (folded out for a "straight edge'), a pen, and drawing on a cocktail napkin works reasonably well! S&P 100 (OEX) Index - Daily/Hourly charts: Hope I'm not confusing you with TOO MANY trendlines, but what else does a technical trader have to do! The latest minor (down) trendline on the OEX hourly chart, turned or "deflected" the rally today at 458. Notice how these channels keep getting narrower and point down at a greater declining angle? Easy to see the "breakout" points here: 458, then 466 at the prior swing highs. Above these points, the first upper trendline (green one) comes in around 470 - that's a likely resistance too. Support can be assumed to be at the prior 436 low - until proven otherwise that is! I would gauge the support zone as 435-439. Then, if exceeded, at the low end of the steeper channel that I have been working with - which intersects in the 433 to 430 areas, over the trading day tomorrow; i.e., as the day goes on the intersection is at a progressively lower level. When these potential support areas are tested, unsuccessfully or not - and when BOTH stochastic studies are showing oversold extremes again, there will likely be another trade on the long side to buy calls. Trading the call side is trickier in this market - sometimes you need to "assume" support or that a turnaround will develop at the lower channel lines or on dips under them. You have to buy low – nothing new there! But you have to buy REALLY low. Shorting and buying index puts is not as "challenging" so to speak, as the ever-declining market has been eventually pumping up your puts even if you miss the highs by a bit. S&P 500 (SPX) Index - Hourly chart: Resistance levels - at the stair step recent (up) swing highs – are 919, then 934, extending to around 337. Support developed today in the 900 area, but with the current downside momentum SPX may well retest the recent intraday low in the 876 area. 868 is the current intersection of the lower channel line and is a next downside target to 870-868. If holding SPX puts, only a move above 913 tomorrow morning – would suggest a possible upside reversal. Absent that, the short side is staying with the trend. Dow Index (1/100: $DJX.X) - Daily/Hourly charts: The Dow looks header right down again. Only a move above 86 would suggest a possible upside reversal. 82.5 becomes a downside target, at the prior low. The pattern of moves to ever lower lows has become the "norm". Sometimes DJX will surprise us with the same or a higher relative low, making it important to watch prior bottoms. The 82.5-82.00 area is my next lower target if 82.5 gives way. I thought perhaps we had put in a "V" bottom, with the recent steep upside reversal. Given the weak action of today in the Dow sector, I now think that the "best case" scenario is for a sideways trend, with DJX holding above 82.5. The more bearish case - is there any other outlook in this market! - DJIA will retest its Sept low which is now not that far under the low for this current move. 8062 in the Dow, 80.6 in DJX, is the post 9/11 weekly low. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: There may be an emerging uptrend developing here - so far, there is only scant evidence of that, but it's a possibility that I highlight in the QQQ hourly chart above. This bullish possibility seems doubtful with the downside reversal in the Q's after the stock reached its "pivotal" 21-day moving average. A move back below 24.5 would suggest that the recent rally was too much to soon, as tech earnings look like they will continue to be disappointing ahead. Intel reported that they saw NO, repeat NADA, pickup in orders. In this climate it appears that traders/investors will not come back in a major way UNTIL they see the "whites of their eyes" - the chip buyers that is! The other factor in the limited upside potential for QQQ is that ALL the key "bellwether" Nasdaq stocks - INTC, CSCO, MSFT, QCOM, and ORCL turned down from technical resistance levels. There were not break out moves. MSFT, reporting after the Thursday close, may be the best "hope" for a bullish surprise, but that's a guess. If we keep heading south (lower), the Nasdaq indices will again be oversold by then at least. We have a slight disconnect in our daily and hourly stochastic models, with the Daily trending higher and the hourly models, moving lower. Well, the daily is slow to react. I gauge a close over 21-day moving average at 26, as being bullish - trade under 26 as indicating no change in the bearish trend. GENERAL MARKET INDICATORS - VOLATILITY INDICES If these two were "stocks" would you rather buy it or sell it? Looks like pretty strong uptrends! So, if volatility is on an increasing or upward trend, it may be that we are not at a bottom yet. The prior (intraday) peak in VIX in this time frame was at 57 post 9/11. The prior intraday peak in VXN was 92. Will one more "extreme" move, put us at the "capitulation" bottom? Or, are we near it already and maybe VIX/VXN won't reach the same extreme again? Stay tuned! VIX was at a new closing high tonight. ------------------------------------------------------------------ MINI-TRADER'S CORNER - QUESTION - Where do you have information on how to set up Q- charts with your moving average envelopes? ------------------------------------------------------------------ MOVING AVERAGE ENVELOPE SET UP AND METHOD -- In a Q-charts chart window with a chart displayed, right click will bring up "Studies" and from there select "Envelopes". Once the "envelopes" window is up, as long as study parameters are highlighted, "edit" will of course allow you choose the LENGTH of your moving average -- set to 21 -- and the Percent figure to whatever. I start with 3-4 percent and work up depending on what percent value will "touch" near the highs or lows most often on the back and forth Index price swings over the preceding weeks/months. As long as you have V4.2 of Q-charts I think it is, you can set one envelope percentage for the upper envelope line and a different value for the lower envelope line. However, even you can set only ONE (percentage) value there is an adjustment you can make. Explanation: On the Indexes sometimes the volatility on the upside is greater than at the last decline or vice-versa. So, even if only one percent value can be set for BOTH envelopes, above and below the "centered moving average", I simply adjust the envelope percent value depending on whether the index is above or below the moving average. Remember, in most applications, you don't "see" the moving average line when you apply the "moving average envelopes" study – however, you can also "insert" or apply a simple moving average at the same "length" you have in set in moving average envelope Study - then, you also see the centered line. When an index or stock is below the line, it might be necessary to INCREASE the percent value in a downtrend and DECREASE the percent value slightly in an uptrend in a bear trend in order to best capture the point are area where prices are at an "extreme" (relative to the moving average you're using). I've started experimenting with using envelope lines on individual "bellwether" stocks, such as ORCL within Nasdaq, that tend to trade in line with the indexes - result: I find some good trading opportunities using the Moving Average Envelope Study (centered moving average: 21) on hourly charts, for periodic short-term in and out trades, especially when combined with the longer stochastic study. Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ------------------------------------------------------------ WINNER of Forbes Best of the Web Award • optionsXpress voted Favorite Options Site by Forbes • Easy screens for spreads, collars, or covered calls • Free streaming quotes • Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ **************** MARKET SENTIMENT **************** You Had Me, Then You Lost Me By Steve Price This is certainly how the markets responded to Alan Greenspan's testimony today. A weak open turned into rally, albeit still in negative territory, but alas, it only lasted a short while before the bears took over. Today was the seventh straight drop for the Dow Jones, which came within a few points of its September closing lows yesterday, only to stage a furious rally. Today, however, was a different story. The Dow dropped 166.08 points to 8,473.11, while the Nasdaq held firmer, but still lost 7.36 points to 1375.26, and the S&P 500 matched the Dow's 1.9% drop to 900.94. Just before the open the Federal Reserve released figures, which showed a 0.8 percent rise in industrial production last month and a 0.5 percent increase in capacity utilization from a revised 75.6 percent in May, to 76.1 percent in June. In his testimony, Greenspan blamed corporate misdeeds for undermining public confidence, and endorsed strong measures to police and punish corporate fraud. The Fed Chairman attempted to pump us up by stating the fundamentals were in place for a return to sustained growth. Unfortunately, the only things that grew during the day were doubts, as the market awaited results from Intel. The Semiconductor Index ($SOX.X) was off only marginally as it maintained its holding pattern ahead of the earnings release. Better than expected earnings from GM, which beat estimates by a penny, and Johnson and Johnson, which came out 2 cents ahead of expectations did little to prop up the market. After the close, Intel released earnings, which missed estimates by two cents per share, however was only punished momentarily before trading up 0.26 to $18.62, Their announcement that they would be cutting 4,000 jobs seem to temper comments that guided expectations downward in the next quarter due to shrinking margins. It still doesn't sound very positive. With IBM set to release earnings tomorrow, it should be interesting to see whether similar bad news pushes the market south, or whether investors are as forgiving as they seem to be with Intel. This willingness to forgive bad news in the tech sector is interesting, given the current difference in bullish percent between the Nasdaq 100($BPNDX), which is in full bull confirmed status, and the S&P 500 ($BPSPX), which is still in bear confirmed status. The S&P Bullish Percent of 22 is in fact approaching similar risk to post September 11th levels of 16, while the OEX Bullish Percent is beyond the September 11th levels of 16, having reached 14. The Nasdaq, however, returned from its low of 8 percent all the way up to 28 percent and is approaching the 30 level, beyond where it will no longer be considered oversold. This combined with the fact hat the QQQ has just reached its bearish vertical count on the point and figure chart demonstrates a crucial point in the market. Is the fact that investors are forgiving the bad news in the tech sector a sign of bullishness to come? Or is it likely that investors ignoring good news from the S&P stocks and driving the market lower signals a change in which sector will drive the market in the future? ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 8473 Moving Averages: (Simple) 10-dma: 8922 50-dma: 9595 200-dma: 9823 S&P 500 ($SPX) 52-week High: 1316 52-week Low : 900 Current : 900 Moving Averages: (Simple) 10-dma: 940 50-dma: 1023 200-dma: 1096 Nasdaq-100 ($NDX) 52-week High: 2071 52-week Low : 946 Current : 1011 Moving Averages: (Simple) 10-dma: 1001 50-dma: 1137 200-dma: 1388 Semiconductor Index ($SOX.X) The semiconductor index has been in a holding pattern since the beginning of the month. The big announcements are here, though, and it should be an interesting week, beginning with Intel missing their earnings after today's close. 52-week High: dna 52-week Low : dna Current : 386.41 Moving Averages: (Simple) 10-dma: 372 50-dma: 443 200-dma: 509 ----------------------------------------------------------------- Market Volatility The VIX has closed over 40 for the first time since last September. Today it closed at 42.05, after reaching a high of 42.85. Don't expect to see the VIX drop very far until some of the uncertainty of this week's earnings is behind us. The markets continue to flirt with big down moves, and after Monday's 400+ point swing, volatility should remain elevated until we find a new range in the broader markets. CBOE Market Volatility Index (VIX) - 42.05 +2.75 Nasdaq-100 Volatility Index (VXN) - 67.06 -0.79 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.76 835,931 636,130 Equity Only 0.67 621,786 418,884 OEX 0.54 69,790 37,799 QQQ 0.53 105,139 55,847 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 37 - 4 Bull Correction NASDAQ-100 29 + 8 Bull Confirmed DOW 10 - 13 Bear Confirmed S&P 500 22 - 4 Bear Confirmed S&P 100 14 - 9 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 1.12 10-Day Arms Index 1.29 21-Day Arms Index 1.39 55-Day Arms Index 1.37 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 1259 1881 NASDAQ 1667 1695 New Highs New Lows NYSE 31 216 NASDAQ 71 178 Volume (in millions) NYSE 2,133 NASDAQ 1,978 ----------------------------------------------------------------- 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 Commercials gave back only 700 of their net long contracts, a small percentage change, maintaining a bearish position. Small Traders added back a couple of thousand contracts to their long position. Commercials Long Short Net % Of OI 06/18/02 437,530 487,956 (50,426) (5.4%) 06/25/02 378,214 438,775 (60,561) (7.4%) 07/09/02 396,321 456,164 (59,843) (7.0%) 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 06/18/02 181,178 88,517 92,661 34.3% 06/25/02 134,380 62,792 71,588 36.3% 07/09/02 145,017 71,402 73,615 34.0% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 Commercials added only slightly to their short position, maintaining the status quo. Small Traders reduced their long position by over 40%. Commercials Long Short Net % of OI 06/18/02 54,816 49,169 5,647 5.4% 06/25/02 27,238 35,926 (8,688) (13.8%) 07/09/02 31,227 39,592 (8,725) (12.3%) 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 06/18/02 20,883 29,153 (8,270) (16.5%) 06/25/02 14,749 7,570 7,179 32.2% 07/09/02 12,520 8,348 4,175 20.0% 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 brought their long positions back up to their previous levels, adding almost 2,000 contracts. Small Traders maintained their previous bullish levels. Commercials Long Short Net % of OI 06/18/02 25,995 19,115 6,880 15.1% 06/25/02 18,016 13,255 4,761 15.2% 07/09/02 20,761 14,122 6,639 19.0% 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 06/18/02 5,379 11,813 (6,434) (37.2%) 06/25/02 6,414 6,597 183 1.40% 07/09/02 6,831 6,623 208 1.50% Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's • optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's • 8 different online tools for options pricing, strategy, and charting • Access to options specialists via email, phone or live chat online • Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ *********************** INDEX TRADER GAME PLANS *********************** THE SECTOR BEAT - 7/16 The Airlines ($XAL.X) may be putting in a double bottom low – heaven help us when the only sector we can find to play is Airlines! Biotech ($BTK.X) was higher on the day, but did stop after moving up into resistance - stay tuned. The Biotech HOLDR's seemed to lag the index. Fiber Optics ($FOP.X) may have finished its "dead cat" bounce. Disk Drive makershave been improving until today when DDX reversed at 70 resistance. UP THE MOST on Tuesday - DOWN THE MOST on Tuesday - Home builders continue to correct off their "over-inflated" (my opinion) highs - looks like a rounding top on the chart ($DJUSHB.X) - with Defense, Gold, Oils, Health Providers and Small Caps no longer going up, is there no place to "hide" - to bury some paper with pictures of dead presidents on them!? Networking sector stocks ($NWX.X) also may have completed its bounce as it hits resistance at its upper channel line. Drug stocks ($DRG.X), unimpressed with the latest merger news with Pfizer and Pharmacia, is at least at the low end of its steep downtrend channel and could have a dead cat bounce any day now – maybe the shorts will all decide to take their profits at once! Retail stocks ($RLX.X) turned down again today - maybe consumer confidence will wane enough to cause consumers to leave their plastic at home. The best recent sector rebound was in the Semiconductor sector index ($SOX.X), but as the chart below suggests - its tough going from here! SECTOR TRADE RECOMMENDATIONS & REVIEW - NEW TRADE RECOMMENDATION(S) - NONE OPEN TRADE REC(S) - NONE ------------------------------------------------------------------ OPEN POSITIONS - Long HHH at 21.50 (Internet HOLDR's) RIASE STOP to 21.2, from 20.00 Long SMH at 28.30 (Semiconductor HOLDR's) RAISE STOP to: 28.7, from 27.00 ------------------------------------------------------------------ TRADE LIQUIDATIONS - NONE ------------------------------------------------------------------ SECTOR HIGHLIGHT(S) - Semiconductor Sector Index ($SOX.X) STOCKS: AMAT; AMD; CMOS; CREE; IDTI; INTC; KLAC; LLTC; LSCC; LSI; MOT; MU; NSM; NVDA; NVLS; PMCS; RMBS; TER; TXN; XLNX We're still in need of a close above 405 to suggest a bullish break out more of a substantial rebound in the SOX. We appear to have significant resistance in the 405 and a bit above - today's high was 407.6 - and support in the area of prior lows in the 344 area - if the SOX continues to stay above this level, there is a double bottom in place, relative to the September low. Recent action is a minor 405 double top and a minor double bottom hourly low around 344. What likelihood of a breakout either way? Hard to tell - my best guess is that the SOX may trade sideways for a time, building a support "base", from which it could then launch a move higher. Stay tuned! - one thing we know for SURE is that this Index really moves when it gets going in a trend. UPDATE: 7/16 Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ------------------------------------------------------------ We got trailing stops! • Trade online with trailing stops at optionsXpress, at no extra cost • Trailing stops based on the option price or the stock price • Also place Contingent, Stop Loss, and "One Cancels Other" orders • $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. 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The Option Investor Newsletter Tuesday 07-16-2002 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: ***** INTU $46.59 +0.32 (-1.17) It’s been a volatile week for INTU so far. That volatility produced a breakdown below trend during yesterday’s wild session, which has us concerned for further weakness. Look to exit open positions into any strength during tomorrow’s session. PUTS: ***** LM $43.10 +0.54 (-0.15) It’s time to book our profits in LM after the stock has shown some signs of bottoming in the last two sessions. Look for another rollover from the $43 level as a chance to take gains into weakness below current levels. Or look to set a tight stop above the $43.50 level to protect against a short squeeze. --- RE $50.26 –0.64 (-1.10) RE has treated us very well since we started the play. The stock has shed another –1.10 so far this week, which is enough to take to the bank. Look for further weakness in tomorrow’s session to exit into. A tight stop above the 10-dma should protect against the upside in the stock. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue INTU 46.59 -1.49 0.32 Dropped, technical damage done Mon. NVDA 21.35 1.98 -0.54 Solidly above the $20 resistance EMC 9.00 0.55 -0.10 Trending higher, new relative high OMC 52.23 -1.01 0.80 Positive finish in a negative day EMC 9.00 0.55 -0.10 Close play on Wed - Earnings Thurs OMC 52.23 -1.01 0.80 Strong despite market weakness PUTS XL 76.88 -0.65 -1.22 New relative low in standing trend AMGN 32.87 -2.20 1.80 Bounced on merger news, entry point LM 43.10 -0.69 0.54 Dropped, showing signs of basing MRK 44.01 0.15 -1.69 Rolled over from the 10-dma again RE 50.26 -0.46 -0.64 Dropped, taking gains off the table PHCC 20.25 -0.36 1.10 Entry point after short covering BJ 33.80 -0.53 -2.17 Broke down below long-term support SBC 29.57 -0.13 0.06 Trending lower, entry near 10-dma VZ 35.00 -0.15 -0.15 Boost from NXTL news, entry point? INVN 27.07 2.72 -0.80 New, ready to rollover from 200-dma CI 86.33 -0.95 -1.97 New, health care coming under fire LOW 37.60 0.82 -3.40 Weak chart, weak retail sector ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity • No hidden fees for limit orders or balances • $1.50 /contract (10+ contracts) or $14.95 minimum. • Zero minimum deposit required to open an account • Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************** PLAY UPDATES - CALLS ******************** NVDA $21.35 –0.54 (+1.45) NVDA rocketed off of its curling 10-dma in yesterday’s session following the broad rebound in the technology sector of the market led by the semiconductor group. The stock finally broke decidedly above the $20 level and continued higher into today’s session. NVDA’s intraday high was traced at the $23.35 level, which made it a solid move in the last two days, one that could have possibly produced a good short term trade for swing traders. The stock did pullback along with the broader market, but it’s now in a bullish technical position in which dips can be bought. Look for a pullback down to and rebound from the $20 level which should now serve as support on the way back down. Look for clues to the sentiment in the chip sector following INTC’s earnings report tomorrow in the way that the SOX opens. A contained pullback should lead to a solid entry into new NVDA plays. --- EMC $9.00 –0.10 (+0.45) EMC has continued its upward climb of the last week. It touched $9.41 today, and may experience a bump tomorrow. The market has refused to sell off (after hours) after Intel's earning's release, which missed estimates by 0.02, and announced plans to cut 4,000 jobs. Goldman Sachs commented that it believes EMC should be able to beat estimates in the June and September quarters, and that it is still emerging as a leader in a more positive IT spending environment. They also made positive comments about storage market pricing in June. EMC has had a nice run from $6 up to $9 for a 50% increase in price. Not all traders follow the 100-dma but we noticed shares have stopped dead right at this level of technical resistance. Then again it happens to coincide pretty closely with the $9.00 level. We will be closing this play tomorrow ahead of Thursday's earnings. An intra-day rise in price would be a good opportunity to close out the position, however it should be closed by the end of the day tomorrow. --- OMC $52.23 +0.80 (-0.21) Omnicom has continued to hold its impressive gains from last week, in spite of two straight down days in the market. While it dipped below $49 yesterday as the market sagged to its intraday lows, OMC recovered nicely and continued its upward move today in spite of the sell off. OMC traded as high as $54.25, which exceeded last week's highs, before being brought back down as the Dow dropped today. The stock remains in an upward trend, as it recovers from its oversold conditions due to accounting problems, which were addressed at the beginning of last week. OI adjusted our original stop up to $49.45, and this will remain in place (please remember that OI uses stops on the equity on a closing basis - not an intraday basis). If the broader market overcomes news by Intel, as it appears to be doing, and heads upward, OMC should continue to seek out new recent highs. Remember that short-term traders may want to seek exit points near the $55 level while OI will continue to aim for the $58 area. We did note that the move over $54 today helped create a new higher column of X's on the PnF chart. That's always a good sign for bulls. ************** NEW CALL PLAYS ************** None ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's • $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees • Easy screens for spreads, collars, or covered calls! • Contingent, Stop Loss, Trailing stop, or OCO • 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************* PLAY UPDATES - PUTS ******************* XL $76.88 –1.22 (-1.87) XL fell lower in today’s session on renewed selling in the broader market. The stock actually traced a new relative low in its long standing descending trend. That new low was hit at the $75.30 level in today’s session on a large increase in declining trading volume. The stock could have one or two more downside days this week if it continues along its recent short term trend of falling then rebounding on short covering. Look for further weakness below current levels in the coming sessions, possibly down to the $73 or $74 levels for a potential exit point to lock in some of the gains that we’ve captured in this stock. New entries should only be taken on a rollover from resistance, which in the case of XL, comes into play up near the 10-dma, which closed today at the $79.62 level. The 10-dma should move lower in the next two sessions to account for the most recent drop in price. We’re lowering the stop to $79.50, which will be above the 10-dma most likely by tomorrow. --- MRK $44.01 –1.89 (-1.54) MRK’s trip up through its 10-dma during yesterday’s recovery in the broader market proved to be a short lived move on what was most likely short covering in the drug sector as others in the group moved higher as well. But MRK was unable to hold onto its gains for the day and gave back more during today’s session when it followed the Dow measurably lower. From here we’re looking for a retest of the recent lows down around the $42 level which could come in the next session or two if the selling continues in the drug space. Look for a breakdown below today’s intraday low at the $43.75 level for a possible entry point into further weakness. Additionally, future rollovers from the 10-dma should produce solid entry points into new put plays. The 10-dma finished the day’s session at the $46 level. --- PHCC $20.25 +1.10 (+0.75) PHCC continued slightly higher in today’s session. But the one thing that was missing from the upward movement was volume. The stock traded only 532 K shares during today’s session, which is far below the one million plus share days that we have witnessed in the last few sessions. The light volume and higher price suggest that today’s strength was most likely a result of short covering. The strength in other health care areas such as the biotech sector most likely helped the short covering along in PHCC, but that most likely set up another good entry into put plays as the stock is now near short term resistance. Look for a rollover from current levels in tomorrow’s session, with confirmation coming on a break back below the $20 level. --- BJ $33.80 –2.17 (-2.70) BJ fell further in today’s session on renewed selling in the broader retail space. The stock appears to have entered a full fledged breakdown below all short term support and it appears that BJ has entered into a new short term declining trend. The stock doesn’t have any longer term support to speak of immediately below current levels until the $30 mark where it bounced from during last fall’s sell off. The stock could quickly make its way down to that level with the 200-week moving average now solidly broken to the downside. Look for momentum entries on a break below the $33 level on the way to the $30 longer term support. We have lowered the stop to just above resistance at the $36.05 level. Rollovers from $35 would also offer good entries into new put plays. --- AMGN $32.87 +1.80 (-1.43) Anyone who doubts we are currently experiencing jittery, volatile markets only needs to look at the trading in AMGN over the past 2 days. Yesterday's late-day slide on the news that the company had completed its acquisition of IMNX was promptly reversed this morning. In a pre-market note, Merrill stated that AMGN might have a marketing opportunity to promote its Arenesp treatment against JNJ's Eprex due to a change in Eprex's mode of delivery. That gave the bulls a shot of adrenaline that helped them to propel AMGN up near the $34.50 level before the sellers re-emerged in the afternoon, knocking the stock back under $33 at the close. Sure enough, rallies are nothing more than entry points to the downside. What is particularly impressive about AMGN's slide is the fact that it happened in the face of the Biotechnology index (BTK.X) continuing to rally from the level of last week's lows. Use failed rallies near the $34.50-35.00 resistance level to initiate new positions, keeping in mind that a close above $34.50 will stop us out of the play. Earnings are scheduled for release next Wednesday, so there is a one-week fuse on the play. --- SBC $29.57 +0.06 (-0.07) There's one thing that can be said about our SBC play. It has gone nowhere fast! The past 2 days have seen the stock gap lower and then recover in the afternoon, but the daily range has been really tight. Rallies are being capped just above the $30 level, while buyers are supporting the stock whenever it dips much below the $28.75 level. The closest thing we've seen to an entry point into the play was today's rollover from the $30 level in the final 90 minutes of the day. Keep in mind that this isn't so much a technical trade as it is a play on the expectation that the company could be a winner in the bid for either Worldcom or Qwest. Either acquisition would come riddled with debt and a host of financial problems to deal with and that news would likely send SBC sharply lower. Continue to use failed rallies near the $30 level to initiate new positions or else wait for a decline under the $28 level before playing. Our stop remains at $31.25. ************* NEW PUT PLAYS ************* CI - CIGNA Corporation $86.33 -1.97 (-2.92 this week) CIGNA is an employee benefits organization in the United States. The company and its subsidiaries are major providers of employee benefits offered through the workplace, including healthcare products and services, group life, accident and disability insurance, retirement products and services and investment management. My, how the mighty have fallen. It wasn't that long ago that the OIN Call list was well-populated by Health Care related stocks, but the past month has been rough on this recently high-flying sector. Since the middle of June, the Health Care Payor index (HMO.X) has retraced fully 62% of its parabolic rise from the March lows. A quick look at the daily Stochastics shows just how weak this area of the market is, as it hasn't been able to get into overbought since the second week of June. Shares of CI have been faring even worse, as they have more than retraced the entire March-June rally and closed Tuesday's session having retraced 62% of the rally off of the September lows. Will the stock completely retrace that rally like so many other stocks have? Its hard to say, but the action this week certainly points in that direction. The $88 level had been holding as support ever since last December, but that level is now just another failed support level, which is likely to act as resistance in the future. Buyers attempted to prop the stock up on Tuesday after Monday's late-afternoon ramp, but to no avail. Sellers once again prevailed, adding yet another data point that tells us rallies in this stock are simply attractive entry opportunities for puts. We are hoping to get another oversold bounce to allow us to enter the trade before the bottom falls out again. Look for a failed rally near the $88 level or a more robust rally to the $90-91 area. We're setting a rather wide stop at $91.50 to prevent being shaken out in what promises to be a wild expiration week. Momentum traders will want to see the $85 level fail as support before playing. Our initial profit target will be the $82 level, although it is entirely possible to see a decline down to the $75-77 area if the HMO sector continues to languish. Earnings are slated for release on August 2nd, so we have a good 2 weeks top play the downside ahead of the announcement. BUY PUT AUG-90 CI-TR OI=112 at $6.30 SL=4.25 BUY PUT AUG-85*CI-TQ OI=207 at $3.50 SL=1.75 Average Daily Volume = 803K --- INVN – InVision Technologies $27.07 -0.08 (+2.69 this week) InVision Technologies is a provider of FAA-certified explosives detection systems (EDSs) used at airports for screening checked passenger baggage. The company's EDS products are based on advanced computed tomography (CT), which is the only technology for explosives detection that has met the FAA certification standards. INVN was the first manufacturer and is one of only two whose EDS products have been certified by the FAA for screening baggage. Through the end of 2001, the company had shipped 18 EDS units for installation at United States airports and 103 units for installation in airports outside of the United States. Remember the peace dividend when the Soviet Union crumbled? Well, the expected surge in defense and security system spending in the wake of the terrorist attacks last September could likewise be called the terrorism dividend. Certainly it was a disastrous development for all those touched by its impact, but it provided the springboard for many stocks to go ballistic. With its lock on the airport security explosives detection equipment market, INVN launched from relative obscurity pre-9/11 to the $50 level by the middle of March. Well, based on the recent price action, it appears that investors aren't nearly as enamored of the stock as they once were. After selling off hard in the spring, INVN finally found support near the $18 level 2 months ago and has been gradually clawing its way back. In fact, the stock broke out above the $25 resistance level yesterday on news that the company had upped its earnings guidance. Adding to the bullish tone, INVN is being added to the Russell indices. So why is it on the Put list, you ask? Simply put (pun intended), it looks like all the bullish news has been factored into the stock and we're looking for it to run out of steam. The increased guidance depends on funding actually coming through, and there is a general worry about funding in the Defense sector that the money that has been promised may not be as easy to get or as quick to arrive as originally anticipated. Note that the stock rallied this morning, but gave it all back after impacting the top of the late-April gap and the 200-dma near $27.40. We're looking for the stock to roll over near current levels and retest major support near the $23 level ahead of its earnings report on July 23rd (next Tuesday). Initial stop is set at $30. Any failed intraday rally between the current price and our stop would make for an attractive entry, although we would be content with a rollover from current levels as well. BUY PUT AUG-30 FQQ-TF OI=129 at $4.90 SL=3.00 BUY PUT AUG-25*FQQ-TE OI=275 at $1.90 SL=1.00 Average Daily Volume = 1.69 mln --- LOW – Lowe's Companies, Inc. $37.60 (-$3.40) With 2001 sales of $22.1 billion, Lowe's Companies, Inc. (NYSE: LOW - News) is the world's second largest home improvement retailer. Headquartered in Wilkesboro, N.C., Lowe's is a Fortune 100 company and the 14th largest retailer in the United States. Lowe's has 110,000 and more than 800 stores in 43 states. (Source: company release) The retail sector has taken quite a beating lately, and Lowe's is no exception. In spite of some positive comments about taking away market share from Home Depot, it's been bad news all around for Lowe's and the other retailers. The Redbook Retail Sales Average, which represents same-store sales at discount, department and chain stores, declined 0.6 percent last week, and the UBS Warburg/BTM Weekly Index, also based on chain store sales, lost 0.3 percent. Much like the Retail Index ($RLX), Lowe's has fallen through support, in spite of attempts to pick itself up along with the rest of the market during yesterday's afternoon rally. Lowe's opened down and did not experience much of a rebound with the rest of the market during Alan Greenspan's testimony today, as it opened down and continued onward throughout the day. Lowe's had been in a slowly descending channel since the end of May, but fell completely out of that channel the last few days. Lowe's has broken through prior resistance in the $38-$39 range from the middle of last year, which often serves as support on the way down. After flirting with its 21 and 50 day moving averages since the middle of January, it is now below its 200, 50 and 21 day moving averages. Volume has increased on the way down, which is bearish, as today's volume was almost three times the 90-day average. The recent decline in the U.S. Home Construction Index ($DJUSHB) also does not bode well for Lowe's, which thrives on home improvement. As Wal-Mart, Home Depot and Sears also continue their heavy declines, Lowe's looks to have little support before the $32 area. OI feels $37.25 would trigger an entry point. Any attempt Lowe's has made to fill its gap down last week from $43.15 to $40.25 has met resistance. Set stops at $40.60, just above today's high. BUY PUT AUG-40*LOW-TH OI= 1528 at $4.20 SL=2.20 BUY PUT OCT-40 LOW-VH OI= 2785 at $5.20 SL=3.00 Average Daily Volume = 4.44 mln ------------------------------------------------------------ WINNER of Forbes Best of the Web Award • optionsXpress voted Favorite Options Site by Forbes • Easy screens for spreads, collars, or covered calls • Free streaming quotes • Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. 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The Option Investor Newsletter Tuesday 07-16-2002 Copyright 2002, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. ********************** PLAY OF THE DAY - CALL ********************** NVDA – NVIDIA $21.35 –0.54 (+1.45 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 NVDA rocketed off of its curling 10-dma in yesterday’s session following the broad rebound in the technology sector of the market led by the semiconductor group. The stock finally broke decidedly above the $20 level and continued higher into today’s session. NVDA’s intraday high was traced at the $23.35 level, which made it a solid move in the last two days, one that could have possibly produced a good short term trade for swing traders. The stock did pullback along with the broader market, but it’s now in a bullish technical position in which dips can be bought. Look for a pullback down to and rebound from the $20 level which should now serve as support on the way back down. Look for clues to the sentiment in the chip sector following INTC’s earnings report tomorrow in the way that the SOX opens. A contained pullback should lead to a solid entry into new NVDA plays. Comments Judging by the after hours response to the INTC earnings report, the chip sector may be ready to run higher. The group has led the tech sector so far. NVDA is one of the leaders in the chip sector and is showing strong technical improvements coming off of its recent lows. Look for a pullback to the $20 level if the chip sector is under pressure early tomorrow morning. The stock should rebound higher from that former resistance level and trace a new high in its recent trend. BUY CALL AUG-17 UVA-HW OI=2268 at $5.00 SL=3.50 BUY CALL AUG-20 UVA-HD OI=1678 at $2.05 SL=1.75 BUY CALL AUG-22 UVA-HE OI=2456 at $1.25 SL=0.75 Average Daily Volume = 11.2 mln ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's • optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's • 8 different online tools for options pricing, strategy, and charting • Access to options specialists via email, phone or live chat online • Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** TRADERS CORNER ************** MOCO - Phase I Complete by Mark Phillips mphillips@OptionInvestor.com This crazy market is getting into a nasty habit of making me change course as to my writing goals on a daily basis. First off, let me apologize for my absence in the Trader's Corner slot last night. Shortly after the closing bell, fate frowned on me and crashed my computer. After several hours of major surgery on my workstation, I was open for business again, but too late to finish the article in time for publication. It is truly frustrating when that happens, especially when I think I've hit on a topic that is so timely. So we juggled priorities and decided to post the finished article tonight. Ah, but fate intervened again! With the VIX spending so much time over 40 and today finally closing over 42, I've had a flood of emails asking loads of great questions about the fine points of my MOCO strategy. So yesterday's article is postponed yet again, so that I can answer the more pressing questions. Tomorrow night, we'll finally run yesterday's intended article, which deals with the topic of secular vs. cyclical markets. I think you'll find it worth the wait. And now let's transition to the topic that seems to be on everyone's mind, my much-ballyhooed MOCO trade. The bulk of the questions seem to center on the issue of what is deemed an acceptable entry, at least into the first stage of the strategy. Let's get it right from the horse's (reader's) mouth, ok? "Mark, I have been following your MOCO strategy, and before you initiated your advance decline recommendation I would have said yesterday when the Dow reversed on a VIX of about 43, was a perfect time to initiate the 1st 10% play. But the adv decline line did not confirm in any way I could tell, so I did not initiate the play. I fear that was a mistake and that we have seen the lows for the DOW, but maybe not. Have you opened a MOCO play yet? If not can you please tell me what you are looking for, and how us mere mortals can detect a decent entry for a MOCO play? Signed, Confused" Mere mortals, huh? Careful, I'm liable to get an inflated ego! (BIG GRIN) I'll cut right to the chase and tell you that we're there. Yesterday's rebound off the lows had all the earmarks I was looking for in order to trigger my allocation of that first 10%. At its worst, the DOW was down more than 400 points and the rebound came right at the closing low from September. Prior to the bounce, the ADVDECV.NY indicator was showing more than 90% of all the volume so far was on the sell side. While we got a nice reversal into the close, nearly moving the DOW back into positive territory, we still ended the day with down volume swamping up volume by nearly 800 million shares. Still a very negative day. But at the point where I would have considered the optimum entry, the VIX was recovering from an extreme near 44, a strong buy program had kicked in and the ADVDECV.NY indicator was seeing its first meaningful reversal of the day. The chart below should demonstrate what the picture looked like shortly before 3pm ET. 5-Minute Chart of the DOW vs. ADVDECV.NY for July 15th But that's where the easy part ends. Now we get into the mode where we are looking to fill out the remainder of the trade. "But wait a minute", say the advanced students. In order to satisfy the next entry target, the VIX needs to be higher (above 45). Won't that mean price is lower? Bingo! I really like the way another reader phrased the question, so let's take a look at what he sent me earlier today. "I really like the organized approach you have taken to the MOCO trades coming up. I have a few questions though. If entering phase 1, your last note said that not only must VIX be above 40, but the market must turn up. This sounds contradictory to getting into phases 2-5. If the market turns up, the probability could be hi of never seeing the other phases entered, but if it keeps going down, you'll never enter phase 1 - unless you actually enter it at VIX level 45. Did I miss something here? Are you now in phase 1? Paul" Paul has captured the essence of what MOCO is all about. Let's walk through the MOCO strategy step by step here and see if we can't shed some light on the questions raised above. Ideally, we would like to get a VIX reading of 58 or above with the DOW at major support and then a light would go on telling us that was the time to buy. We could apply all of our capital available for MOCO to buying distant month OTM calls and hang on for the snap-back rally. Unfortunately, the market isn't nearly that cooperative. The current decline will end in fits and starts in an attempt to leave as many eager bulls on the sidelines as possible as the next bear market rally gets underway. We don't know whether the VIX will top out at 42, 47, 51 or if we'll get the whole enchilada, with the VIX running as high (near 58) as it did in September. If it does go that high, our rubber band is going to be stretched fearfully tight and the rally back from that level will likely be fierce and volatile. At the same time, only the boldest of souls (or those with a solid action plan in place in advance) will be able to pull the trigger to go long. But the market could begin the next rally at a VIX of 47. If it did that, we don't want to be left waiting on the sidelines, waiting for a VIX of 50 before committing capital to the trade. By the same token, we don't want to allocate all of our capital the first time the VIX tops 40. That would make for a long, painful slide if the VIX then went over 55 before the final reversal. So here's how it works. The VIX goes over 40 and we get a decent rebound as shown above. That's where we allocate the first 10%. Then we sit and wait until the next trigger (VIX > 45) is triggered. This will almost certainly occur at a lower price level than where we allocated the first 10%. But when we get that VIX above 45, we allocate another 15%. At that point we have 25% of our MOCO capital invested in the trade. On one hand, we'd like to see the markets rally from that point, but on the other hand we would like to be able to put more of our cash to work. The difficult part of this trade is having the confidence that if the VIX goes to 55 or higher, the market will snap back strongly. The greatest bang for our buck comes from the higher levels of the VIX and that is precisely why the majority of our capital (55%) is invested after the VIX moves above the 55 level. But if you are going to pursue this strategy, you must be prepared for the reality that money invested at VIX=40, VIX=45 and VIX=50 will be showing a loss at VIX=55. This strategy must be implemented with 100% risk capital, because stop losses are not an option. So let's recap where I'm at right now. Phase 1 is complete and I am patiently (well, sort of...) waiting for a VIX over 45 so that I can implement Phase 2. If the VIX stops rising at 47 and the markets head off in rally mode, then I'll ride the recovery with only 25% of my available capital committed to the trade. In that scenario, Phases 3-5 will never come to pass and I'll have to settle for what I get. If Phases 3-5 do come to fruition, I'll be able to allocate all of the cash I have set aside for the trade, but will have to grit my teeth as the market grinds lower before finding that elusive bottom. I know I didn't give a clean closed-form answer to each of the answers raised by the many emails I received today, but hopefully I managed to fill in enough of the blanks that the entire process now makes sense. If not, feel free to drop me a line and I'll do what I can to elucidate. As a final note, if any of this commentary seems completely foreign to you, then that means you missed the earlier articles on the topic. For your convenience, here are the links to those articles. Happy reading! http://www.OptionInvestor.com/traderscorner/062402_1.asp http://members.OptionInvestor.com/options101/062602_1.asp http://members.OptionInvestor.com/options101/071002_1.asp Have a great week! Mark ------------------------------------------------------------ We got trailing stops! • Trade online with trailing stops at optionsXpress, at no extra cost • Trailing stops based on the option price or the stock price • Also place Contingent, Stop Loss, and "One Cancels Other" orders • $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************ MARKET WATCH ************ Will the volatility continue? Look for the these two new watch list candidates to benefit from such movement. To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/071602.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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