The Option Investor Newsletter Thursday 07-18-2002 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) ************************************************************ 07-18-2002 High Low Volume Advance/Decline DJIA 8409.49 -133.00 8621.95 8404.43 2.02 bln 1024/2138 NASDAQ 1356.95 - 40.30 1395.29 1356.80 1.80 bln 1025/2334 S&P 100 441.28 - 12.40 454.56 440.74 Totals 2049/4472 S&P 500 881.56 - 24.48 907.80 880.60 RUS 2000 396.71 - 12.98 409.69 396.71 DJ TRANS 2382.60 - 29.20 2435.12 2378.90 VIX 39.95 + 0.15 41.33 38.24 VXN 63.61 + 0.38 65.38 62.61 Total UpVol 677.7M Total DnVol 3,322.1M 52wk Highs 66 52wk Lows 436 TRIN 1.29 PUT/CALL .93 ************************************************************* Super Thursday! For a day that started with five hours of pure boredom the close proved that investors were not as convinced in their heart as they were in their mind that Microsoft would beat the street. The markets not only sold off into the close they accelerated as investors raced to avoid a negative surprise from MSFT, SUNW, EBAY, GTW and NT. The actual earnings were a mixed bag but the market internals at the close were very lopsided. Chart of the S&P/Dow Chart of the Nasdaq The day started off good with jobless claims coming in at an 18 month low. That was the end of the good news. The Philadelphia Fed survey crashed with a drop from 22.2 in June to only 6.6 in July. This was significantly below the 18.0 analysts expected and the lowest number since December. Analysts tried to spin the release saying it was still positive and still represented an expansion of the economy. It does not take a rocket scientist to see that a drop from 22.2 to a seven month low just over zero is a stark change in direction. This weighed on the markets as the possibility of that double dip grows larger. The conference board Leading Indicators were also flat and indicated the expansion could have topped. This news weighed on the market along with the fear of negative earnings surprises tonight. The market traded in a very narrow range until 2:PM and then the bottom fell out. Had it not been for the MSFT bulls holding up the stock in the morning and indirectly the Dow and Nasdaq it could have gotten much worse. At the end of the day the up volume across all exchanges was only 677 million compared to 3.3 billion of down volume. For a day that was flat until 2:PM it proves how narrow the bullish support really was. The after hours earnings parade was led by several of the giants in the tech sector. Microsoft announced earnings of $.43 cents that beat the street by a penny but included several charges not previously announced. There was a lot of discussion in whether it was actually a beat or possibly a serious miss but the revenue numbers outweighed the decision. They beat the $7.08 billion revenue estimate with $7.25 billion. They affirmed on the surface the numbers for the next quarter and revenue just barely under estimates. The preliminary outlook was still cautious. They said the environment remained very challenging which has become a familiar refrain. MSFT traded down about $1 in after hours. SUNW announced earnings that were inline with estimates at a penny and broke a string of losses for the last four quarters. SUNW was optimistic and stressed gains in market share and sales of low end and high end servers. They predict a slight loss next quarter due to very strong competition for sales that reduced selling prices in the current quarter. They said their intention is to take market share and return to profitability later. The shares were down -15% to $4.90 from $5.80 in early trading. EBAY posted results of $.19 cents and inline with estimates but guided analysts slightly lower on revenue for the next quarter. They affirmed earnings despite the lower revenue. Meg Whitman said they hoped to see a rebound in the economy in early 2003. The current weak economy is hampering their ability to grow despite hitting estimates. Investors fear the "fad" will burn out eventually and the very high PE will drop back to more realistic levels. EBAY is being added to the S&P at the close on Friday and will be added as a put play on OIN on Sunday. GTW missed estimates by two cents when they announced a -.19 cent loss after the close. They expect conditions to remain challenging for the rest of the year and they are pinning their hopes on a sudden back to school buying binge in August. Don't hold your breath! The CEO said he was gaining share in the marketplace, which I am sure is news to Dell. He was pressed with questions about what they were having to do to gain this share and the answer was price. They are constantly cutting prices to undercut the bigger players which means their margins are shrinking. They were confident the business was going according to plan and would continue to improve. Let's hope they are right because Steve Jobs said yesterday he saw no recovery in the PC sector for AT LEAST nine months. PMCS beat the street by a penny. VTSS reported earnings inline with estimates and said it would cut -200 more jobs to curtail research expenses and consolidate facilities. Cypress Semi (CY) beat the street by two cents on the third quarter of sequential revenue growth. XLNX reported earnings inline with estimates and said they saw continued steady sales of new chips. Reading between the lines on the semi earnings above, it appears the chip sector is actually seeing a rise in bookings. Nobody said they saw a jump but all said they were seeing business improve. Despite the gloom and doom that appears to be covering techs I think this is a positive light at the end of the tunnel. The Book-to-Bill numbers will be out on Friday. SMH calls anyone? The IBM spin results continued to amaze. The stock ran to over $74 intraday before closing at $72.11. Despite the post earnings bullishness the stock may suffer from clearer heads next week. The comments about a slowdown in the global services business as well as profits from the currency impact has thrown a cloud over their future. The dollar is not expected to fall much more but the services appear to be suffering. ADP dropped nearly -25% after warning of slower growth and weak economic conditions. This was the first quarter in 40 years that ADP did not grow in the double digits. EDS dropped another -1.50 on fears of shrinking services contracts. PAYX fell -3.72 on the same fears. There is a good possibility IBM will end up back on the put list on Sunday as well. AOL took another hit at the close with the resignation of Pitman as the CEO. This may actually be a positive as it ends the speculation about when/if it was going to occur. AOL is suffering from a drop in advertising revenue and the growing DSL market. Once you are on DSL you don't need AOL and with the bloom off the Internet surfing boom AOL is struggling to maintain dialup accounts. AOL traded under $12 at the open as the result of two separate newspaper stories. The Washington Post called their accounting into question and said they pumped up revenue to appear better than actual. Analysts have been making a big deal out of the results of the current round of earnings. According to First Call of the first 125 S&P companies to report earnings 76 have beaten estimates, 36 reported inline and only 13 missed estimates. While that may look good on the surface we need to remember that nearly all of those companies have been guiding lower for the last three quarters. The bar is so low a snake could cross it! What is not reported in these stories are the number of companies lowering guidance for the next quarter and that is most of them. A year ago analysts were projecting earnings growth for the 2Q of +113%. In December they were still projecting +38% growth. In April those estimates had dropped to only +4% growth. The current estimates for the 3Q are +16% growth and according to First Call need to come down to a more realistic +1% growth. With the constant negative guidance from reporting companies these earnings downgrades should start to appear quickly. With the market pause yesterday there were many traders who quickly got their hopes up that a bottom had been seen and a rebound was underway. Most would be surprised to learn that in the last five days there has only been two S&P-500 stocks that hit a new 52-wk high. The advancing S&P stocks on Thursday were 65 to 428 declining. This is not a picture of a rally in progress or even of consolidation in progress. The Russell-2000, normally a leading indicator of any broad market rally, has lost more than -65 points since the reshuffle highs on June-30th, nearly -15% of its value in three weeks. It closed today at 397.47 with a loss of a whopping -12.98. While I applaud the positive comments from the semiconductor sector tonight I think the markets still have the confidence virus. They are afraid of the coming restatements of earnings beginning on or before August 14th. They are concerned about the possibility of a second recessionary dip. They are concerned about an anniversary attack on 9/11. They are afraid about holding stock overnight much less for weeks/months at a time. The retail investor is withdrawing cash from mutual funds in record amounts and there appears to be no end in sight. I believe it will take more than a couple positive earnings surprises to make the retail investor rush back into the markets. The stampede is still headed south and any attempts by individual cows to turn around is met with a swift end as they are run over by the herd behind them. We blame everything on the shorts. Those dirty rotten scoundrels who are profiting off the misery of retail investors. Surprise! In numbers released today only 2% of the recent high volume on the NYSE was short sales. Does that surprise you? It does me. Suddenly the picture becomes clearer. If it is not the shorts then it must be real sellers liquidating portfolios and moving to cash or worse foreign investors taking that cash back overseas. If it is millions of individual sellers driving the markets down and not a few back rooms of fur coated bears then maybe this irrational pessimism is actually rational. Alas, for my final thought, remember the herd is always wrong on both ends. They are the last ones in and the last ones out just before the reversal comes. The direction for tomorrow is a toss up. Futures have been on both sides or zero tonight as the earnings from more than 200 companies today are being digested. The markets closed right at support based on the S&P at 880. If that support fails then the next couple of weeks are not going to be pretty. With the major earnings leaders already announced we are back to depending on the second tier companies for inspiration. The earnings incentive to draw/keep investors in the market is basically over for the quarter. We are now back to the age old question, "why buy now?" Enter Very Passively, Exit Very Aggressively! Jim Brown Editor Did this commentary help you? jim@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** SLOW GRIND by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - We're back to the slow grinding "bear machine" - this most recent rally held up longer than in awhile, but then all the same bearish influences then wore down buyers. To use a war analogy, the buyers coming in on the first assault, don't have a "second wave" behind them to keep going up the beach! Before I look at today, keep in mind the backdrop to tomorrow of unwinding of positions related to options expiration - OEX and SPX July options trading finished today, but settlement is at the opening tomorrow. Then we have individual stock options and the SPX index changes going on - could be a volatile day again. MSFT company announced after the close that it earned $1.53 billion, 28 cents a share, up from $65 million, on sales of $7.25 billion. Excluding charges, the company earned 43 cents, a cent above expectations. Nevertheless, the stock traded a somewhat lower after hours, relative to its close. I don't know what insights prompted this, but the reaction to earnings - at least this close to expectations - usually has more to do with the recent market "tone" and with talk from the company about what they project going forward. And, there hasn't been much talk of how tech companies see glimmers of an upcoming turnaround in business spending. Sun Micro (SUNW) didn't indicate this - their earnings were also in line with Street expectations - revenue was UP from the year ago period, which seems pretty good to me. Nevertheless, the stock fell after the close - go figure! For companies that use technology to provide a service that consumers like and will pay to use, its another story - EBay is one such and its expectations are for substantially higher earnings ahead, also in line with previous expectations. Today, we had another down day, but due to yesterday, it was not 7 in a row for the Dow. If it wasn't for "program trading" there ould not be nearly as much volume today, as I saw figures that indicated that program trading was accounting for as much as 50% of the NYSE daily volume. Speaking of program trading, I will be posting a Trader's Corner article tonight on "program trading", with special emphasis on the type of program trading that that involves index arbitrage or buying and selling baskets of stock versus taking an opposite position in index futures. This as opposed to "plain vanilla" program trading which is simply when a fund or other institution simultaneously buys and sells at least 15 stocks, each with a value of at least, I think it is $50,000 - there is an "official" definition of what constitutes a program trade. Buying and selling such "baskets" of stocks, occurs a lot, especially when Standard & Poor announces several "drops" and corresponding "adds" to the S&P 500 index such as seen today. Index funds and many other general funds, who are tied to the S&P 500 (SPX) benchmark, like to do their buys and sells in a "basket", so that they get prices on both the buy and the sell side that is in line with where SPX is trading at the time. Going out of SPX is RD, UN, NT, AL, ABX, PDG and N Coming into the Index is EBAY, ERTS, UPS, GS, PRU, PFG and SDS 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. 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 Omarket 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 100 (OEX) Index - Daily/Hourly charts: S&P 500 (SPX) Index - Hourly chart: As I noted last night, there was "congestion" overhead on recent rallies as sellers put a cap on rallies. The hourly chart pattern traced out a minor Head & Shoulder's (H&S) pattern with a "neckline" that was pierced around 448.50 today. Given the 16.5 points from the top of the Head to where it intersected the neckline directly below the top - deduct this amount from 448.50 gives a possible or potential "minimum" downside objective to 432 in OEX. 432 would of course be a new low, and keep the bearish pattern going; i.e., successively lower rally highs and lower (down) swing lows. A buying opportunity may set up if OEX gets into the 430 to 435 area - wait and watch for what tomorrow brings and we should also pay attention to when the longer hourly stochastic gets fully oversold again. Key overhead resistance is on a rebound to the 448-450 area, back to the aforementioned "neckline". Only an hourly close above 450 would suggest we were seeing a bullish turnaround. S&P 5100 (SPXOEX) Index - Hourly chart: The Head and Shoulder's pattern is not quite as well-defined on the SPX intraday charts, but the equivalent move in the S&P 500 suggests that the Index will take out its prior low - it was near to this on the close and the index had downside momentum going. I calculate a possible downside target of about 10 points under the recent low, or to the 866 area. Such a move would put SPX down near the low end of its current downtrend channel and not far under my lower trading envelope line at 871 - this line is now turning down, so we'll see how close the a next low might come to the lower envelope line I'm using. SPX has a substantial overhead resistance in the 896-897 area, the low end of the past two days trading and the "breakdown" point of today. 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: The same topping pattern is apparent in DJX - the potential downside objective based on the "minimum" downside measurement implied by the H&S top pattern relative to the intersection of a "neckline" at 85, is to 82.3 - guess what! - right around the prior low. My guess is that the DJIA is now finding more stability than the broader market measures. Stay tuned for a possible double bottom. If this were to develop, it should offer a good buy point for a next trade - if so, exit puts and go for calls. 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 $10 suggests a move to around 12. Nasdaq Composite ($COMPX) Daily/Hourly charts: It's more apparent (than in the Nas 100) in Composite chart above that the Nasdaq is still within its hourly downtrend channel. Sometimes you learn different things by looking at the different, but related, indexes. Notice also that a downside reversal occurred right at resistance implied by the 21-day moving average and, more importantly I think, a rally that failed to hold above its September low at 1387. The tech favorites - the big cap Nasdaq stocks in the Nasdaq 100 - may be rebounding, but there are still a lot of former fallen tech angels that are a dead weight in the overall Nasdaq market. The 1315 low looms large as a important chart point - if the COMP turns higher at or above this prior low, its encouraging for the bullish case that the market is in a process of bottoming - however, just as it took months to "build" a top in 2000, it can take some months of bottoming action before there is a really sustained rebound. But, hey, this current back and forth action makes for good trading market. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: As it appeared on the charts, there was too much overhead resistance for the Q's to make more upside headway. And, as we know, if they can't take em up, they take em down! A well- defined trading range is being established in QQQ it appears. We haven't seen this in while - a range that can be defined by horizontal "level" lines and not down sloping channel lines. Again, this makes for a good trading market - the kind of market where such a trading range makes oscillator type technical indicators like stochastics "work" really well - in a way, that’s what they were "made" for. You buy em when oversold, sell em when overbought in such a range-bound affair. The "emerging" up trendline apparent on the hourly chart intersecting around 24.5, may define support tomorrow - or, the Q's head back toward the low end of their range - to the 23.5- 23.7 area, where the stock would get fully oversold again. QQQ traders may have another buying opportunity in the 24-24.50 area, but I suggest watching intraday to see how a next low shapes up. The last rally up to the upper end of the range yielded a good trading opportunity - patience to wait for the next low should provide another good trade opportunity, this time on the buy side. As mentioned already, Microsoft an important influence within the Nas 100 QQQ tracking stock, announced their earnings after the close - and true to the MSFT chart pattern where the stock has been trending back toward its recent lows - the stock traded a buck lower initially in after hours trade as analysts picked over the numbers. 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 ------------------------------------------------------------ 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 **************** What Never Goes Up must Come Down By Steven Price What started out looking like a rebound, once again soured as the day went on, with a 200 point downward swing in the Dow Jones beginning around 2:00 PM ET. The earnings season's heaviest day started out on a positive note with IBM posted slightly better than expected earnings after yesterday's close. A drop in jobless claims seemed to foretell a positive trend in the labor market. However, the index of leading economic indicators was not so good, and contributed to a tempered reaction. As the day wore on, the retreat covered most sectors. S&P 500 was down 24.48 to 881.56, the Dow fell 132.99 to 8409.49 and the Nasdaq dropped 40.30 to 1356.95. The leading winners were Oil Services (OSX.X) and Gold and Silver (XAU.X). Interestingly enough, the VIX was actually down fractionally on a very volatile day. This may have had something to do with expectations of positive earnings news from Microsoft. As Jim noted on the Market Monitor, we have reached some interesting support levels. The Dow now hovers just over 8400, and the SPX is just above its 877 support. Microsoft surpassed expectations by $0.01, earning $0.43 versus expectations of $0.42. Revenue also was up 10% to $7.25 billion. They did, however, reduce estimates for fiscal 2003, which began July 1. Profits are now expected between $1.85 and $1.91 per share, down from analyst's expectations of $1.92. After closing at $51.11, the stock was down slightly, trading at $50.80. AOL Time Warner Chief Operating Officer Robert Pittman has resigned, confirming the longstanding rumors that he was being forced out. That was the tip of the iceberg on a day when rumors circulated about the company improperly booking revenue, and a story in the Washington Post questioned unconventional deals AOL used to increase revenue before the Time Warner merger. In other earnings news, EBay said they would match 3rd quarter earnings expectations, but revenue will be just under analyst predictions. Gateway missed by $0.02, but confirmed targets for the rest of the year. Sun Microsystems also met expectations. The after hours markets have looked soft in these stocks, with Sun down almost 20% (trading just over $5 after a $5.79 close) and EBay down $1.25, in addition to Microsoft's slight pullback. However, Intel has done fine after disappointing earnings on Tuesday and IBM has been strong after beating expectations by a penny last night. If the markets react negatively tomorrow we could be in for a very large down move. Below Monday's S&P 500 low of 876.46, the first real support appears to be under 800. In the Dow, a drop below 8400 could see us retesting September's closing lows, as we did earlier in the week. Below that the next significant support looks to be in the 8000 range and then 7500. The bearishness is underscored by the CBOE's Put/Call ratio, which has soared back to .93, representing almost as many puts traded as calls. As I noted a couple of days ago, the bullish percent in the Nasdaq 100 ($BPNDX) continues upward. It has now surpassed the oversold level and appears on its way up. The Bullish percent in the Dow, S&P 500, and OEX, however continue downward. As long as the NDX continues to make new relative highs there seems to be a glimmer of hope. Watch out, however, if the pattern reverses itself. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 8409 Moving Averages: (Simple) 10-dma: 8811 50-dma: 9542 200-dma: 9819 S&P 500 ($SPX) 52-week High: 1316 52-week Low : 876 Current : 881 Moving Averages: (Simple) 10-dma: 929 50-dma: 1016 200-dma: 1094 Nasdaq-100 ($NDX) 52-week High: 1782 52-week Low : 946 Current : 994 Moving Averages: (Simple) 10-dma: 1007 50-dma: 1132 200-dma: 1387 Gold and Silver ($XAU.X) The XAU was back in contrarian mode today, rallying as the equity markets and dollar both slipped. The index has slipped, however, back to its 50% retracement level from its Nov 2001 to May 2002 rally. Last time the sector was here it rebounded to its 50-dma. Keep an eye on this factor as Placer Dome (PDG) and Barrick Gold (ABX) are removed from the S&P 500 at the end of tomorrow's trade. 52-week High: 89 52-week Low : 49 Current : 70.69 Moving Averages: (Simple) 10-dma: 73 50-dma: 78 200-dma: 65 ----------------------------------------------------------------- Market Volatility The VIX was down slightly today, cracking back below the 40 level, to 39.63. This is still a very high reading, and has maintained itself in this range since last week. Periods of high volatility reflect fear in the market place on everyone's part, since the OEX option bids would be repeatedly hit and taken down if anyone had confidence that the market would return to normal soon. This has not happened. CBOE Market Volatility Index (VIX) = 39.63 -0.17 Nasdaq-100 Volatility Index (VXN) = 62.99 -0.24 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.93 839,580 778,924 Equity Only 0.81 564,328 462,004 OEX 0.70 73,306 51,657 QQQ 0.66 90,150 59,458 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 36 - 1 Bull Correction NASDAQ-100 35 + 6 Bull Confirmed DOW 13 + 3 Bear Confirmed S&P 500 21 - 1 Bear Confirmed S&P 100 15 + 1 Bear Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.22 10-Day Arms Index 1.26 21-Day Arms Index 1.47 55-Day Arms Index 1.36 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 994 2124 NASDAQ 982 2303 New Highs New Lows NYSE 29 211 NASDAQ 66 177 Volume (in millions) NYSE 2,013 NASDAQ 1,591 ----------------------------------------------------------------- Commitments Of Traders Report: 07/09/02 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 - 7/18 by Leigh Stevens The sectors reflected the overall market with weakness in what had been up and minor bounces in some of the sectors that had been in corrections. This could be summarized by saying that what was up was down and what was previously down, had "dead cat" bounces, was up. Bottoming out, if that is what is happening, is fun! Bullish disappointments stemming from rally failures at first areas of technical resistance were plentiful. The Biotech (BTK) sector failed to hold up above recently penetrated resistance. Rally failures at technical resistance today or in the past two sessions included: the Computer Tech index (XCI), Defense (DFI), Fiber Optics (FOP), Forest Products (FPP), Disk Drive sector (DDX), the High Tech index (MSH), Networking sector (NWX), Semiconductors (SOX) and the Wireless (telecom) group (YLS). Accelerating to the downside and resuming their obvious bearish trends were: the Bank Index (BKX), Airlines (XAL), Cyclicals (CYC), the NYSE Financial sector (NF), Home builders (DJUSHB), Health Providers (RXH), Natural Gas (XNG), Oils (OIX), Pharmaceuticals (DRG), the Russell 2000 (RUT), Retail stock sector (RLX), and Utilities. You can’t even hide in Gold stocks anymore, as you can see from the XAU sector chart, highlighted below. Its interesting to note, and very typical of the stage of extreme bearish sentiment that we are in that, unlike the case in the first half, there are no, none, nada sectors that are bucking the bearish trend. Some, are still holding up a bit, like the Internet stocks, but it seems like it is just a matter of time before bearish influences return to it. When will it end - when we give up all ideas that there is any area of the market, an industry group or category of stocks like small caps that will allow us to be long and to hold our own in the bear market. Rather, the watchword is "be short and prosper" - tall people beware! UP on Thursday - DOWN on Thursday - SECTOR TRADE RECOMMENDATIONS & REVIEW - NEW/OPEN TRADE RECOMMENDATION(S) - NONE OPEN POSITIONS - Long HHH at 21.50 (Internet HOLDR's) STOP: 21.2 Long SMH at 28.30 (Semiconductor HOLDR's) STOP: 28.70 TRADE LIQUIDATIONS - NONE SECTOR HIGHLIGHT - Gold & Silver Sector Index ($XAU.X) STOCKS: ABX; AEM; AU; FCX; GOLD; HGMCY; MDG; NEM; PD; PDG; SIL No place to hide! - no longer can the gold bulls carry the secret smile of participating (long at least) in the a "silver bullet" sector. With the sizable gap lower opening of yesterday and the inability of a rally to develop today, XAU looks lower. My long-standing target has been to the 67 area, equal to at least a 75% retracement with a possible lower objective to the area of the 200-day moving average in the 65 area. I would not rule out a move back to the March low at 60.50 even. I have been suggesting selling rallies in this sector. At this point, if short any XAU stocks or holding puts in them or the XAU options, looks like there is still more downside ahead. This sector is getting a bit oversold, but so is every other sector at this point. UPDATE: 7/18 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 Thursday 07-18-2002 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: ***** NVDA $18.99 –0.50 (-2.90) NVDA broke down below its 10-dma during today’s session, then continued lower in today’s session on a return of the sellers in the semiconductor sector after the AMD earnings report, which was less than stellar. NVDA has suffered short term technical damage, which gives us reason to drop the play. Look for a relief rally early tomorrow to exit plays. --- EMC $8.40 (-0.23) As we said in yesterday's update, this play was closed last night ahead of today's earnings. EMC reported break even numbers and said they were comfortable with analysts' future estimates. The CEO stated, however, that he did not see the IT spending environment improving in 2002 and that customers are extremely tight with their dollars. --- OMC $49.99 -1.49 (-1.43) We are closing OMC ahead of our stop loss. While this stock had been strong in the last week, after several days of struggling to hold its highs in the current market environment, we are punting. While the stock came close to our first target of $55, trading over $54 on several occasions, it has fallen back each time and no longer looks as strong as it did. All the negative press about AOL and a tough advertising climate lately has done little to support the bulls for OMC. Any strong up move should be seen as an opportunity to close out for a profit. While they have reassured investors since their accounting problems beat the stock down earlier in the year, OMC seems unable to sustain its recent rally. PUTS: ***** XL $65.50 –9.00 (-12.60) Thank you, XL! We certainly weren’t expecting what happened today, but we’re very, very pleased that it did. There’s not much more to worry about at this point in this very successful position other than to look to take profits in tomorrow’s session. Congratulations if you took the play! --- MRK $42.00 –2.50 (-3.70) We got exactly what we were looking for out of MRK during today’s session after we added the stock as the play of the day last night. The –2.50 drop offered traders with a quick trade ahead of the company’s earnings report. Look to book gains early tomorrow on further downside movement. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu NVDA 18.99 1.98 -0.54 -0.80 -0.50 Dropped, damage done EMC 8.40 0.55 -0.10 -0.37 -0.23 Closed, earnings today OMC 49.99 -0.99 0.80 -0.75 -1.49 Closed, out of gas JNPR 8.93 0.35 0.25 0.91 -0.28 New, Nice strength! STM 25.10 2.72 -0.03 0.32 -2.29 New, Chip Bounce? PUTS XL 65.50 -0.65 -1.22 -2.38 -9.00 Dropped, take gains! MRK 42.00 0.15 -1.69 0.49 -2.50 Dropped, book gains! BJ 34.32 -0.53 -2.17 0.03 0.49 Inside day set up SBC 27.74 -0.13 0.06 -0.68 -1.15 Break below support VZ 34.05 -0.15 -0.15 0.36 -1.31 Rolled below 10-dma INVN 25.10 2.72 -0.80 0.32 -2.30 Accelerating decline CI 82.80 -0.95 -1.97 -1.00 -2.53 New relative lows!!! BLL 38.25 -0.16 -0.93 -0.45 -0.45 New, break lower GDW 60.68 0.50 -0.22 0.38 -1.60 New, 200-dma gone JNJ 49.73 -1.50 1.10 1.14 -1.51 Weak side effects VZ 34.05 -0.15 -0.15 0.36 -1.31 Breaking down ------------------------------------------------------------ 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 ******************** None ************** NEW CALL PLAYS ************** STM – STMicroelectronics N.V. $25.20 +0.11 (+2.31 last week) Company Description: STMicroelectonics is a global independent semiconductor company that designs, develops, manufacturers and markets semiconductor integrated circuits and discrete devices used in a wide variety of microelectronic applications. These devices include automotive products, computer peripherals, telecommunications systems, consumer products, industrial automation and control systems. The company's products include standard commodity components, full custom devices, semi-custom devices and application-specific standard products for analog, digital and mixed-signal applications. Why We Like It: As the NASDAQ has worked its way into a solid base over the past 2 weeks, the Semiconductor sector (SOX.X) has been struggling to build a base near the site of its September lows. And judging by the series of solid earnings coming from the likes of PMCS, CY, VTSS and XLNX, there just might be enough gas to get the job done. While INTC didn't "WOW" the street, neither did their earnings prove a major disappointment. Note that the SOX has twice tested the September lows near $345 but has stubbornly remained below the $400 resistance level. Given the oversold nature of the entire technology market, the SOX is that coiled spring that just needs something to release that energy. When it comes, the short-covering rally could be explosive. That draws our attention to STM, which has been trading rather strongly in recent sessions and appears to be trying to build a new level of support near $25. This is a highly speculative play, where we are looking for a near-term catalyst to ignite some short-covering. The fuse is very short, as the company is set to release earnings next Tuesday after the closing bell. Look to enter new positions on a rebound from the $25 level (or possibly at stronger support down near $23.50-24.00), or else enter on a volume-backed breakout through the $26.30 level (the site of today's intraday highs). Initial stops are set at $22.50. BUY CALL AUG-22 STM-HX OI= 36 at $3.60 SL=1.75 BUY CALL AUG-25*STM-HE OI= 50 at $2.00 SL=1.00 BUY CALL OCT-25 STM-JE OI= 524 at $3.30 SL=1.75 BUY CALL OCT-30 STM-JF OI=2758 at $1.40 SL=0.75 Average Daily Volume = 1.56 mln --- Juniper Networks - JNPR $8.93 -0.28 (+1.23 for the week) Company Description: Headquartered in Sunnyvale, California Juniper Networks engages in the business of delivery of core, edge, mobile and cable Internet services at scale for the New Public Network. Why We Like It: Juniper Networks has been on a steep rise from the $5 level at the end of June. It has held strong during the past week's swoon, and has continued upward since breaking through resistance around $8.00. Juniper released earnings July 12, which beat expectations. They had a profit of $421,000.00, which came out to even per share, while analysts had expected them to lose a penny. Their revenues were also greater than expected, as they brought in $117 million, which was almost $8 million above predictions. This stock could benefit from a bounce in the Nasdaq, which has produced a positive reversal in its NDX bullish percent numbers in the last few weeks, recently breaking the oversold barrier of 30% to close at 35%. There is support at the 50-dma just above $8.00, which should be used as a stop loss. Resistance could appear at the 100-dma of $9.70 and again at the $10.00 round number mark. Beyond these points, the next level of resistance looks to be around $12.50. Often resistance points around option strike prices act somewhat magnetically as short option sellers attempt to push the stock to the strike on expiration. OI sees the current level as an entry point to go long but it would probably be prudent to confirm bullish movement in the Nasdaq first. BUY CALL AUG-7.50*JUX-HU OI=3251 at $1.95 SL=0.80 BUY CALL OCT-7.50 JUX-JU OI=1798 at $2.60 SL=1.30 Average Daily Volume = 13.7m ------------------------------------------------------------ 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 ******************* BJ $34.32 +0.49 (-1.65) BJ traced the infamous inside day set up during today’s session with its sideways trading on relatively lighter volume. Given the weakness in the broader market and the long standing trend in BJ, its tight trading range today was most likely a pause in that trend before lower lows ahead. Further weakness in the broader retail space should continue to add pressure to shares, as well as selling in the broader market. Look for weakness to return to stocks in general during tomorrow’s session by watching for weakness in the S&P and Dow. New momentum based entry points can be taken in such a market environment on a break below yesterday’s low at the $33.30 level from the inside day traced today. Confirm a return of intraday volume during a breakdown as a sign that the sellers have returned with conviction. Intraday rollovers from just below the $35 level would offer additional entry points. Make sure to keep an eye on the Retail Sector Index (RLX.X) for insights into the sentiment in the broader retail space. --- CI $82.80 -2.53 (-6.45) There hasn't been much in the way of bullish price action in the Insurance stocks over the past 2 days and that is certainly apparent when looking at a chart of CI. After breaking below the long-term support near $88 earlier this week, the stock looked vulnerable to further downside and boy, was it ever. The past 2 days have both presented us with attractive entries into the play as CI has popped up near the $88 area (now resistance) before dropping sharply in the afternoon. Thursday's action was even more bearish, with the stock going out on the lows after breaking mild intraday support in the $84.50 area. XL Capital gapped down on news that it is increasing its loss reserves and took the rest of the group down in its wake. Use a rebound to resistance near $85.50-86.00 or even up at $87 to initiate new positions. Lower stops to $87.50. Support near $82 could be the catalyst for an oversold rebound, so we want to avoid trading a breakdown until CI drops through strong support at $80. --- INVN $25.10 -2.30 (+0.72) There's nothing like catching the top to make you feel like a genius. Traders that followed our recommendation to fade the rally in shares of INVN are feeling like geniuses after entering this play as the stock rolled over Wednesday morning. The irrational pop higher following INTC's earnings gave us a great entry as INVN moved right up to resistance near $28.50 and then fell under its own weight. The real pain was inflicted today though, with the stock gapping down and bleeding throughout the day, ending at $25 with a 8.5% loss. Unless buyers appear to prop support the stock near $24.50 (the bottom of Monday's gap, INVN looks destined to test major support in the $22-23 area. New entries can be taken on another failed rally attempt near resistance (now at $26.75 and then $27.50). Consider harvesting gains should the $22-23 area be reached. We are lowering our stop to $28 tonight. Don't forget, the company is set to release earnings next Tuesday after the close, so we'll be dropping it by then. --- SBC $27.74 -1.15 (-1.90) Wednesday's early morning euphoric ramp in the broad markets provided just the entry point we were looking for in our SBC play. The stock opened just over $30 before rolling over and heading down to close at the low of the day. Weighing on the stock was the Morgan Stanley estimate cut for all the RBOCs due to a more conservative long-term outlook for both top line revenues and margins. The firm cut their price target for SBC from $41 to $33, and that pretty much sealed the stock's fate. With the broad market unable to put together a rally on Thursday and selling off into the close, SBC followed suit, ending the day at its lowest level since August of 1997 and looking like it wants to head lower from here. While there is some mild support at $27, the next level of strong support appears to be the site of the 1997 lows near $25. Resistance is firming up in the $28.50-29.00 area and we can use a failed rally near that level to initiate new positions. Lower stops to $30.25. --- Verizon Communications - VZ $34.05 -1.31 (-1.10) We originally recommended this put play with a trade under $35. It has traded below 35 several times this week, but today was its first close below that level. VZ struggled to get above the $36 mark earlier in the week, but has fallen back in its continuing downward channel. The last couple of days its intraday lows have actually fallen below that channel, and a close below $34 today would have been a significant close below it. However, this pattern continues to look weak and signals bearishness ahead. VZ continues to find resistance at its 21 dma, 10 dma and the $36.00 mark. The North American Telecom Sector was one of the few up on the day, however not even that strength was enough to prop up Verizon. We are adjusting our stop down from $37.75 to $36.50 to reflect the stocks current weakness. Another failure at $36.00 might be an entry point but given the last two days' attempts to do so, VZ looks like it's heading lower into the weekend! ************* NEW PUT PLAYS ************* GDW – Golden West $60.68 –1.60 (-1.44 this week) Company Description: Golden West Financial Corporation (Golden West) is a savings and loan holding company, the principal business of which is the operation of a savings bank business through its wholly owned savings bank subsidiary, World Savings Bank, FSB (WSB). Golden West also has two other operating subsidiaries, Atlas Advisers, Inc. and Atlas Securities, Inc. These two companies were formed to provide services to Atlas Assets, Inc., a registered open-end management investment company sponsored by the Company. Atlas Advisers is a registered investment adviser and the investment manager of Atlas Assets' 14 portfolios (the Atlas Funds). Atlas Securities is a registered broker-dealer and the sole distributor of Atlas Fund shares. The principal business of the Company, through WSB, is attracting funds from the investing public and the capital markets and investing those funds principally in loans secured by deeds of trust or mortgages on residential real estate, and mortgage-backed securities. Why We Like It: Weakness is creeping into all corners of the market. Those sectors that were immune from the weakness in stocks since the spring have now begun to show signs of technical deterioration. The banks fall into that group as only recently the sector has lost its upside momentum and shown signs of promising downside movement. Individual stocks are breaking down as well, showing signs of major technical failures. GDW is one such stock that recently tested its long-term 200-dma, but finally closed below that level during today’s session on continued heavy trading activity. The heavy volume is most likely a product of institutional sell programs based on the stock’s break below the 200-dma, which is a favorite indicator of institutional trading desks. The close below that level during today’s session should usher in further weakness in the days ahead for GDW. But the stock first needs to breakdown below the $60 triple-bottom support level, which we’re anticipating that it will do. The stock needs to decline below the $60 level for the breakdown to be complete, which would then point to a decline down to the $55 level. So we expect a momentum based move down to the $55 level provided that GDW does indeed decline below the $60 level first. Look for that breakdown in the early part of tomorrow’s session on an increase in intraday declining volume. If the stock bounces back to resistance first, then watch for a rollover from the now overhead 200-dma at the $61.42 level, which should cap any intraday rally attempt from here forward. The stop for this play is initially above the 200-dma at the $62.50 level. BUY PUT AUG-65 GDW-TM OI=140 at $5.20 SL=3.05 BUY PUT AUG-60*GDW-TL OI=197 at $2.70 SL=1.75 Average Daily Volume = 558 K --- BLL - Ball Corporation $38.25 -2.88 (-2.92 this week) Company Description: Ball Corp. is a manufacturer of metal and plastic packaging, primarily for beverages and foods, and a supplier of aerospace and other technologies and services to commercial and governmental customers. Ball's principal business is the manufacture and sale of rigid packaging products, primarily for beverages and foods. Polyethylene terephthalate packaging is the company's newest product line. The aerospace and technologies segment includes civil space systems, defense operations and commercial space operations. The defense operations business unit includes defense systems, systems engineering services and advanced antenna and video systems, as well as electro-optics and cryogenic systems and components. Why We Like It: If you need proof that this latest stock market decline is widespread and hitting every sector, you need only look at some of the secondary stocks that are being taken apart. Due to its involvement in the Defense industry, BLL experienced a stellar rally following the September attacks and the expected ramp-up in Defense spending. That propelled the stock as high as $51 before the music stopped. The rally in the Defense industry came to an end in the late spring and the sector (DFI.X) has been rapidly disintegrating in recent weeks, having recently fallen back near its November highs. Add in the slowdown in the manufacturing sector, which hits BLL in its primary business unit is involved in making packaging for food and beverages, and it should come as no surprise that the stock has been falling sharply in recent weeks. After bottoming near $39 in early June, it actually looked like the bulls were going to try for a rally, but that timid series of higher highs and higher lows came to an abrupt end when Merrill downgraded the stock on Monday. BLL gapped down and actually traded as low as $37.50 before closing just below $40. That was as good as it got this week, as the stock has been drifting lower every day. The real carnage occurred on Wednesday when the bears pushed the stock down for its first close under the 200-dma ($39.53) since late 2000. The PnF chart is now on a sell signal, with a bearish price target of $29, giving us plenty of room to play the downside. Use failed intraday rallies below the $40 level to initiate new positions. Aggressive entries can be considered on a volume-backed drop under $37.50, but look out for a short covering rally. Initial stops are in place at $40.50. BUY PUT AUG-40 BLL-TH OI=1183 at $3.20 SL=1.50 BUY PUT AUG-37*BLL-TU OI= 489 at $2.10 SL=1.00 BUY PUT AUG-35 BLL-TG OI= 770 at $1.25 SL=0.50 Average Daily Volume = 526 K --- JNJ - Johnson & Johnson $49.73 -1.51 (-0.77 this week) Company Description: Johnson & Johnson, with approximately 106,100 employees, is the world's most comprehensive and broadly based manufacturer of health care products, as well as a provider of related services, for the consumer, pharmaceutical and medical devices and diagnostics markets. Johnson & Johnson has 197 operating companies in 54 countries around the world, selling products in more than 175 countries. Why We Like It: Johnson and Johnson has been under attack by Amgen, from who they licensed Eprex. Amgen has developed newer drugs, which operate similarly, however they are trying to distance themselves from Eprex, which has some serious side effects. JNJ came out and admitted these problems and warned patients not to use the product, which can lead to a blood disorder called PRCA that requires lifelong blood transfusions. Technically, JNJ broke its psychological support line at $50, and looks to have little support between its current price of $49.73 and 45. OI sees the recent failed rally at $52.30 near the top of its descending channel and the current price under $50 as an entry point to get short. JNJ reported earnings on Tuesday, which showed an increase in net income of 10% and beat earnings estimates by $0.02. This news, combined with an upgrade from A.G. Edwards still has not been enough to boost this stock. The stock closed at $50.10 the day the news was released, as the bears were not impressed. It has been in sharp decline with the rest of the Pharmaceutical sector ($DRG). One reason may be concerns over accounting practices in the sector after Merck's Medco problems. OI sees a stop loss of $52, a level that the stock has tried to cross intraday, but has been unable to maintain. JNJ is currently trading at a price-to-sales ratio of 4.9, which is more than three times the average of the S&P 500 (1.4). Of the drug sector stocks, the only ones to come in with a multiple under twice the average are Bristol-Myers (2.6) and Merck (2.3), which have already been beaten down. There may be more room to fall in this sector, as the index has indicated. BUY PUT AUG-50*JNJ-TJ OI=5068 at $2.80 SL=1.70 BUY PUT OCT-50 JNJ-VJ OI=2207 at $4.00 SL=2.50 Average Daily Volume = 8.54 m ------------------------------------------------------------ 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 ------------------------------------------------------------ ********** 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 07-18-2002 Copyright 2002, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. ********************* PLAY OF THE DAY - PUT ********************* BJ – BJ’s Wholesale Club $34.32 +0.49 (-1.65 this week) BJ's Wholesale Club, Inc. is a warehouse club operator in the eastern United States. As of February 2, 2002, the Company operated 130 warehouse clubs in 15 states, and had approximately 6.9 million members. Warehouse clubs offer a narrow assortment of brand name food and general merchandise items within a wide range of product categories. In order to achieve high sales volumes and rapid inventory turnover, merchandise selections are generally limited to items that are brand name leaders in their categories. Since warehouse clubs sell a diversified selection of product categories, they attract customers from a wide range of other wholesale and retail distribution channels, such as supermarkets, supercenters, department stores, drug stores, discount stores, office supply stores, consumer electronics stores, automotive stores and wholesale distributors. Most Recent Update BJ traced the infamous inside day set up during today’s session with its sideways trading on relatively lighter volume. Given the weakness in the broader market and the long standing trend in BJ, its tight trading range today was most likely a pause in that trend before lower lows ahead. Further weakness in the broader retail space should continue to add pressure to shares, as well as selling in the broader market. Look for weakness to return to stocks in general during tomorrow’s session by watching for weakness in the S&P and Dow. New momentum based entry points can be taken in such a market environment on a break below yesterday’s low at the $33.30 level from the inside day traced today. Confirm a return of intraday volume during a breakdown as a sign that the sellers have returned with conviction. Intraday rollovers from just below the $35 level would offer additional entry points. Make sure to keep an eye on the Retail Sector Index (RLX.X) for insights into the sentiment in the broader retail space. Comments BJ traced the classic inside day pattern during today’s session that usually comes ahead of the next leg lower in a long standing descending trend. The stock should breakdown from its inside day set-up in tomorrow’s session. Watch for such a breakdown on a decline below the $33.30 level. Confirm a breakdown attempt with high volume and weakness in the retail sector. BUY PUT AUG-35*BJ-TG OI=29 at $2.15 SL=1.25 BUY PUT AUG-30 BJ-TF OI= 4 at $0.50 SL=0.00 Average Daily Volume = 664 K ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's • optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's • 8 different online tools for options pricing, strategy, and charting • Access to options specialists via email, phone or live chat online • Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ *********** OPTIONS 101 *********** Bullish or Bearish - Stay hedged, Make Money Buzz Lynn buzz@OptionInvestor.com Everybody loves a bull. Nobody loves a bear, except when he helps a former bull make money. Call me "Buddy Bear". (I think Jimmy Buffet (not Warren) wrote a song about "Buddy Bear" many years ago.) That, Dear Reader, is my intent for today - to be your Buddy Bear. It is no secret that we are locked into secular bear market, probably for years to come. However, that doesn't mean we can't make money on the bullish side by trading a cyclical bull, which WILL happen. It's just a matter of time. Trouble is, we don't when this secular bull will show itself, and we could be killed by whipsaw volatility while waiting to be right. That's no fun. What to do? Maybe there is a way to use high volatility to our advantage rather than having it cost us money. Maybe there is also a way to make money that doesn't require us to be right on market direction. Will the market sink further from where we are now? Or is the oversold condition of the market so tightly spring that markets can't help but explode to the upside beginning, ummm. . .tomorrow? What if we could find a way to avoid picking sides, and to maximize profits in the process? The good news is that Fundamentals Guy is going to spare us all the usual rant tonight in order to demonstrate a potentially great trading opportunity that is market neutral and takes advantage of the current high volatility premiums on options. Anybody think we want to buy options - puts or calls - in this environment and wait for them to rise? Nope! We want to SELL options to maximize our take while preserving our principle. After all, huge premiums belong in our collective pockets so their value can evaporate on the "other guy". So how do we do that? What I'm about to show is a simple hedged straddle or strangle. First the definitions: A strangle is the hedged use of two DIFFERENT strike-price options. A straddle employs the use of two of the SAME strike-price options. For instance with the QQQ trading at roughly $24, a strangle would employ the use of say a $23 strike and a $25 strike while the straddle would employ the use of two $24 strikes. Since the VIX (volatility measure of the S&P 100, or OEX) is historically high at 39.69, and the VXN (volatility measure of the NASDAQ 100, or NDX) is historically high at 63.61, let's sell some of that juicy premium! For that we'll stick to our current example of the QQQ (NASDAQ 100), currently at $24.73. So here's what we do. We simultaneously SELL a QQQ straddle of say the $25 strike price, which is to say we sell a $25 call and a $25 put. Ideally we do this when the QQQ is exactly at $25, but we are close enough right now. That begs the question of which one - current month or some back month option do we sell? To aid in that decision, remember we want the biggest time premium evaporation possible, and that means current or front month, not back month where the duration to expiration is, by definition, longer. We won't use July options because those will expire tomorrow and carry very little premium. So August strikes will give us the biggest bang for the buck. September strike don't suit our purpose either because of the lengthy term to expiration and volatility premium falls off the further off we are from expiration. Checking prices, we see that the AUG-25 call is $1.40 bid by $1.50 ask, and the AUG-25 put is $1.60 bid by $1.70 ask. If we sell the straddle at bid, we take in $1.40 for the call and $1.60 for the put for a total of $3.00 premium. By definition, at expiration in August, one of those will be in the money and one will out of the money, but we don't know which yet. And $3 may not be enough profit to cover a substantial move against us - say under $22 or above $28. So we have a great short straddle with money in our pocket, but how do we protect it from moves that are guaranteed to call us out or put stock to us? The answer is simple. We hedge by going long or short actual shares in the direction of the trade. Here are the two possible scenarios. First, the price can move down from $25, which sets us up for having stock put to us at an expiration date close at under $25. Anything under $25 has the QQQ put to us at the then closing price. Conversely, the price can rise above $25, which sets us up for having the stock called from us at an expiration date close at over $25. Let's follow each of these scenarios to see how the hedge is put in place that allows us to keep most of the sold premium. Let's break this up into two parts. What we will be watching for is a break in either direction at from $25. Suppose we are watching and waiting for the perfect moment to enter our trade. We find it as the QQQ price hits $25. Then and there, we sell the AUG-25 straddle for $3. Let's see what the chart looks like here. QQQ daily chart: Notice that support and resistance has been pretty steady between $23.50 and $26.50. In purely technical terms, I'm going to expect it bounce around in that range. If this were to happen through to expiration, we would be forced to buy shares at $25 if put to us, which would then be sold at a loss, say at $23.50 worst case. But that's OK because we collected $3 up front for a net gain on the whole trade of $1.50 on $25, or 6% for the month. Not bad. Similarly, we could be forced to sell shares if called away at $26.50. We would then buy the shares to cover at $26.50 and sell them at $25 to the call holder for $1.50 loss. But remember we took in $3 up front so our net profit is still $1.50 here too. However, once it quits bouncing around and makes a move outside of support or resistance, we hedge in the direction of the trade. I'll split this into two sides again. Think of this as writing a covered call OR a married put simultaneously. Let's say QQQ breaks over $26.50, we would then simply go long QQQ shares in an amount sufficient to cover our short call position. In essence we would have a covered call and a short put. We could never lose more than $1.50 on the covered position because it is offset by our $3 premium we sold. Even if QQQ goes to $30 or more, we win. Why? Because we own shares bought at $26.50, or slightly more, when we covered that are increasing in value right along side the call buyer's option. Now, let's say the price falls under $23.50. We would still hedge in the direction of the trade, only this time we would short the number of shares to match our short put. Remember, we are short put options which gives the right to the put buyer to "put shares too us" at a price of $25. By going short the shares, we take in $23.50 per share and effectively build in a loss of $1.50 ($25 cost minus $23.50 income from the short). But remember again that we took in $3 in option premium at the start. So we still have a net profit of $1.50 even if the price falls to $20 or less. As our short put becomes more valuable to the put buyer and costs us money, we have an offsetting position of short shares (a married put) that gain equal value as the price falls. The beauty of both of these examples is that we are hedged and we pick our hedge based on which way the QQQ moves. We will want to be short shares at some point under $25 and long shares at some point over $25. Of course, there will be adjustments, and we may want to pick our trigger points to get long at $25.50 or $26, or
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