The Option Investor Newsletter Tuesday 09-10-2002 Copyright 2002, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: What's Up? Index Trader Wrap: "Code Orange" left bears with acidic aftertaste Market Sentiment: The Bigger They Are... Weekly Fund Screen: Sour on Japan? Try a Pacific Ex. Japan Fund Index Trader Game Plans: (see note) Updated on the site tonight: Swing Trader Game Plan: Chickened Out Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 09-10-2002 High Low Volume Advance/Decline DJIA 8602.61 + 83.20 8602.61 8502.32 1.37 bln 1780/1365 NASDAQ 1320.10 + 15.50 1322.43 1299.53 1.41 bln 1774/1560 S&P 100 455.89 + 4.62 455.90 450.62 Totals 3554/2925 S&P 500 909.58 + 6.62 909.89 900.50 RUS 2000 394.16 + 1.69 394.58 389.53 DJ TRANS 2287.60 + 24.20 2294.67 2259.42 VIX 36.96 - 1.44 38.40 36.78 VXN 53.07 - 2.40 56.57 53.03 Total Vol 2,949M Total UpVol 1,783M Total DnVol 980M 52wk Highs 142 52wk Lows 195 TRIN 0.96 PUT/CALL 0.65 ************************************************************* What's Up? The short answer is the market! On the day before a possible flood of anniversary attacks by terrorists or copy cats trying to capitalize on the event, the buyers appeared. A high profile announcement by the government that the terrorist risk was at the highest level since 9/11/01 simply produced a dip back to intraday support and then another rally to the highs of the day. What is up with this? Dow Chart Nasdaq Chart The day started out more like Christmas Eve than Halloween. Expectations for a post 9/11 rally were shown in the positive markets and even the few goblins that showed up intraday could not scare away the bulls. The "fix" was in and it appeared nobody wanted to let the markets drop. If you doubt the conspiracy theory and the plunge protection team intervention stories then why did the S&P futures close the regular session exactly at 911 after a strong futures led buy program in the last 15 minutes? Just a coincidence, right? Intel shook off the cautious comments by its president yesterday and closed up +.39 cents for the day. Intel pledged to increase the speed of its chips and include hyper threading in the majority of its chips next year. That feature allows the processor to run about 25% faster than chips without it. They demonstrated a Pentium4 running at 4.7GHZ or almost double the speed of current P4 chips. They demonstrated a new Itanium chip with 500 million transistors and said a one billion transistor chip is already under development. The biggest news was its wireless connectivity announcements which allows laptops to connect to the Internet wirelessly. They claim they are capturing market share and will increase margins with the integrated chips. Not to be outdone HPQ announced a new chip architecture that would enable 1000 transistors to fit on the end of a human hair. This ability could lead to memory chips that are 1/10th the size or offer 10 times as much capacity. AMD announced its Fin Field Effect that could lead to a billion transistor chip the same size as the current 100 million transistor chip. All these chip advances produced bullishness in the chip sector. The SOX came off the bottom and back to resistance at 300. This was aided by news that NVDA had increased its order for wafers, which led investors to guess that business was improving. News out of Taiwan was that mother board production climbed +9% in August. Bulls were absolutely giddy about all this positive news. The current business model appears to be if you build a fast enough chip they will buy. This of course requires that buyers have money. It was announced today that 640,000 homes were in foreclosure during the Apr/May/Jun period. This was the highest rate in the 30 years of tracking by the Mortgage Bankers Association. The low down, interest only and high equity loans have suckered consumers into payments they cannot handle in a weak economy and weak unemployment. Previous surveys had not predicted this problem and it calls into question the current real estate bubble. With unemployment expected to go over 6% soon this problem will grow. Consumers with high debt have been lured to roll this debt into home equity loans and off their credit cards. Once rolled the cards are free to be used again and once maxed out the cycle is complete. More debt, no way out and a loose job market prevents them from moving up to a higher paying position. The survey also showed an increase to nearly 5% of all home owners those who were behind in their payments 30 days or more. Since homeowners with foreclosures on their credit are no longer home buyers but lifetime renters it means an entire sector of the population can no longer buy a home regardless of how cheap the interest will be. Tomorrow will not depend on stock news. It will be directly related to world and national events OR the lack of them. Regardless of what brought us to the closing level of 911 on the futures or faster chips and bursting housing bubbles, with no terrorist event the buyers will return. If we do have an event somewhere else on the globe the market will probably open down and then rally if nothing happens here. If we have an event here it will depend on the magnitude of the event as to the market reaction. Obviously they are not going to be able to pull off another event of WTC proportions without a nuclear weapon. As I have said earlier I doubt there will be a large scale attack tomorrow. There may be some small events around the world but nothing big in the US. Terrorists are cowards. They want to strike when nobody expects them. They do not want to face an armed security force that will shoot first and ask questions later. In a surprising move the defense department has now ordered that the antiaircraft defense systems deployed around Washington yesterday as only an "exercise" now be loaded with live rockets. (Did anybody really believe it was an exercise?) The problem is not tomorrow. The problem is next Monday. If we do rally on Wednesday it could carry over for a couple days. Monday will be the pivot point. That is where the fundamentals will start being important again. Mutual funds will know by Monday if deposits are going to return. Traders on the fence will have used the weekend to analyze the weeks events and decide if the bull market has returned or if it was just temporary. This is where the markets must stand on their own shaky legs and take on all comers. This is where normal markets return. Unfortunately normal markets go down in Sept and October. Normal markets are plagued with earnings warnings by the dozens in September and missed estimates in October. Normal markets are not supported by the Fed. Geenspan speaks on Thursday and is expected to say that the economy does not need another rate cut and will eventually get there on its own. He is on record recently for missing the boat on slowing the last bubble. He does not want a new bubble and is quite content to see the economy struggle for a couple more years as long as growth is still present. Bush speaks at the United Nations and is expected to tell them to get in line or get out of the way as he attacks Iraq on his own. This is not a speech that will be taken lightly around the world or at home. Yes, normal markets are just a few hours away. Are we ready? Enter Very Passively, Exit Very Aggressively! Jim Brown Editor Please be advised that during tomorrow's Memorial Service for September 11th, the following exchanges will experience changes to their opening schedules: Please note the differences. NASDAQ In memoriam and remembrance of the events of September 11, 2001, NASDAQ will delay its Market Open on September 11, 2002, until 11 a.m. Eastern Time NYSE/AMEX On Sept. 11, the New York Stock Exchange will open for trading 30 minutes after the conclusion of the memorial service being held at the World Trade Center site, but not before 11 a.m. Should the event last longer than its anticipated 10:29 a.m. conclusion, the NYSE will delay its opening beyond 11 a.m. The Exchange will announce the exact timing of the opening bell following the conclusion of the memorial service. ******************** INDEX TRADER SUMMARY ******************** "Code Orange" left bears with acidic aftertaste After a modestly higher open for the major indexes, stocks slowly built gains in the early morning hours, but then dipped red on "rumor" that the U.S. government would hold a press conference later in the day and raise the Homeland Security Advisory System alert to "Orange" from "Yellow" based on intelligence received over the past 24-hours. Sure enough, stock dipped into the red just after the Homeland Security Advisory System was raised to "Orange" signaling a "higher" probability alert to potential near-term terrorist activities, from the previous "elevated/yellow" alert status. But the dip lower was marginal and looked to have equity bears finding a rather acidic taste in their mouths after the anticipated "bad news" left stocks rather firm. Bears that had seen a Dow Industrials (INDU) 8,602 +0.97% decline from the 9,000 in the past two-weeks to a recent low of 8,262 didn't seem to want to sit on their hands and see further gains erode and looked to cover positions into the close. With retracement set from this spring's relative high close of 10,635 to the recent July 23 relative low close of 7,702, I think shorter-term bears continued to close out some positions and further assessed some upside risk to the 8,800 level. Dow Industrials Chart - Daily Interval It's always difficult for any trader/investor to try and predict what the impact of "emotion" will have on a MARKET as humans have emotion and it does impact how stock's trade. Bar chart technicals have both the 50-day MA (intermediated term) and 21-day MA (shorter-term) in play. With stochastics yet to reach more overbought levels, bears most likely didn't want to risk the 8,822 level of retracement into tomorrow when "American pride" most likely presents itself one year after the September 11 terrorist attacks. If I check my own emotions (not that I'm the MARKET, but can help to try and understand what other MARKET participants may be feeling), I'd have to say that American pride and determination to conquer terrorism will most likely have investors trying to "prove" that what took place 1-year ago tomorrow, may have changed the world we live in, but will be hard pressed to send Americans into the dark ages that the terrorists of September 11, 2001 thought their actions might have. While we see some "technical" support at the 8,262 level from retracement on the bar chart, we also see how that level came into play from the point and figure chart last week at the same level. In the point and figure chartist world, there's an old saying that the first test of bullish support trend can be painful for a bear, we note the Dow Industrials did test its bullish support trend last week. Dow Industrials Chart - $1 box Market technicians, use the different tools in their tool box to identify potential levels of support and resistance. The point and figure chart also showed an important level of support at the 8,250 level, which correlates with our bar chart retracement of 8,262. We also get some good correlation with resistance on the p/f chart at 8,800, which correlate with retracement at 8,822. For now, traders are trading a range between 8,250 and 8,800 and risk/reward for new positions in the Dow Industrials rather unfavorable. Currently I'd be looking to short a rally near 8,750 (say $87.50 in the Dow Diamonds (AMEX:DIA) $86.49) with about a $1.00 stop loss. In this morning's 11:00 AM intraday update http://members.OptionInvestor.com/intraday/091002_2.asp , I thought the S&P 500 Index (SPX.X) 909.58 +0.73% might close at a recognizable 911 level. While that wasn't really a "stretch to the imagination, today's close was back above the still trending lower 50-day moving average of 906 could have the 940 level in play. Short- term, traders will monitor the SPX at its 21-day simple MA of 919 for further bullishness, which would be above the 912 level I felt could further spur some bullishness. HOWEVER.... with the S&P 500 Bullish % ($BPSPX) back in "bear confirmed" status and more stocks generating point and figure sell signals, bullish SPX or SPDRS (AMEX:SPY) $91.70 +1.14% aren't swinging for the fences and should only be looking to trade a one-to-two day rally into Thursday's close. S&P 500 Index Chart - Daily Interval With retracement anchored similarly to the spring highs and July's recent relative low close, we find very similar technical support having come into play in the SPX last week. Today's close back above the 50-day moving average will test a short-term bear's resolve. Two levels of short-term resistance to monitor are the 912 level and the 21-day simple moving average at 919. A break above these two levels most likely has bears closing some positions out as risk becomes 940 into Thursday's close. Then I'd look for resistance to firm on such a rally at that level into the weekend considering today's "Orange" alert level to potential terrorist attacks. Not that we'd expect a terrorist event over the weekend, just that many traders don't like to put on large bullish positions into a weekend with concerns toward a potential terrorist attack. Conventional point and figure chart scale for the S&P 500 Index (SPX.X) is $10 box scale. This would have current support at $840 and resistance at 960. In recent weeks, I did introduce more "noise" with a $5-box scale, which showed a similar triple- bottom sell signal at 930 that correlated with the Dow Industrials triple-bottom sell signal at 8,750. As such, on the $5 box scale traders will be monitoring the SPX for resistance at 930-935 (correlate with Dow Industrials at 8,750-8,800) and SPX support at 870-875 (correlate with Dow support at 8,250). Once again, I'd alert traders that the S&P 500 Bullish % ($BPSPX) and S&P 100 Bullish % ($BPOEX) from www.stockcharts.com have reversed back into "bear confirmed" status and this follows our more volatile and quicker changing "bull correction" alert for weakness in the NASDAQ-100 Bullish % ($BPNDX) from August 29th. The bullish % charts don't necessarily tell us about near-term market direction, but are very good for assessing risk in each MARKET and signaling more intermediate to longer-lasting degrees of bullishness and bearishness. The recent declines in the bullish % of these two measures (SPX and NDX) tell us that more stocks are beginning to give sell signals on their point and figure charts and have bulls taking a more cautious stance toward the NASDAQ-100 (NDX.X) 947.72 +1.66%, S&P 100 Index (OEX.X) 455.89 +1.02% and S&P 500 Index (SPX.X) 909.58% as the internals show weakness. NASDAQ-100 Tracking Stock (QQQ) - Daily Interval In late March and then again in early April, a converging 21-day and 50-day simple MA near the upper-end of downward would have resulted in a some nice bearish swing trades. With stochastics nearing the "overbought" level, bearish traders may look for a rather low risk and potentially high reward trade in the QQQ above the $24.50 level, stop $25.25 and target a retest of the lows near $21.30. Technicals become rather tough when using the point and figure charts on this one, because a simple 3-box reversal relates to a $3 move, which is more that 10%. However, almost like "clockwork" the narrow (just 100 stocks) and more volatile (lots of technology stocks) NASDAQ-100 Bullish % ($BPNDX) from www.stockscharts.com was the first to reverse back into a more cautious and defensive posture on August 29th, and the S&P 100 Bullish % ($BPOEX) which is also narrow (100 stocks), but not nearly as technology laden followed with a reversal lower in its bullish % chart as did the broader S&P 500 Bullish % ($BPSPX). While some subscribers don't understand these key indicators of market risk and how they can help us understand the internal strengthening/weakening of the MARKET internals, current analysis is that a more bearish posture is being taken by the MARKET as more stocks are starting to give point and figure sell signals. As such, short-covering rallies are common and can be traded to the upside, but on a very short-term type of basis as the more intermediate-term picture has internal damage taking place. Jeff Bailey ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** **************** MARKET SENTIMENT **************** The Bigger They Are... by Steven Price The day many investors have been waiting on pins and needles for is finally here. In spite of predictions of a massive sell-off, the Dow, Nasdaq Composite and NDX all rallied heartily today. The government raised our security status to high-alert, citing credible and specific threats to U.S. overseas installations, and the bulls only took a temporary break. The rally was pretty much industry wide, with even the beleaguered Semiconductor Index (SOX.X) making a run through 300 resistance intraday. It settled back below that level, but a 3.6% gain, after setting 52-week lows just a few days ago, indicates that buyers are creeping back in market wide. The fact that we have had more tech warnings and lowering of estimates for both 2002 and 2003 and yet the tech indices are all higher, demonstrates that there are an awful lot of investors out there with 401(k) dollars waiting to re-invest. The Dow found support at the 50% retracement of its gains from July 24 through August 22, before the recent sell-off. It has not only rebounded from that level after testing it on 5 successive sessions, but the rally of the last two days leading up to today's close of 8602.61, also surpassed the 38.2% retracement level and the index looks headed toward the 50-dma of 8624.20. The Nasdaq Composite, which finished the day up 15.49 to close at 1320.09, is headed toward its 50-dma of 1330.85. The NDX is also headed toward this level, with a close of 947.72, just 15 points away from its 50-dma. The last time all three crossed this level at the same time was on August 19. It appeared as though the foundation for a rally had been laid, much the way the same action had led us out of the autumn 1998 lows. The Dow traded over 9000, the Nasdaq made it over 1400 and it appeared as though the recovery was underway. Of course, it didn't last. With the 9/11 anniversary behind us, maybe this time a crossing of the 50-dmas by all three can bring us a little further. Remember however, that we still need some good news from the techs for a real rally to take place. The bullish percentages of the NDX and Nasdaq Composite remain in the 30s and have come off their highs significantly. I am looking for a turnaround in these percentages before a rally can maintain itself. That doesn't mean we won't have a big run after 9/11 passes and investors start pumping money back into the market, but for a sustained rally we will need to see an increase in IT spending to lift the techs. Until that happens, we could be in for some extremely volatile trading. The Market Volatility Index (VIX.X) has fallen to 36.96, but even though this is much lower than the readings in the high 50's we saw in July, it is still on the high side and predicting some movement in the near future. Although when compared to past Septembers, I get the feeling it is not high enough, especially given the competing forces playing tug of war right now. When I think about the rally that looks as though it is about to take place, I can't help but remember the saying, "The bigger they are, the harder they fall." ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10679 52-week Low : 7702 Current : 8602 Moving Averages: (Simple) 10-dma: 8541 50-dma: 8624 200-dma: 9658 S&P 500 ($SPX) 52-week High: 1226 52-week Low : 797 Current : 909 Moving Averages: (Simple) 10-dma: 904 50-dma: 906 200-dma: 1057 Nasdaq-100 ($NDX) 52-week High: 1782 52-week Low : 892 Current : 947 Moving Averages: (Simple) 10-dma: 932 50-dma: 962 200-dma: 1300 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): The SOX rallied through resistance at 300 today, but couldn't hold up along with the rest of the market, settling back at 298 by the end of the day. Ongoing tech warnings and a lowering of expectations by forecasting firm IDC from 4.7% to 1.1% for 2002 in the sector didn't help. I expect the SOX to make it back into the low 300s tomorrow on a broad market rally and to possibly test resistance at 310 as well. However, until the IT spending environment improves, it is hard to believe we will not re-test last Thursday's 52-week low of 275 at least one more time. 52-week High: 657 52-week Low : 275 Current : 288 Moving Averages: (Simple) 10-dma: 295 50-dma: 334 200-dma: 482 ----------------------------------------------------------------- Market Volatility The VIX is on the high side. However, given the action of recent Septembers, combined with the threat of war, a rally that looks like it is about to take place, and the ongoing earnings warnings in the tech sector, I keep wondering if it is high enough to account for the possibility of extreme movement in the near future. Don't be too anxious to sell those straddles if volatility starts coming in after tomorrow, if there are no attacks. There are still many competing factors, which will take some time to shake out. Expect the VIX to drop tomorrow on a market rally, but don't get too confident. CBOE Market Volatility Index (VIX) = 36.96 –1.44 Nasdaq-100 Volatility Index (VXN) = 53.07 –2.40 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.68 502,264 339,165 Equity Only 0.57 338,636 193,184 OEX 1.26 17,243 21,791 QQQ 2.56 60,804 15,570 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 43 + 0 Bull Confirmed NASDAQ-100 36 + 0 Bull Correction DOW 50 + 0 Bull Correction S&P 500 51 + 0 Bear Confirmed S&P 100 46 + 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 0.94 10-Day Arms Index 1.45 21-Day Arms Index 1.31 55-Day Arms Index 1.30 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 they do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals Advancers Decliners NYSE 1508 1200 NASDAQ 1691 1493 New Highs New Lows NYSE 31 25 NASDAQ 18 66 Volume (in millions) NYSE 1,363 NASDAQ 1,433 ----------------------------------------------------------------- Commitments Of Traders Report: 09/03/02 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 added 6,000 contracts to the long side, while reducing shorts by only 500, in what appears to be a stockpiling in anticipation of extreme movement next week. Small traders increased both long contracts and short, adding 5,000 to the long side and 8,000 to the short side. Commercials Long Short Net % Of OI 08/13/02 427,618 475,536 (47,918) (5.3%) 08/20/02 422,100 469,556 (47,456) (5.3%) 08/27/02 425,982 469,087 (43,105) (4.8%) 09/03/02 431,755 468,529 (36,774) (4.1%) 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 08/13/02 155,040 66,546 88,494 39.9% 08/20/02 156,974 69,071 87,903 38.9% 08/27/02 153,152 72,408 80,744 35.8% 09/03/02 158,262 80,130 78,132 32.8% 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 2600 short contracts and only 1400 longs, while small traders got longer, adding 1,000 longs and reducing short positions by 300. Commercials Long Short Net % of OI 08/13/02 42,303 50,354 (8,051) ( 8.7%) 08/20/02 41,876 49,461 (7,585) ( 8.3%) 08/27/02 45,354 50,634 (5,280) ( 5.5%) 09/03/02 46,712 53,287 (6,575) ( 6.6%) 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 08/13/02 12,797 8,933 3,864 17.8% 08/20/02 11,321 7,980 3,341 17.3% 08/27/02 10,156 8,040 2,116 11.6% 09/03/02 11,150 7,720 3,430 18.2% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 8,460 - 3/13/02 DOW JONES INDUSTRIAL Commercials reduced short positions slightly, reducing risk heading into next week, while small traders reduced both sides by about 500 contracts. Commercials Long Short Net % of OI 08/13/02 22,837 13,833 9,004 24.6% 08/20/02 21,160 15,349 5,811 15.9% 08/27/02 21,023 14,328 6,695 18.9% 09/03/02 21,161 13,792 7,369 21.1% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 08/13/02 5,050 8,349 (3,299) (24.6%) 08/20/02 6,216 8,163 (1,947) (13.5%) 08/27/02 6,825 8,438 (1,613) (10.6%) 09/03/02 6,395 7,966 (1,571) (10.9%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ****************** Weekly Funs Screen ****************** Sour on Japan? Try a Pacific Ex. Japan Fund Last week, the Nikkei hit a 19-year low, so if you want to be in the Pacific region while at the same time limiting your exposure to Japan, consider investing in what's called a Pacific stock ex. Japan fund. These specialized funds seek long-term appreciation by generally investing at least 75% of stock holdings in Pacific countries, with less than 10% of stocks invested in Japan. That is Morningstar's criteria for classification in the category. Accordingly, we're also going to be using Morningstar's screener online to isolate the top performing funds in the category based on relative returns as adjusted for risks and costs and expenses. Since Morningstar's ratings are based on performance compared to category peers, we will also consider Lipper's consistent return and preservation grades, which are relative to all international stock funds. The first fund of its kind, Newport Tiger Fund (CNTTX), now part of the Liberty fund family, originated in May 1989, and invests primarily in equity securities issued in the ten Tigers of Asia: Hong Kong, Singapore, South Korea, Taiwan, Malaysia, Thailand, Indonesia, China, Philippines, and India. At its peak in 1994, the fund had over $450 million in net assets, but recently the fund's assets were valued at just $26 million. Wright Investors' Service introduced the EquityFund - Hong Kong Fund (WEHKX) in June 1990. It invests primarily in equities of companies domiciled in Hong Kong, one of the ten Asian "tigers." T. Rowe Price launched their New Asia Fund (PRASX) in September 1990, and has net assets today of $676 million. In 1993 and in 1996, the fund had over $2.1 billion in assets under management. It invests at least 65% of assets in the common stocks of large- and small-cap companies in Asia and the Pacific Basin (excluding Japan). It invests in at least five countries, with emphasis on equities issued in China, Hong Kong, Indonesia, India, Malaysia, Philippines, Singapore, South Korea, Taiwan, and Thailand. The subcategory's second largest fund today, Fidelity Southeast Asia (FSEAX) with $282 million in assets, started operations in April 1993. So this is not one of the bigger fund groups based on assets managed today, something to keep in mind as you think through whether an investment in a Pacific ex. Japan fund may be appropriate for you. Screen Process The first thing we did was run an all-inclusive screen to show us all funds in the category, regardless of their Morningstar rating so we could isolate the category leaders based on assets managed. Note that only seven funds in the Pacific ex. Japan category have net assets today of more than $100 million today per Morningstar, as follows: Largest Pacific Ex. Japan Funds: T. Rowe Price New Asia (PRASX) Fidelity Southeast Asia (FSEAX) Matthews Korea (MAKOX) Matthews Asian Growth & Income (MACSX) Liberty Newport Tiger (CNTAX, CNTBX, CNTZX) Fidelity China Region (FHKCX) Matthews Asian Pacific Tiger (MAPTX) Next, we sorted the category by Morningstar Rating (with 5 stars highest) and found that four funds, including the Matthews Asian Growth & Income Fund, was among the highest rated funds based on relative risk-adjusted performance. Its sibling, Matthews China Fund (MCHFX) is also 5-star rated by Morningstar. The other two 5-star funds are Commonwealth Australia/New Zealand Fund (CNZLX) and Phoenix-Aberdeen New Asia Fund (PAFAX, PAFBX). Seven additional funds sport an above average rating of 4 stars from Morningstar: Dreyfus Premier Greater China (Multiple Class) Fidelity China Region (FHKCX), Fidelity Southeast Asia (FSEAX), Matthews Pacific Tiger (MAPTX), Pacific Capital New Asia (PNAAX, PNASX), T. Rowe Price New Asia (PRASX), and TCW Galileo Asia Pacific (TGAPX). The 4-star funds from T. Rowe Price, Fidelity and Liberty Newport are also among the category's largest funds. To have a closer look at risk, we next sorted the funds by their Morningstar Risk Rating (from low to high). Here, we found that only three funds have "low" risk ratings: Commonwealth Australia New Zealand (CNZLX), Matthews Asian Growth & Income (MACSX), and the two class shares of Phoenix-Aberdeen New Asia Fund. It's no surprise then that each fund is Morningstar 5-star rated overall based on relative performance, as adjusted for risk. Several fund groups including AIM, DFA, Fidelity, Goldman Sachs, Ivy, Scudder and T. Rowe Price had at least one offering with a "below average" risk rating per Morningstar. We turned our attention next to Lipper's ratings for return and preservation. Lipper rates funds versus their broad peer group, so the comparison group is all international stock funds rather than Pacific ex. Japan funds only. We first screened for funds with 1-highest Lipper grades for consistent return, identifying six funds that are Lipper Leaders (1's) for consistent, strong return performance relative to the broad peer group as follows: Lipper Leaders for Consistent Return: Matthews Asian Growth & Income (MACSX) Phoenix-Aberdeen New Asia (PAFAX, PAFBX) Commonwealth Australia/New Zealand (CNZLX) Fidelity Southeast Asia (FSEAX) Investec Asia Focus (IASMX) Matthews Asian Pacific Tiger (MAPTX) Two of the Lipper Leaders for consistent return are also Lipper Leaders for preservation: Matthews Asian Growth & Income (MACSX) and Phoenix-Aberdeen New Asia (PAFAX). Commonwealth Australia New Zealand Fund (CNZLX) and the Class B shares of the Phoenix- Aberdeen New Asia Fund (PAFBX) have Lipper preservation ratings of 2's, signifying above average skill in preserving capital in relation to all international stock funds. Lastly, we looked to see which funds were graded 2's per Lipper for consistent return. The "above average" performers included among others Goldman Sachs Asia Growth (GSABX), Liberty Newport Tiger (Multiple Class), and T. Rowe Price New Asia Fund (PRASX). To summarize the major findings so far, we have identified which funds in the category have been the most successful based on net assets under management today. We then identified four funds in the category that are Morningstar 5-star rated for risk-adjusted relative performance, and noted that each one was also graded as having "low" risk relative to category peers. Lipper's analysis identified six Lipper Leaders for consistent return performance, of which two funds were also top-rated for their preservation of capital ability (in relation to all international equity funds). In the next section, we tell you which Pacific stock (ex. Japan) funds we like the most based on their independent ratings, funds management and other factors, such as costs and expenses. Our Favorite Funds We think your best bets now in this category are Matthews Asian Growth & Income Fund (MACSX) and Phoenix-Aberdeen New Asia Fund (PAFAX). Both funds are top rated relative to their broad fund group and their category peers, and have manager tenures of six years or more (the all funds average is 4.1 years, according to Morningstar). Matthews Asian Growth & Income Fund (MACSX) seeks appreciation and current income by investing at least 65% of fund assets in "convertible securities" issued in at least three Pacific Rim markets. The remainder of assets may be invested in securities of any type, including preferred shares, issued in any country. To select convertibles, the fund assesses capital appreciation potential, price to the underlying stock's price, yield relative to other fixed-income options, interest or dividend income of convertible and underlying stock, call and put features, and creditworthiness. The fund may invest without limit in lower- quality debt securities. Morningstar says "conservative investors looking to invest in emerging Asia won't do better than this fund," and we concur. Its focus on convertibles and preferred shares (that are less volatile than the region's common stocks) has resulted in the lowest risk score in the category. According to Morningstar, Matthews Asian Growth & Income Fund's trailing 3-year standard deviation of 12.5% is approximately half the category average. While maintaining its low risk profile, the fund has produced consistent, strong returns relative to both its category peers and all international stock funds. The fund's trailing 3-year average total return of 12.7% as of Sep. 9, 2002 beat the MSCI EAFE index by 25.1% per year on average, ranking it in the top percentile of the Pacific stock ex. Japan stock category. The fund's trailing 5-year annualized return of 7.5% beat the MSCI EAFE index benchmark by 11.7% per year on average for a top 1% category ranking. Matthews Asian Growth & Income Fund is managed by CEO and head investment officer, G. Paul Matthews. He has managed the fund since inception in September 1994 so all of the fund's history and performance may be attributed to him and his support staff. The fund's expense ratio of 1.95% is a little high, but all in all, Matthews have delivered strong performance net of expense. The other fund we like in the Pacific stock ex. Japan group is Phoenix-Aberdeen New Asia Fund Class A (PAFAX). It seeks long- term capital appreciation by normally investing at least 65% of assets in equities issued from countries in Asia, but excluding Japan. Investments may include common stocks, convertibles and preferred stocks. According to Morningstar, 83% of assets were invested in stocks as of July 31, 2002, with a "mid-cap blend" style overall. The fund typically invests in three (or more) of the following countries: China, Hong Kong, India, Indonesia, South Korea, Malaysia, Pakistan, Philippines, Singapore, Sri Lanka, Taiwan, and Thailand. It may also invest from time to time in nations such as Australia and New Zealand. The Class A shares have a front-end load of 5.75%. Phoenix-Aberdeen's low average standard deviation (18.5%) the last three years is indicative of its low risk profile versus other Pacific ex. Japan funds (as well as broad peer group of international stock funds). While maintaining its lower risk profile, the fund has delivered strong performance versus its category peers. According to Morningstar, the fund's 3-year average return of 1.0% was 13.4% better than the MSCI EAFE index for a category ranking of 11% (near top decile). The fund's trailing 5-year average return of negative 0.6% was 3.6% better than the MSCI EAFE index and strong enough on a relative basis to rank it in the category's top 4% for performance. Hugh Young, a managing director and portfolio manager for the Phoenix-Aberdeen Asia Series, has run the portfolio since its inception in September 1996, so the fund's performance may be attributed to him and his support staff. Conservative equity investors looking for a little exposure to Asian stocks (sans Japan) have an appropriate choice here. Conclusion With the Japanese stock market hitting a 19-year low last week, it's understandable to be leery about the country's prospects. However, if you like the long-term growth opportunities of the other markets of the Asia/Pacific region, then you may want to consider some of the better rated funds identified herein. If you want to limit your risk within the category, we've pointed out two funds we like on a risk-adjusted performance basis and have excelled at delivering consistent, strong performance and preserving capital. For more information on the Matthews Asian Growth & Income Fund, log on to www.matthewsfunds.com and for more information on the Phoenix-Aberdeen New Asia Fund, log on to www.phoenixfunds.com. Steve Wagner Editor, Mutual Investor email@example.com *********************** INDEX TRADER GAME PLANS *********************** Due to Leigh Stevens being out of town, the Index Trader Game Plan, otherwise known as the Sector Beat, will not be updated for the remainder of this week. Jeff Bailey will be updating the Sector Beat regularly starting September Eleventh. ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********************** SWING TRADER GAME PLANS *********************** Chickened Out I blew it. The plan was to remain long all day and go into any post 9/11 open with profit points under our belt. Instead I read more into the heightened warning and falling market than I should have and closed the LONG signal. Was it the right decision or the wrong one? To read the rest of the Swing Trader Game Plan Click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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The Option Investor Newsletter Tuesday 09-10-2002 Copyright 2002, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: BYD, SYK Dropped Puts: WY Daily Results Call Play Updates: MSFT, TRMS, LLL, OMC New Calls Plays: DJX, QQQ, SPW, CVG, IDPH Put Play Updates: AA, EXC New Put Plays: AGN, TXU **************** 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: ***** BYD $17.64 +0.13 (-0.07) The buying enthusiasm that fueled BYD's rise through the $17 resistance level seems to have run its course. Over the past 3 days, the stock has been stuck in a rather narrow range and appears to be in danger of rolling over. Since tomorrow is likely to be rangebound, at least in the early going, we want to take this opportunity to close this play before it goes against us. --- SYK $58.20 -0.41 (+0.50) SYK's successful breakout over the $57 level should have generated more follow-through to the upside today, especially with the broad market rallying to close at its high of the day. Instead, SYK fell early in the day and strength in the broad market appears to be the only thing that kept the stock from violating near-term support. With oscillators looking toppy, we want to close the play tonight while it is still in the black. Use any follow through of this afternoon's rebound to exit open positions at a more favorable level. PUTS: ***** WY $51.54 -0.23 (+0.54) Failed breakouts and breakdowns have been the rule, rather than the exception lately. WY provides a perfect example, as the stock broke down below the $51 level, only to find support at $50 and begin its recovery. There is still the possibility of further weakness, but the fact that there were willing buyers despite the apparent breakdown hints at an underlying bid in the stock. With daily oscillators turning bullish, risk has shifted to the upside. Rather than wait for our stop to take us out of the play, we're going to close it out tonight ahead of a possible relief rally later this week. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu Week BYD 17.64 -0.21 0.13 Drop, going sideways CVG 19.11 0.56 0.65 New, heading over $20 DJX N/A New, market play as buyers come back IDPH 43.33 1.57 1.32 New, rounding from support LLL 54.95 1.99 0.11 Higher ground every day MSFT 49.79 -1.44 1.09 leading overall tech rally OMC 62.94 2.04 1.20 5 straight green candles QQQ 23.65 0.41 0.57 New, tech rally SPW 58.25 0.56 2.92 New, 2 for 1 equals momentum SYK 58.25 0.96 -0.36 Drop, underperforming TRMS 47.01 -1.05 0.17 big meeting coming up PUTS AA 23.76 0.71 0.46 failed rally AGN 55.16 -0.61 -1.28 New, wrinkles are back EXC 44.76 0.58 -0.22 ready to break TXU 44.70 0.09 -1.19 New, break from consolidation WY 51.54 0.76 -0.23 Drop, hanging in there ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************** PLAY UPDATES - CALLS ******************** MSFT $49.79 +1.09 (+1.97 for the week) Microsoft has remained above the fray of the IT spending slowdown. In spite of a weak PC market and predictions of it getting weaker, MSFT continues to show impressive sales of its software products. Last week CDW raised its earnings guidance, citing strong sales of Microsoft products. While other companies have cut capital spending, MSFT has increased its R&D budget by 20% to $5.2 billion and hired an additional 5,000 employees to prepare for a series of new software launches. They are planning a new OS, code named "Longhorn," which will better blend OS, applications and web services. Although some critics have doubted sales potential of new operating systems upgrades, Microsoft need only point out the 46 million copies of XP that have been sold through OEMs and retail outlets since it was released in October 2001. Sales of XP have outpaced all other operating systems that Microsoft has released, including Windows 98, which sold 28 million copies in the first 9 months after its release. The PC slowdown will certainly affect Microsoft to some degree, but if users who don't want to pony up for a new PC can simply upgrade the OS, Microsoft will come out of the slowdown just fine, providing an alternative to users. A look at the daily chart shows MSFT clearing out the 50-dma of $49.34, and closing on its high of the day, another bullish sign. The next level of resistance is $53.45, and the stock has bounced from the point and figure bullish support line on six straight occasions. The next bullish support level is $47 and our new stop loss of $46.00 will signal a break in this strong support level. The current bullish vertical count on the stock is $72. While this would be a long-term target, it is still very bullish. Our initial target on the play remains $53.50, however given the strong bullish case for the stock, we may simply raise our stops if we approach that level, rather than sell. --- TRMS $47.01 +0.17 (+1.71 for the week) Trimeris found legs on its recent pullback to $43, holding above its 200-dma of $42.67 and flirting with the 50-dma of $44.47 for several days before rallying back toward $50. The stock has shown good relative strength when compared to the Biotech Index (BTK.X), which has found resistance at its 50-dma. This is most likely because TRMS's new class of drug, T-20, has not only been scheduled for release in early 2003, but demand is far outstripping supply. This new class of HIV drug, called fusion inhibitors, has shown great promise, and T-20 will be the first to hit the market. In addition to the studies already released, Trimeris will be presenting at the end of September at ICAAC (Interscience Conference on Antimicrobial Agents and Chemotherapy) in San Diego, which is the world's premier conference on infectious diseases. At this meeting they plan on presenting two positive studies. The first one will show the tolerability of T-20 during therapy in the phase II trials. The second study, which is a collaboration between Trimeris, Roche, Stanford University, University of North Carolina, Duke University, Cornell Medical Center, and the University of Alabama, will be a complete analysis of the anti-retroviral activity of Trimeris's T-1249, a fast tracked drug still in the pipeline, which may hold even more promise than T-20. These results should help the stock's current run, possibly through previous resistance at $50. We will hold our long position on Trimeris, raising our stop loss from $42.50 to $44.00, just below the 50-dma. --- LLL $54.94 +0.13 (+2.10) As the 9/11 anniversary and President Bush's speech to the UN loom large in our immediate future, Defense stocks have continued to trade well. While the DFI index was unable to gain significant ground on Tuesday, this is likely due to a lack of conviction ahead of a couple of important events. Note that the index managed a technical breakout over the $574 level on Monday and appears ready to push up towards the next major obstacle near $595-600. Giving a hint of the bullishness in the sector is LLL, which rallied through $55 and briefly pushed through the $56 level on Tuesday before settling back near the $55 level at the close. This looks like simple consolidation ahead of the next bullish move. There are a couple of levels to look at for new entries on a pullback. First is intraday support near $54.60 and then down near $52.50-53.00, which is supported by the 200-dma at $52.54. Catching an entry on a dip is preferable, but should a momentum move develop, new entries can be considered on a push through Tuesday's high ($56.05) on strong volume and sector participation. Note that our stop is now set at $51. --- OMC $62.94 +1.20 (+2.94) Company-specific and economic developments are currently taking a back-seat to concerns about the 9/11 anniversary and the potential for war with Iraq. Despite these fears, there appears to still be a bullish bid in the broad markets, as denoted by the DOW's 83 point advance on Tuesday. OMC took advantage of the bullish tone and continued its 5-day advance, ending with another 2% gain. This bullish action has driven the stock right into the heart of the $61-65 congestion zone, as buyers are trying to jockey into position ahead of an expected post-9/11 rally. Prior resistance at $61 and then $60 are now likely to act as support on a pullback. Traders still looking to enter the play can use a dip and rebound in this area for initiating new positions, while momentum traders will want to be very careful until OMC can clear the $65 level and preferably the mid-August intraday highs near $66. Raise stops to $59. ************** NEW CALL PLAYS ************** DJX - Dow Jones Industrial Average - 86.03 +0.84 (+1.76 for the week) Company Summary: The DJX is derived from the Dow Jones Industrial Average. This index of 30 stocks represents different areas of the economy and has been in use since 1896, when it was started with 12 stocks. It increased to its current level of 30 stocks in 1928. The DJX trades on a multiple of 1/100 of the Dow. Why We Like It: The Dow has shown amazing resiliency recently, in the face of anxiety over the 9/11 anniversary. After the September 3 sell- off the group found its legs as investors began to sneak back into the market last Wednesday, a week ahead of the anniversary. While many analysts expected a pre-9/11 sell-off, that just hasn't been the case. Even sectors such as Insurance (IUX.X) and Airlines (XAL.X), which were pummeled after last year's attack, have avoided a big drop ahead of tomorrow's 1-year mark. Looking at a retracement bracket of the 1500-point rally between July 24 and August 22, the Dow found support on 5 straight trading sessions last week at the 50% retracement level. This support provided the foundation for the rally of the last two days. With many investors on the sidelines, waiting for the anniversary to pass before getting back into the market, the fact that the Dow has rallied with the current players is impressive. In spite of the U.S. government raising its security alert level, identifying intelligence that pointed to specific plans to attack U.S. installations, buyers didn't flee. Instead, after the initial announcement that we were raising the level of alert to high-risk caused a market pullback, the Dow once again rallied to finish the day on its high, indicating buyer's are shrugging off the possibility of attacks to get back in ahead of a possible rally, and were still looking to by more as the market closed. This date has been looming for quite a while, giving investors every reason to stay away. Now that it is upon us, we are looking for a rally, as long as nothing happens attack-wise that would seriously interfere with an economic recovery. Those would-be buyers who have stayed away until now, should begin to come back at an increasing pace and we would look for them to boost the Dow back toward 9000, making up the losses of the last three weeks. Our initial target on the play will be $90, with a stop loss of 84.00. BUY CALL SEP-85*DJX-IG OI= 6447 at $2.50 SL=1.25 BUY CALL SEP-87 DJX-II OI= 17925 at $1.35 SL=0.75 BUY CALL OCT-85 DJX-JG OI= 1077 at $4.30 SL=2.20 BUY CALL OCT-87 DJX-JI OI= 285 at $3.10 SL=1.50 Average Daily Volume = n/a --- QQQ - NASDAQ 100 Tracking Stock - $23.65 +0.57 (+0.80 for the week) Company Summary: The QQQ is the Nasdaq 100 tracking stock. The Nasdaq 100 represents 100 of the leading companies trading on the Nasdaq stock exchange. Why We Like it: The tech sector has rebounded strongly after the sell-off between 8/23 and 9/5. Buyers have begun to creep back into the market ahead of 9/11 and with so many investors still on the sidelines ahead of that date, we should continue to see an influx of buying by tomorrow afternoon, if there are no anniversary attacks. The tech sector that has been beat up the worst is the semiconductors. Even this group rebounded strongly today, taking out resistance at 300 to trade as high as 304.09. The sector gained over 3% on the day, in a reversal of fortune after last week's Intel news pushed it to new 52-week lows. The Nasdaq-100 (NDX.X), which the QQQs track, found support on September 5 at 900, trading as low as 900.90, before rebounding to make up 47 points in only three trading sessions, correlating to the recent rise in the Qs. In fact, 76% of the stocks in the NDX showed gains today, led by stalwarts Microsoft, Yahoo and Applied Materials. A look across some of the technology indices shows the Software Index (GSO.X) and Internet Index (INX.X) crossing their 50-dmas, while the Disk Drive Index (DDX.X) and Computer Technology Index (XCI.X) are flirting with theirs, as well. The QQQs will most likely see this level (23.95) crossed on Wednesday or Thursday as the post-9/11 rally ensues. A look at the oscillators show the NDX oversold, with both stochastic and MACD indicators turning up and giving new buy signals. The real story, however, is the overall market rally that is expected with the passing of the 9/11 anniversary. For investors who would rather buy the market wave, than try to pick an individual tech stock, this is the play for them. We will use an initial target of $26, where the Qs last traded on August 22, before the recent decline. Place stop losses at $22.25. BUY CALL SEP-22*QAV-IU OI= 56481 at $1.90 SL=1.00 BUY CALL SEP-25 QAV-IY OI= 155758 at $0.25 SL=0.00 BUY CALL OCT-22 QAV-JU OI= 10712 at $2.55 SL=1.25 BUY CALL OCT-25 QAV-IU OI= 35511 at $0.95 SL=0.00 Average Daily Volume = n/a --- SPW - SPX Corporation - $112.92 +2.92 (+3.47 for the week) Company Summary: SPX Corporation is a global provider of technical products and systems, industrial products and services, flow technology and service solutions. Why We Like It: Two for one stock splits are usually kind to strong issues, as it signals strength that draws investors to the possibility of getting more shares of a stock that is on the rise. While the math turns out to be a wash, there are not many stocks in the current market conditions that are priced high enough for a split which would still leave the stock at a high enough price for some real post-split movement. SPW is the exception. On August 28, the Board of Directors approved a split that will be distributed to shareholders of record on October 1, 2002. The split will take place on October 24 and begin trading October 25. In addition to the split, the Board also approved a $250 million stock re-purchase program, showing its faith in the current stock price. SPX has put in place its third series of higher highs and higher lows since July 24, a very bullish sign. The ascending channel provided support on all three occasions, the last time being accompanied by the 50-dma of 103.20. On September 4, the bottom trendline of this channel coincided with the 50-dma to give the stock a renewed boost to its current level of $112.92. The stock rode the 50-dma, holding above it for three days on its most recent pullback. As stocks rarely go straight up, traders look for the pattern of higher highs and higher lows as the next best thing. This pattern in SPX has been accompanied by recent buy signals in both Stochastic and MACD oscillators. The stock's most recent previous high, of $112.75 on August 23, was surpassed today, as SPX traded as high as $113.50. A look at the point and figure chart shows that the stock experienced a 4-box reversal after reaching the August high, found support, and then reversed up once more. It is now on the verge of a fresh PnF buy signal at $114. The current bullish vertical count is $134 and the fact that we are initiating entry after the stock found support on a reversal from its recent run is that much more bullish. Traders who would have initiated a 1/2 position on the previous PnF breakout would be filling in the full position with a trade at $114. Our initial target on the play will be the next level of resistance at $120, but above that level, $128 looks like a possibility. Place stops at 107.50, just below Monday's low. BUY CALL SEP-110 SPW-IB OI= 158 at $5.20 SL=2.60 BUY CALL SEP-115 SPW-IC OI= 212 at $2.45 SL=1.20 BUY CALL OCT-110*SPW-JB OI= 6 at $9.20 SL=5.00 BUY CALL OCT-115 SPW-IB OI= 8 at $6.60 SL=3.30 Average Daily Volume = 632 K --- CVG - Convergys Corporation $19.11 +0.65 (+1.17 this week) Company Summary: Convergys Corporation is engaged in the provision of outsourced, integrated billing and customer care software and services. The company focuses on developing long-term strategic relationships with clients in customer-intensive industries, including telecommunications, cable, broadband, direct satellite broadcasting, Internet services, technology and financial services. CVG serves its clients through its two operating segments: the Information Management Group (IMG), which provides outsourced billing and information services and software, and the Customer Management Group (CMG), which provides outsourced marketing and customer support services and outsourced employee care services. Why We Like It: Despite the persistent weakness in the Telecom and Media sectors of the market, there is one undeniable fact. Consumers are still using these services and the bills still need to be sent and accounts still need to be serviced. CVG gets that job done and judging by the recent series of contracts the company has either signed or extended, they must be doing the job right. Most recently, Time Warner Cable expanded its billing services contract with CVG on Monday. Apparently investors liked the sound of things as they have been bidding the stock sharply higher over the past 2 days, and CVG is close to completing the handle portion of a healthy 10-week Cup & Handle formation. The bottom of the cup formed near the $13 level, with the lip of the cup now resting at $19 (where the rally off the July lows took a pause). That led to a 2-week consolidation pattern that has been capped off by the rally of the past 2 days. A successful completion of the pattern will occur with CVG continuing its rally and moving through the $19.25 level. A quick look at the PnF chart also shows the bulls in control, with the current vertical count pointing to the $30.50 level as the eventual destination. And a print of $19.50 will generate a fresh double-top Buy signal, giving the bulls even more confidence. This is one of those pending breakouts, where buying the breakout has greater odds of success. Momentum traders will want to see CVG trade through the $19.50 level on solid volume before taking a position. With the current uncertainty in the markets, dip buyers might get one more dip before the breakout attempt. Look to enter the play on a rebound from the $18.00-18.50 area. Place stops initially at $17, just below last week's consolidation lows. *** September contracts expire in less than 2 weeks *** BUY CALL SEP-17 CVG-IW OI= 76 at $1.85 SL=1.00 BUY CALL SEP-20 CVG-ID OI= 150 at $0.45 SL=0.25 BUY CALL OCT-17 CVG-JW OI=9123 at $2.30 SL=1.50 BUY CALL OCT-20*CVG-JD OI= 214 at $0.95 SL=0.50 BUY CALL OCT-22 CVG-JX OI= 141 at $0.35 SL=0.00 Average Daily Volume = 1.42 mln --- IDPH – IDEC Pharmaceuticals $43.33 +1.32 (+2.62 this week) Company Summary: IDEC Pharmaceuticals is a biopharmaceutical company engaged primarily in the research, development and commercialization of targeted therapies for the treatment of cancer, autoimmune and inflammatory diseases. IDPH's first commercial product, Rituxan, and its most advanced product candidate, Zevalin (formerly Y2B8), are for use in the treatment of certain B-cell non-Hodgkin's lymphomas. The company is also developing products for the treatment of various autoimmune diseases such as psoriasis, rheumatoid arthritis and lupus. Why We Like It: As the broad market bottomed in late July, the Biotechnology sector (BTK.X) led the charge up the charts. In fact, the BTK index actually bottomed in early July, ahead of the rest of the market. Since then, the index gave back nearly two-thirds of its rally, finding support at the 62% retracement level, and despite a series of negative pieces of news, appears to be getting started on its next rally attempt. While the recovery in the BTK index has been rather tepid so far, shares of IDPH have been moving strongly so far this week. After getting back above the 50-dma ($40.52) late last week, the stock has been moving well, ignoring the intraday weakness in the overall sector, and today tacked on more than 3% in the process of moving back through the 20-dma at $42.79. While there is significant resistance waiting just overhead in the $44-45 area, once clear of that obstacle (especially if the BTK index gets moving), IDPH could find itself challenging the August highs near $47.50 in short order. Should tomorrow pass without incident, the broad markets are likely to experience a powerful relief rally, and as one of the remaining momentum favorites, the BTK should lead that charge. With IDPH now above some important resistance levels (namely $41 and $42), these levels should now act as support on intraday pullbacks before that rally gets going. Look to initiate new positions on a rebound from support, but wait for confirmation of continued buying interest in the BTK sector. Momentum traders will want to wait for IDPH to push through the $45 resistance level before opening new positions. We are initiating the play with our stop set at $40.50, just above the 50-dma. *** September contracts expire in less than 2 weeks *** BUY CALL SEP-40 IDK-II OI= 2034 at $4.50 SL=2.75 BUY CALL SEP-45 IDK-IJ OI= 2460 at $1.30 SL=0.75 BUY CALL OCT-45*IDK-JI OI=13159 at $3.00 SL=1.50 BUY CALL OCT-50 IDK-JJ OI= 4477 at $1.35 SL=0.75 Average Daily Volume = 5.43 mln ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* PLAY UPDATES - PUTS ******************* AA $23.76 +0.46 (+1.17 for the week) Alcoa has rebounded with the rest of the market, but has fallen short of its high of September 3, $24.50, which is also our stop loss. The problems AA has experienced have not changed. There is still an oversupply of product sitting in storage, pricing pressure from Chinese producers adding supply to an already saturated market, and aluminum prices, which have dropped 15% in the last year, show no signs of recovery. Now Icelandic producers Nordural, Isal and Atlantsal all plan on expanding smelting capacity, which will increase supply, competition and pricing pressure. Alcoa was also trying to win approval for a plant in Iceland, due to low hydropower costs, but talks are ongoing. The fact that China has switched from importer to exporter has also reduced the customer base for the U.S. In fact, steelmaker Corus Group Plc announced plans to spin off its aluminum plants, but has found no clear takers yet. Today's rally in AA found plenty of supply at $24. A look at the 5-minute chart shows the stock was turned away from that level this morning and additional attempts at a rally were subdued. This failure at $24 looks like evidence of an opportunity for new short entries. A look at the point and figure chart shows no real change, as the stock would have to trade $25 to reverse its current signal, a level that would take us out of the play. We remain bearish on the stock, although traders should view a trade of $25 on a Dow 9/11 rally as a sign of a sympathy bounce, which cold sweep AA along as it is a Dow component and thus subject to being carried along with the rising tide. Look for continued failure below $24.50 to initiate new positions and leave stop losses at that level. --- EXC $44.76 -0.22 (+0.36) Despite the resiliency in the broad market, Utility stocks continue to be under significant selling pressure. Rather than finding support near the $270 level on Tuesday, the Utility sector index (UTY.X) broke down and this is a good confirming indicator for our EXC play. Recall that the stock broke down a couple weeks ago and has spent the past week mired in a fairly narrow range between $43.50-46.00. Each attempted rally is being turned back near the $45.50 level and with the bearish action in the UTY index, it appears the next breakdown is close at hand. Use failed rallies near the $45.50 level to initiate new positions with an eye towards a breakdown out of the recent trading range. Traders looking for confirmation before playing, will want to target new entries on a breakdown under $43.25, confirmed by the UTY index breaking under the $260 support level. Keep stops in place at $46.25. ************* NEW PUT PLAYS ************* AGN – Allergan, Inc. $55.16 -1.28 (-1.93 this week) Company Summary: Allergan is a technology-driven, global healthcare company that develops and commercializes specialty pharmaceutical products for the ophthalmic neurological, dermatological and other specialty markets, as well as ophthalmic surgical devices and contact lens care solutions. Its revenues are principally generated by prescription and non-prescription pharmaceutical products in the areas of ophthalmology and skin care, neurotoxins, intra-ocular lenses and contact lens care products. The company's are sold to drug wholesalers, independent and chain drug stores, pharmacies, commercial optical chains, commercial optical chains, food stores, hospitals and individual medical practitioners. Why We Like It: The longer a trend remains in force, the stronger that trend becomes. As each rally attempt fails at a lower level, it leaves behind a larger number of investors that are still hoping to get out close to break-even. Shares of AGN have been pinned under a descending trendline since late November, and even the rally off the July lows didn't have enough power to break above that trendline. That rally failed right at the trendline near $63 and the past 2 weeks have seen the stock continuing to slide lower. In the process, it has broken back under all of its shorter term moving averages and is now resting precariously on the $55 support level. And judging by the heavy selling volume over the past 2 days, that support level could give way at any time. Last week's decline under $56 put the PnF chart back on a Sell signal and the current vertical count points to an eventual price target of $46. Note that the bullish support line currently rests at $54, and that could be the catalyst for a brief rebound. When that rebound fails it will be our high-odds opportunity to target new positions. Look for any rally attempt to fail near the $56 level, which is shaping up as resistance. An even better entry may be possible up near the $57 level, but we won't want to press it any further than that. Should the bears continue to press AGN lower from current levels, momentum trades can be taken on a decline under Tuesday's afternoon low of $54.70. A rally through the $57.50 level will give us a clear indication that we're on the wrong side of the trade, so our stop is set at $57.50. *** September contracts expire in less than 2 weeks *** BUY PUT SEP-55 AGN-UK OI= 786 at $1.55 SL=0.75 BUY PUT OCT-55*AGN-VK OI=1315 at $2.95 SL=1.50 BUY PUT OCT-50 AGN-VJ OI= 340 at $1.35 SL=0.75 Average Daily Volume = 1.10 mln --- TXU – TXU Corporation $44.70 -1.19 (-1.22 this week) Company Summary: TXU Corporation is a global energy services company that engages in electricity generation, wholesale energy trading, retail energy marketing, energy delivery, other energy-related services and, through a joint venture, telecommunications services. TXU owns over 22,600 megawatts of power generation and sells 335 terawatt hours of electricity and 2.8 trillion cubic feet of natural gas annually. The company delivers or sells energy to approximately 11 million residential, commercial and industrial customers primarily in the United States, Europe and Australia. Why We Like It: Despite the broad market strength so far this week, the Utilities just can't seem to get in on the act, and the Utilities index (UTY.X) fell under the important $270 support level on Tuesday. The Utilities got absolutely pummeled after the UTY index fell under the $300 support level in July and after failing to even retest that level late last month, the sellers appear to be back in control. TXU posted an impressive rally off the July lows, rising from $34 all the way back up to $50 (right at the bearish resistance line on the PnF chart) before the buyers lost their conviction. The stock quickly fell back under the 200-dma and then built a temporary floor near $45.50-46.00 late last week. That floor gave way on Tuesday, as the stock fell through support, and then the 50-dma ($44.78) on solid volume. The 38% retracement of the rally off the July lows is at $43.69, and that is the next level where the bulls might attempt to get a rally going. If they fail, TXU will likely fall to the 50% retracement ($41.77) in short order. Right now, the best scenario for the play would be a broad market rebound that lifts TXU back near the $46 level before the sellers lean on the stock again. Look to initiate new positions either on a failed rally near $46, or on a breakdown under the $43.50 level. We are initiating the play with our stop set at $47. If playing a breakdown move, be sure to confirm weakness in the UTY index before initiating your position. *** September contracts expire in less than 2 weeks *** BUY PUT SEP-45 TXU-UI OI= 120 at $1.20 SL=0.50 BUY PUT OCT-45*TXU-VI OI=1358 at $2.45 SL=1.25 BUY PUT OCT-40 TXU-VH OI=1322 at $0.85 SL=0.40 Average Daily Volume = 1.76 mln ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Tuesday 09-10-2002 Copyright 2002, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: Call - DJX Traders Corner: Candles Burning Bright ********************** PLAY OF THE DAY - CALL ********************** DJX - Dow Jones Industrial Average - 86.03 +0.84 (+1.76 for the week) Company Summary: The DJX is derived from the Dow Jones Industrial Average. This index of 30 stocks represents different areas of the economy and has been in use since 1896, when it was started with 12 stocks. It increased to its current level of 30 stocks in 1928. The DJX trades on a multiple of 1/100 of the Dow. Why We Like It: The Dow has shown amazing resiliency recently, in the face of anxiety over the 9/11 anniversary. After the September 3 sell- off the group found its legs as investors began to sneak back into the market last Wednesday, a week ahead of the anniversary. While many analysts expected a pre-9/11 sell-off, that just hasn't been the case. Even sectors such as Insurance (IUX.X) and Airlines (XAL.X), which were pummeled after last year's attack, have avoided a big drop ahead of tomorrow's 1-year mark. Looking at a retracement bracket of the 1500-point rally between July 24 and August 22, the Dow found support on 5 straight trading sessions last week at the 50% retracement level. This support provided the foundation for the rally of the last two days. With many investors on the sidelines, waiting for the anniversary to pass before getting back into the market, the fact that the Dow has rallied with the current players is impressive. In spite of the U.S. government raising its security alert level, identifying intelligence that pointed to specific plans to attack U.S. installations, buyers didn't flee. Instead, after the initial announcement that we were raising the level of alert to high-risk caused a market pullback, the Dow once again rallied to finish the day on its high, indicating buyer's are shrugging off the possibility of attacks to get back in ahead of a possible rally, and were still looking to by more as the market closed. This date has been looming for quite a while, giving investors every reason to stay away. Now that it is upon us, we are looking for a rally, as long as nothing happens attack-wise that would seriously interfere with an economic recovery. Those would-be buyers who have stayed away until now, should begin to come back at an increasing pace and we would look for them to boost the Dow back toward 9000, making up the losses of the last three weeks. Our initial target on the play will be $90, with a stop loss of 84.00. BUY CALL SEP-85*DJX-IG OI= 6447 at $2.50 SL=1.25 BUY CALL SEP-87 DJX-II OI= 17925 at $1.35 SL=0.75 BUY CALL OCT-85 DJX-JG OI= 1077 at $4.30 SL=2.20 BUY CALL OCT-87 DJX-JI OI= 285 at $3.10 SL=1.50 Average Daily Volume = n/a ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** TRADERS CORNER ************** Candles Burning Bright By John Seckinger jseckinger@OptionInvestor.com Using Candlestick analysis on indices ranging from the Dollar to the Dow has resulted in encouraging news for bullish traders. As I have stated many times, it is my opinion that traders can gather important clues about equities by looking at asset allocation stemming from other indices. The indices I will cover here include Bonds, Dollar, Oil, Utilities, and the Dow. I have altered the pattern slightly, giving emphasis on short-term movement within the bond market and how prices can be inversely related to the Dow. Yes, in the intermediate and long-term time frame, I do believe bond prices and equity prices trend in the same direction. However, the bond market has recently become overextended to the upside and traders taking profits should allow for bond prices to fall while equities become the beneficiary. A few Traders Corner articles back, I made it clear that I felt the Dow led all other indices. That correlation isn’t as strong now as it once was; nevertheless, looking at a chart of the Dow shows a “piercing pattern” back on July 24th – much earlier than the other indices. Of course, I still needed confirmation from the other indices before turning significantly bullish. Back on July 24th, there was still the weak dollar to be concerned about, a ton of buying within the five-year note, a long bearish trend in all indices, and yields falling to record levels. This article may have not made a ton of sense then. As noted in the chart, the piercing pattern followed the normal sequence of a piercing pattern; opening underneath the previous day’s close and selling off significant before recovering. The recovery, by definition, has to end at least in the mid-point of the previous day’s real body. Obviously, the Dow did much more than that. Chart of Dow Jones Industrial Average Index, Daily Ok, we have now established a reversal signal in the Dow. How is this practical? To me, it indicates that the trend has changed and investors can buy dips going forward. A change in psychology. Therefore, when the Dow recently fell towards 8215 it gave the look of a double-bottom and signaled a possible buying signal. A place for a stop would then be under 8202, the high of the piercing pattern formation. I gave the Dollar the second highest weighting; therefore, it makes sense to cover it now. The candlestick pattern seen here is the “inverted hammer.” This bullish reversal pattern is similar to the Dow in that it was an overachiever. By definition, following an inverted hammer the next day should provide a gap higher for confirmation. The Dollar significantly gapped higher and has not looked back. In fact, at this posting, the Dollar has closed above the 50 DMA for only the third time since April. Chart of the US Dollar Index, Daily Usually ahead of all indices, the Treasury Bond market has recently been lagging behind both the Dow and Dollar. I believe this correlation is starting to change, and the powerful bond pits are setting their sights on the top of the podium once again. Looking at a chart of the 30-year cash bond (note: Quoted in YIEDLS, so a “bad looking” chart means lower YIELDS and higher prices), the Treasury Index has not seen a “doji” reversal pattern between May 14th and September 5th. This “doji” can be within or outside of the previous candlestick. With yields at 4.861 percent, both the 22 DMA and significant resistance can be seen at much higher YIELDS (read: lower prices). Therefore, bond prices should move inversely with stocks in the near-term. Lower prices, higher yields, higher equity prices. Chart of 30-year Treasury Bond Index, Daily Time to turn to the Oil Index (XOI.X) and see if there is a candlestick formation that supports our premise of higher equity prices. The Oil Index, in my opinion, has traded instep with equities in the past and should continue to do so in the near term. Therefore, a bullish pattern in Oil should be bullish for blue chip holders. The Oil Index can at times led the Dow Jones; therefore, a reversal in this index should be given weight and watched very closely. The “hammer” formation seen in the XOI index is most likely nothing new to readers; nevertheless, it can be an important reversal pattern after an established trend. Apparently, it does not matter if the trend lasted a few days or a few years; as long as there is a trend in place. Looking at the Oil Index, there was six days of selling and a loss of close to 10 percent over that time period (intra-day high to intra-day low); thereby giving the impression a down trend is in place. With the hammer formation, by definition its shadow has to be at least twice its real body with a higher close adding slightly to the bullishness. The shadow, in this example, is 14x its real body. Chart of the Oil Index, Daily Last, but not necessarily least, is the Utility Sector Index. Why last if such a powerful leading indicator for the Dow? That has to do with their candlestick formation. It isn’t as clear as the above examples; therefore, to the end of the article it goes. There is a pair of hammer patterns with “scouting parties” testing the conviction of bearish traders, but weakness on Tuesday took the index towards 263. It is ok to have the second hammer low underneath the first hammer low, but the market will need to hold 258 in order to keep the reversal pattern in tact. Chart of the Utility Sector Index, Daily Let’s recap: All Intermarket Relationships appear to have shown a strong reversal candlestick formation. When does this relationship become nullified? Most likely weakness in the Dow under 8200. If 400 points is too much, I would give the Dow a “neutral” rating at 8385. A decline under the 22 DMA in the Dollar should weaken that indices relationship, while a move in yields under 4.70 percent would strain the relationship between bonds and stocks. Turning to Oil, weakness in the XOI under 460 should be reason enough to look at its relationship to the Dow in a different light. Utilities have their proverbial line in the sand at 258. However, as things stand now, all signs point towards a continued uptrend in the Dow. ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** 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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