The Option Investor Newsletter Tuesday 09-17-2002 Copyright 2002, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Volume is Back! Index Trader Wrap: No pleasant surprise in a bull's "Happy Meal" Market Sentiment: I Think I Broke My Neckline Weekly Fund Screen: European Region Funds Updated on the site tonight: Swing Trader Game Plan: Testing Support Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 09-17-2002 High Low Volume Advance/Decline DJIA 8207.55 -172.60 8482.34 8192.01 1.67 bln 949/2242 NASDAQ 1259.94 - 15.90 1298.50 1295.30 1.45 bln 1204/2104 S&P 100 438.55 - 8.10 453.44 437.86 Totals 2153/4346 S&P 500 873.52 - 17.58 902.68 872.38 RUS 2000 379.31 - 6.82 388.46 379.15 DJ TRANS 2203.69 - 28.30 2262.91 2201.04 VIX 41.96 + 1.42 42.21 38.50 VXN 60.39 + 2.66 60.67 57.08 Total Vol 3,321M Total UpVol 547M Total DnVol 2,733M 52wk Highs 88 52wk Lows 340 TRIN 2.81 PUT/CALL 1.20 ************************************************************ Volume is Back! Unfortunately it was all down! For all U.S. markets the total down volume at 2.7 billion swamped up volume of only 548 million. Traders came back to news of an apparent Iraq capitulation and were faced with covering shorts in an exploding market. Once the Iraq news was called into question those same traders piled on the shorts again to recover their lost profits. Dow Chart Nasdaq Chart It was an ugly day after about 9:40. All the good news for the bulls was sold with abandon by institutions looking for an opportunity to raise cash and get out of stocks. The bad news started with the Industrial Production numbers which came in much lower than expected at -0.3% instead of estimates for a gain of +0.1%. This was the first decline in production in seven months and shows that the economy is rapidly coming to a halt. Construction was the only sector to post an improvement. Business equipment has now declined two months in a row. The risks to the economy are definitely to the downside as the Fed would say. There was slightly more than a 10% chance of a rate cut by October yesterday. After this report and the JPM warning tonight those chances should get much better tomorrow. We had earnings warnings from almost every sector today and those warnings helped add speed to the bursting Iraq bubble. McDonalds lead the parade with a McWarning, the 6th in the last two years. Store traffic is down, sales are down, competitors are kicking Mcbutt with the 99 cent menus. MCD fell to 18.91 and a seven year low. Who says there is no recession? (grin) Kroger (nyse:KR) missed analyst's estimates for the quarter and lowered estimates for the year. The slumping economy was the major reason along with increased competition. ToysRus (nyse:TOY) was cut after analysts were told that buyers were cutting nonessential inventory for the 4Q and reducing the number of toy lines carried. It appears that inventory levels are too high for the current and expected holiday sales levels and TOY is going to cut the expected losses early. BBY hit lowered estimates this morning but said profits would be flat the rest of the year. They said sales of big screen TVs and DVD players are slowing due to worries over unemployment and the market. Schwab (Nyse:SCH) warned that retail trading volume was dropping significantly as traders closed accounts and bailed out of the market for safer investments. They were cutting another -1800 employees and earnings were going to suffer. I could go on but you get the picture. Chips, healthcare, food, restaurants, brokers, banks, software, toys, retail and insurance all saw earnings warnings today. After the bell the carnage continued. Oracle (nasdaq:ORCL) announced earnings after the bell and while they hit the proforma seven cent number analysts were expecting they missed the revenue numbers. Oracle said it is still difficult to forecast future revenue and with license revenue down the outlook is not positive. New license revenues were down -24%. Larry Ellison said businesses around the globe were still reluctant to spend for IT until economies recovered. Even more detrimental to trading tomorrow was a high profile warning from JP Morgan (nyse:JPM). They warned that 3Q earnings would be significantly below 2Q levels. They blamed higher corporate credit losses, weaker trading losses and higher reserves for non-performing assets. They only made $100 million in trading profits for this quarter after $1.2 billion in the prior quarter. (You thought swing trading was hard?) They said they had $1.4 billion in credit losses for the quarter and were going to lose another $1 billion in questionable credit assets. Analysts had expected $.54 cents per share and now the guesses are anywhere between zero and $.25 cents. This knocked the bottom out of the futures which were down -8.00 in after hours. Iraq news after the bell is starting to show cracks all ready. After the inspectors said they could be in Iraq by tomorrow the Iraq authorities said no! We will meet with you in Vienna in about ten days to discuss the terms of the inspection. Terms to an unconditional offer? It appears Iraq wants limited teams, closely watched, inspecting military sites only and lasting only a "matter of days". Unconditional? The only unconditional thing about this offer is that it will not fly. Iraq saw the pressure building and is trying to buy time. If they can delay the process several months then it could delay the war up to a year before the weather would be right again. Traders came back to work with a vengeance today and the result was a 5:1 down volume day. The negative news tonight will apply added pressure at the open tomorrow. Support appears to be in the OEX 436, SPX 870, Dow 8050 level. This is not that far below where we closed today. The TRIN closed at 2.81, VIX at 41.98, VXN 60.39 and the put/call ratio at 1.20. These are all levels that indicate strong fear in the market and a possible bounce ahead. Unfortunately these were closing levels and with the ORCL/JPM news they could become even more oversold at the open. I have made the mistake many times of seeing the market close deeply negative, have more negative news after the bell and just when I turned severely bearish in my outlook have it rally at the open. I don't think that will happen tonight but with support just below us there is a good chance the bulls will buy the dip again. I think that any bounce is just another opportunity to get short again but my main point is that I would not be surprised to see us not go straight down. Bottom line, if you are short, stay short. If you are not short look for a failed bounce and get short. The next two weeks will be heavy with earnings warnings and there will not be many opportunities for good news. The best we could hope for is a rate cut from the Fed next week and that is only a slim chance tonight. The bears are on a feeding frenzy prior to hibernation and they are far from full. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor ******************** INDEX TRADER SUMMARY ******************** No pleasant surprise in a bull's "Happy Meal" It is a day like today when a plethora of trader's axioms run through my mind. An old trader-buddy and staunch technical analyst friend of mine would say "those that anticipate a move with a large bet, better be careful as they often participate in a move against them." I would be hard pressed to say that today's action could have been predicted, just as it was relatively impossible to predict last night's news out of Iraq. While stocks opened higher, the major market averages were hard pressed to make a meaningful challenge of their still trending lower 50-day simple moving averages (an intermediate-term moving average) for more than 20-minutes of this morning's trading session. Perhaps an early morning warning on earnings from Dow component McDonald's (NYSE:MCD) $18.91 -12.8% after a plethora of broker downgrades in recent sessions and pattern of new 52-week lows since mid-July's break of the $25 level set the table for some negative action in the Dow and what eventually unfolded by session's end. While a Dow bull didn't like the taste of today's action, what comes at the end of a kid's "happy meal" will most not likely be a pleasant bullish "surprise" either. While the Dow Industrials (INDU) 8,207 -2.05% posted a 102 point gain in the early going, this major market average didn't come close to testing its 50-day simple moving average of 8,544 nor a more psychological level of 8,500. Let's take a look at the Dow DIAMONDS (AMEX:DIA) $82.17 -2.35%. What I'm doing tonight is removing the "aggressive" upward trend we've talked about in recent wraps, and now leaving only the "conservative" trend, which is anchored from the 07/23 close of $77.17. For "historical" purposes, I'm going to place a retracement bracket on the DIA from this spring's highs and anchor to the relative low close of $77.17 of 07/23. The reason I'm showing retracement tonight, is only for future use should the Dow break to new 52-week lows in the coming months. Then and only then, would we use a "rolled down" retracement bracket technique. Dow DIAMONDS Chart (DIA) - Daily Interval Bears got the technical break of trend on a more meaningful basis and a close below the 19.1% retracement level. These were to two technical levels identified that stood between a swing-trader's target of $80.50, which marks a level near the August 5 close of $80.47. A DIA bear would love nothing more than some type of bearish catalyst to help further a move to the $80.50 level, especially if he/she is a trader that factors in stochastics reaching the "oversold" level on the daily interval bar chart. How about a warning from the nations second-largest bank and Dow component JP Morgan (NYSE:JPM) $21.55 -0.73% warning that its upcoming Q3 earning will be "well below" Q2 EPS of $0.58 and analyst's consensus for Q3 of $0.55, citing a larger than expected corporate credit losses of -$1.4 billion. In Instinet trading, the NYSE listed JPM has traded down $-3.55 at $18.00, which represents an additional 16.4% decline from the close. While I won't argue that a fast food restaurant like McDonald's (MCD) is cause for a broader market decline, one has to wonder if the MARKET smelled out tonight's warning from JP Morgan (JPM), the nation's second-largest bank and sold this morning's strength in the markets. It's a little "too weird" that in this weekend's index wrap, I actually "switched" places from a bear's shoes to a bull's shoes with the DIA and started thinking like a bull that was a bit underwater and thought a bull might sell strength on a rally near the 50-day SMA and sit things out. From here, managing a trade in the DIA becomes a little easier. If short 1/2 position from Thursday's open, can leg to full position above $80.50 as some gains are found from first 1/2 bearish position. Trader that went full position and took on more risk Thursday morning, may look to take 1/2 off the table at trader's target. For now, looking for rallies back near $82.80 DIA as entry points, using the 50-day MA as a stop. Even if you're an OEX or SPX trader. Perhaps the above "thinking" on a technical basis will help you with some trade strategy and "level" thinking as it relates to retracement and the moving averages. Did you say JP Morgan? While I mentioned JP Morgan's (JPM) warning as a possible catalyst for further downside in the Dow, JPM is also a component of the OEX and SPX for all you S&P bears. For those that did some homework from Friday evening's wrap and looked at "financial" weighting's in the OEX and SPX, a bear feels some desert coming on in bearish trades held in the OEX and SPX to also provide a downside catalyst tomorrow morning. Remember, "financials" represent an approximate 21% weighting in the SPX and JPM is a component of both the SPX and OEX. So is MCD for that matter. Tonight I'm also removing the "aggressive" trend we had in the OEX has we've got a break and close below our most "conservative" trend, which the OEX had been holding a close on for the past three sessions. Still some work to be done for a break of 19.1% retracement at 434.90, but I'm looking for the JPM news to get than done in the morning. S&P 100 Index Chart - Daily Interval The OEX was a "stubborn" little bugger and closed on our upward trend for three-consecutive closes. While most view the "Iraq news" as a positive for the markets, you and I are left to wonder if it was this morning's weaker-than-expected production data, or tonight's JPM news that the MARKET knew about. DON'T get frustrated if you closed out a bearish trade in the OEX today on the break above 50-day SMA. Just don't do it. However, just make a quick note perhaps of how the DIA may have signaled some pending weakness from past intra-day updates as it was perhaps a little weaker at trend and didn't come close to breaking above its 50-day SMA. Maybe in the future, Dow weakness will be the thing that would keep a trader in a trade in the OEX (long or short). Just remember that each Dow component comprises your SPX and OEX. Now, think about this. If it's true that "weakness leads" then an OEX and SPX trader are darned sure going to be monitoring the DIA or Dow Industrials at their respective 07/23/02 low closes of $80.50 and 8,050 aren't you? Why? Who knows how many computerized "buy programs" may be lined up to "buy" stocks when the Dow trades 8,050 or a round number like 8,000 (not predicting, just thinking ahead. I'm always looking for trouble). What if there's a bunch of institutions that were playing a "negative" scenario on an invasion of Iraq within the next two- weeks and now changes their scenario and stock allocation a bit. If the OEX is trading 425 and the DIA is trading $80.50, it may be helpful to have the morning's "buy/sell" premium execution levels we post from HL Camp & Company set on your trade station that day. Then, if DIA $80.50 is traded, a trader might be able to use any "buy program" alerts as a head's up for some program buying. If you have q-charts, or a charting service where you can track the premium, (q-charts symbol is $prem), check out the 5-minute chart. See those premium execution levels at $-1.32, which started at about 09:40 AM EST, then 3 more times between then and 10:30 AM EST. Those were computerized sell programs whacking the S&P futures in the early morning. I'll discuss this tomorrow, but as described above, might take some notes and look for reverse action at lower levels described. Hey! Let's do this. Since the OEX and SPX look pretty much identical on their daily intervals and we have retracement set to mark identical ranges, lets look at the 60-minute interval chart of the SPX. Let's also tie in the "sell program" premium execution levels of $-1.32 that were hit between 09:40 AM and 10:40 AM, which pretty much covers the first hour of today's trading in the SPX. S&P 500 Index Chart - 60-minute intervals I'll confess! I didn't have my "buy/sell program" execution levels set on my trade station today. I'm not showing the 60- minute chart of the SPX to say "see how the buy/sell programs" told you to short/put this morning's rally. Nope, this is an index wrap and what took place and information that may help us in the future. Observation is that for whatever reason (economic data, JPM eventual warning) there were several computerized sell programs lined up after the open. Heck, maybe it was the "round number" of SPX 900. Maybe it was based on all that SPX 900 open interest in the calls/puts with triple-witching this week. Who knows and who really cares right? That's right! Trade what you observe, not what you believe. SPX and OEX traders may also want to review today's 03:00 intra- day update http://members.OptionInvestor.com/intraday/091702_4.asp and what took place in the Retail HOLDRS (AMEX:RTH) $81.10 -2.26%. Tomorrow, all the "focus" is going to be on the banks. Keep an eye on the retailers in order to view/monitor a key sector that comprises a weighting in the SPX and OEX. Often times, it is helpful to monitor sector's AWAY from all the news to really get a feel for things. QQQ traders Aaaaaagh! Guess what you're in for? If you've been following the recent battle between bulls and bears at the DIA, OEX and SPX upward trends, you know what to be looking for near-term don't you. Now, I'm not saying we're in for a 3-day battle, but as the dominos slowly get tipped over, your "domino" at trend is now in play. NASDAQ-100 Index Tracking Stock (QQQ) - Daily Interval Nobody has to take more heat than a QQQ trader and there was some heat at the open, but nowhere close to a challenge of the QQQ's 50-day SMA or 21-day SMA. Still targeting the $21.35 level if short/put. In last night's wrap, I thought bear could play his/her short safe with a stop just above Friday's high of $23.08, and by golly, that would have gotten taken out just after the open at $23.05. Only thing I see that could have saved a bear from that tighter stop was in two key sector Indexes today. As discussed in recent commentary, software and biotechs are the two biggest weighting's in the QQQ. That darned GSTI Software Index (GSO.X) opened flat then rallied to a session high of $95.62, which was just below the 50-day SMA of $95.90. Then, this sector index (GSO.X) turned red, while the Biotech Index (BTK.X) 331.03 -0.82% was still just under it's 50-day SMA of 343.92. All be darned if the BTK.X didn't trade down from its 50-day SMA and kind of like a hammer, help drive the QQQ lower. What a QQQ bear simply wants to see is further negativity from the BTK.X and GSO.X. The "good news" near-term is that Microsoft (NASDAQ:MSFT) $47.29 -1.02% is a BIG weighting in the QQQ and it is also a "software" stock. Key stocks are biotech=AMGN and software=MSFT. Both traded relatively strong today considering how things panned out. Always remember, the BIG guys lead and advance, and trail a decline. The decline looks to be taking place in the QQQ, now you want the BIG guys to give in. These are the "institutional" stocks that will hold bullishness longest. Only when the institutions need to meet redemptions from their mutual fund shareholders will they get rid of their more fundamentally sound and liquid stocks like AMGN and MSFT. Jeff Bailey ------------------------------------------------------------ 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 **************** I Think I Broke My Neckline by Steven Price So much for the theory that we would rally on the news that Iraq had decided to let weapons inspectors back into the country. Actually we did rally briefly, but eventually this morning's economic data caught up with the euphoria, as well as the Bush Administration's comments about Hussein's "unconditional" pledge being merely a ploy to split the U.N. Security Council. Even Crude Oil Futures made it back over $29 a barrel after initially plunging on the Iraqi news. This would indicate that oil traders don't believe much has changed in regard to an invasion. Industrial Production fell 0.3%, registering the first decline since December. Output from factories also fell 0.1%, also the first decline of the year. Capacity Utilization dropped 0.2% to 76.0 and output of both business and consumer goods fell, as well. The decline in output was unexpected, as analysts were looking for a 0.2% gain. The day started out looking like the head and shoulders pattern that had been forming across the broader markets, would once again fail to breakdown - a very bullish sign. However, by the end of the trading day, the Dow had fallen through the neckline, which had formed at the 50% retracement of its gains from July 24 through August 22. The Nasdaq suffered the same fate, however it can be argued that a true break in Nasdaq support comes 9 points below today's close of 1259.94 at the September 5 low of 1251.00. The Semiconductor Sector Index (SOX.X) may help speed that process along, however, as it set its fourth 52-week low in the last six weeks. We are already trading at 1998 levels, but those levels keep getting lower. yesterday's downgrade of 15 semis apparently was too much to be overcome by Microchip Technology (MCHP) raising its guidance after the bell last night. Following the bell, J.P. Morgan (JPM) warned that it would miss earnings, saying it would fall well below their second quarter numbers. It blamed the shortfall on commercial credit costs of $1.4 billion, due to the "adverse actions" of several telecom companies, leading to bad loans. This level is compared to $302 million in the previous quarter. If JPM is only the first domino to fall amongst the banks, due to credit defaults from other suffering sectors, the head and shoulders breakdown may lead us below the July lows. Oracle met earnings expectations after the bell, however, it was not enough for investors as the stock dropped from a close of $9.03 to $8.40 in after hours trading. After today's failed rally, I hate to be the "bear"- er of more bad news, but JPM's warning should lead us lower tomorrow. The breakdown in the semiconductors also should lead the Nasdaq through a decisive head and shoulders neckline break, although many analysts (myself included) can argue the break actually occurred today. If the semis aren't enough, then the sell-off in Oracle should do the trick. I'm out of hibernation, but that doesn't mean we won't see some bullish candidates here and there. Hang onto your puts, we should find old ground again tomorrow. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10679 52-week Low : 7702 Current : 8207 Moving Averages: (Simple) 10-dma: 8411 50-dma: 8544 200-dma: 9620 S&P 500 ($SPX) 52-week High: 1226 52-week Low : 797 Current : 873 Moving Averages: (Simple) 10-dma: 892 50-dma: 898 200-dma: 1051 Nasdaq-100 ($NDX) 52-week High: 1782 52-week Low : 892 Current : 897 Moving Averages: (Simple) 10-dma: 919 50-dma: 954 200-dma: 1283 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): This is starting to sound like a broken record, but the SOX set its fourth 52-week low in the last six weeks. Yesterday's downgrade of 15 stocks in the sector seems to have pushed it over the edge since breaking its support level of 275. 250 looks like the next likely target, following today's close of 263.56. The Nasdaq is on the verge of a head and shoulders breakdown, which would follow that of the Dow. The semis should lead it through the next nine points to the downside to achieve that breakdown. The sell-off in Oracle following its earnings release after the bell looks bearish for the software sector, as well, and should give the entire tech sector a push downward tomorrow. 52-week High: 657 52-week Low : 263 Current : 263 Moving Averages: (Simple) 10-dma: 283 50-dma: 325 200-dma: 476 ----------------------------------------------------------------- Market Volatility The VIX should be heading higher tomorrow after today's technical breakdowns in the broader markets. J.P. Morgan's warning after the bell should only serve to increase anxiety over bad debts as they blamed their losses on defaults in the telecom sector. This most likely means there are other banks with outstanding loans to other sectors not making good on their business debts. Watch for the VIX to creep toward the mid 40s, and we could once again see it into the 50s if we re-test July's lows. CBOE Market Volatility Index (VIX) = 41.96 +1.42 Nasdaq-100 Volatility Index (VXN) = 60.39 +2.66 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 1.20 478,669 572,073 Equity Only 1.14 307,066 349,696 OEX 1.27 33,734 42,800 QQQ 1.23 17,193 21,128 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 42 - 1 Bull Confirmed NASDAQ-100 35 + 1 Bull Correction DOW 43 - 7 Bull Correction S&P 500 48 - 3 Bear Confirmed S&P 100 44 - 2 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 1.71 10-Day Arms Index 1.32 21-Day Arms Index 1.42 55-Day Arms Index 1.34 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when they do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals Advancers Decliners NYSE 730 2017 NASDAQ 1131 2024 New Highs New Lows NYSE 22 30 NASDAQ 108 180 Volume (in millions) NYSE 1,659 NASDAQ 1,490 ----------------------------------------------------------------- Commitments Of Traders Report: 09/10/02 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 reduced long positions and added to shorts, reflecting an increase of almost 8,000 short contracts overall. Small traders increased both sides of the equation considerably, leaning long by an extra 3,000 contracts. Commercials Long Short Net % Of OI 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%) 09/10/02 426,230 470,537 (44,307) (5.0%) 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 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% 09/10/02 166,696 85,259 81,437 32.3% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 Commercials added to both long and short positions, for a net reduction of 1,000 contracts to the short positions. Small traders also added to both sides, netting out about the same as they finished the last period. Commercials Long Short Net % of OI 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%) 09/10/02 53,309 58,745 (5,436) ( 4.9%) 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 08/20/02 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% 09/10/02 14,024 10,494 3,530 14.4% 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 added slightly to both sides, leaving their long contract positions slightly higher by about 800 contracts. Small traders beefed up both sides, with an extra 1,000 short contracts overall. Commercials Long Short Net % of OI 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% 09/10/02 22,946 14,936 8,010 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 08/20/02 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%) 09/10/02 7,568 10,129 (2,561) (14.5%) 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 ------------------------------------------------------------ ****************** WEEKLY Fund Screen ****************** European Region Funds Last week, we looked at the Pacific ex. Japan funds category; this week, we screen for the best European Region funds using various online screen tools. European region funds invest at least 75% of stocks in Europe to use Morningstar's definition. For the most part, that means the developed markets of Europe, including the U.K., Germany, France, Switzerland, etc. Since they belong to the broad international equity fund peer group, U.S. stocks are generally limited to 10% of assets. The category's largest fund, Vanguard Europe Stock Index (VEURX) with assets today of $4.5 billion, seeks to track the investment returns of the Morgan Stanley Capital International Europe Index (MSCI Europe). This market-cap weighted index fund measures the performance of 16 developed European countries: Austria Belgium Denmark Finland France Germany Greece Ireland Italy The Netherlands Norway Portugal Spain Sweden Switzerland United Kingdom According to Morningstar, Vanguard Europe Stock Index Fund had 35.4% of assets invested in U.K. stocks as of mid-year for the largest country exposure. France is second, representing 13.5% of assets. Switzerland and Germany each represent about 10% of the portfolio, while the Netherlands comprises 8.6% of net fund assets. So while it invests in 16 developed European countries, the top five countries represent the lion's share (78%) of fund assets. That gives you a good sense of what the category's largest fund (and index benchmark) is all about. Who should invest in Europe stock funds? According to Vanguard's website, investors seeking capital growth and to further diversify a portfolio of U.S. stock holdings may find these funds to be appropriate for them. These investors should have a long-term investment horizon of at least five years. Last week, we showed you how you could invest in the Pacific region (excluding Japan) using mutual funds. If you want to avoid the Pacific region altogether but still seek to have a little international diversification, Europe stock funds can provide that specific regional exposure. As an example, you could invest 80% of your equity assets in Vanguard 500 Index (VFINX) and 20% in Vanguard Europe (VEURX). That equity mix would provide for 20% international exposure and be invested principally in the largest developed markets of the U.S. and Europe (including the U.K.). Screen Process We begin our search this week using Standard & Poor's (S&P's) mutual fund screener located at the www.funds-sp.com website. The database you want to use is called "USA Mutuals" and that database is then broken down into various main and sub-groups. We went into the main category called "Equity Funds" and then found the category known as "Regional Market/Developed" funds. Once in the regional market/developed fund database, we sorted the funds by their S&P rating (similar to Morningstar's 5-star based system). This quick rank isolated five funds that sport S&P's highest rating of five stars, including an institutional fund and an Asian small-cap fund that doesn't really belong in this category. The three retail class funds with S&P's highest overall rating of five stars are as follows: Driehaus European Opportunity (DREOX) Mutual European (Multiple Class) Ivy European Opportunity (Multiple Class) Two of the three funds, the Driehaus and Mutual offerings, are also rated five stars by Morningstar, with Ivy's fund having a Morningstar 4-star rating in relation to the Europe stock fund category. Morningstar's 5-star funds in the European category are as follows: Driehaus European Opportunity (DREOX) Mutual European (Multiple Class) JP Morgan Fleming European (Multiple Class) Note that JP Morgan Fleming's offering is only 3-star rated by Standard & Poor's versus its European region stock fund peers. Lipper Analytical Services' Lipper Leader screen tool found at the www.lipperleaders.com website yielded some additional fund possibilities based on strength/consistency of returns and the fund's ability to preserve capital. In contrast to Morningstar and Standard & Poor's, Lipper ranks return and preservation in relation to a fund's broad peer group (all international stock funds in this case). The Lipper leaders for consistent return and preservation include Merrill Lynch EuroFund (Multiple Class), Morgan Stanley: European Value Fund (Multiple Class), and Van Kampen European Value Equity (Multiple Class). Below is how the Europe funds with the highest S&P and Morningstar ratings scored according to Lipper's system. Driehaus European Opportunity (Return = 1)(Preservation = 4) Mutual European (Return = 2)(Preservation = 1) Ivy European Opportunity (Return = 1)(Preservation = 4) JP Morgan Fleming European (Return = 2)(Preservation = 2) To summarize our observations so far, we have two funds (Driehaus and Ivy) that are associated with above-average volatility versus the broad peer group but have excelled at delivering returns that are consistently above the broad peer group (of all international stock funds). In Ivy's case, returns have not been strong enough to get Morningstar's 5-star rating, while in Driehaus' case their returns have been superior, earning Morningstar's highest rating. Two funds (Mutual and JP Morgan) preserve capital better than the average international stock fund, but aren't Lipper Leaders based on consistent return. Lipper's screener identified three further possibilities, funds that were top-rated in both measures of fund performance: consistent return and preservation of capital. But, on a risk-adjusted basis, none of them are 5-star rated by S&P or Morningstar. How come we haven't seen Vanguard Europe Stock Index Fund's name show up in any of our screen results so far? The long and short of it is that Vanguard's offering is rated only two stars by S&P while Morningstar rates the fund four stars. In my opinion, the Morningstar ratings are better suited to long-term investors, as their rating system gives more weight to a fund's 5-year/10-year results than its does a fund's trailing 3-year returns (both S&P and Lipper's system look back just three years). The other reason we tend to rely more heavily on the Morningstar ratings is because Morningstar's ratings reflect performance as adjusted for risk as well as for all sales charges and expenses of the fund. The three funds that Lipper's system identified as Lipper Leaders for consistent return and preservation aren't top rated (5-star rated) by Morningstar because of their "loads" and expenses. That's also why a no-load, 0.30% expense ratio "index" fund like Vanguard can be rated four stars in Morningstar's star rating system, yet not look as good in other mutual fund screens. In the next section, we identify the funds we like the best over the very long-term (10+ years). Our Favorite Funds If your investment horizon is very long-term, let's say 10 years or more, then it's hard to argue with Vanguard Europe Stock Fund (VEURX). For the trailing 10-year period ended August 31, 2002, Vanguard's European stock index fund had an average total return of 7.8%, twice the annualized return of the MSCI EAFE index (the MSCI EAFE index is comprised of the MSCI Europe and MSCI Pacific indices). The fund's 7.8% annual-equivalent return ranked it in the 28th percentile near top quartile of the European stock fund category per Morningstar, so it outperformed nearly three out of four funds within the category over the last ten years. For the same trailing 10-year period, the average European stock fund averaged 6.9% a year, while the average international stock fund had only a 4.4% average rate of return. Only four funds in the category have delivered more total return for investors over the past decade than Vanguard Europe Stock Index Fund managed by Vanguard's index guru, Gus Sauter. One of them is Merrill Lynch EuroFund (MAEFX) which sports a 10-year average annual return of 11.6% through August 31, 2002. The Class B shares (MBEFX) sport a 10-year annualized return of 10.5%. Merrill Lynch EuroFund seeks capital appreciation by generally investing at least 80% of assets in European stocks, with the majority of assets invested in western Europe (the "developed" region within Europe). The fund also intends to capitalize on opportunities in eastern Europe (the "emerging" markets within Europe). The prospectus states that geographic allocation is based on the relative climates for economic, currency, tax and political factors. James MacMillan has managed the fund since April 2000. He has been a portfolio manager for Merrill Lynch Asset Management or its affiliates since 1993. Compared to other Europe stock funds, Merrill Lynch's offering has "low" risk. It holds a 10-year Morningstar rating of five stars, but is 4-star rated overall by the funds tracker. Fund investors that are using a Merrill Lynch financial advisor may want to speak to their advisor about the EuroFund fund, to see whether it may be appropriate for them. Note that this fund's equity style is value-driven, so when value stocks lag, so may this offering. Conclusion Our analysis this week identified some Europe stock funds with above average risk-reward profiles versus comparable funds per different independent ratings. We found that the results from the three funds trackers were somewhat different, with S&P and Lipper basing their ratings on 3-year performance, while stars are assigned by Morningstar giving more weight to longer-term returns as adjusted for risks, costs and expenses of the fund. Because the majority of mutual fund investors are longer-term oriented, we showed two funds that have performed well in the last decade relative to the competition. One was the Vanguard Stock Index Fund, which can represent the core portion of your European stock portfolio. In addition to Vanguard and Merrill Lynch, the Europe stock funds from Morgan Stanley, Fidelity, T. Rowe Price, Mutual, Scudder and JP Morgan Fleming may be worth considering as well. Steve Wagner Editor, Mutual Investor firstname.lastname@example.org ------------------------------------------------------------ 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 ------------------------------------------------------------ *********************** SWING TRADER GAME PLANS *********************** Testing Support Wednesday all the indexes will see new support levels tested after a solid failure of Dow 8300 Tuesday. Solid support at SPX 880 failed and the index closed on the verge of significantly breaking 875 as well. With the ORCL and JPM news after the bell it would not be surprising to see Dow 8050 tested at the open. 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. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Tuesday 09-17-2002 Copyright 2002, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Stock Picks: RSAS Dropped Calls: MSFT, LLL Dropped Puts: AET, CTX, CMA, FDX, GE, MTG Daily Results Call Play Updates: AZO, TRMS, INVN New Calls Plays: None Put Play Updates: AVY, AGN, TXU New Put Plays: PNRA, MXIM, BRL, LTR, TIN *********** STOCK PICKS *********** A Secure Choice Stock Pick: RSAS - RSA Security - Close $3.84 Strategy: Long stock with put-option insurance An area that has received very little attention during the past year's security escalation is internet security. While it has not made the news, which has been dominated by photographs of the 9/11 plane crashes and stories about possible biological weapons, internet security has not escaped the view of the White House. In fact, President Bush appointed Richard Clarke as his special adviser for cyberspace security following last year's attacks. Clarke was given the task of developing a set of guidelines the administration could follow to ramp up protection against terrorists attacking our information networks. Unlike terrorism that relies on destruction or poisoning, a program that searches a database for information, classified or otherwise, does not have to pass through a metal detector and can continue its attempts indefinitely. It is this threat that contributed to Clarke's recent report. The report suggested that government become involved in the issue of internet security and said changes will be needed in key internet protocols and endorses trustworthy computing technologies. One draft of the report has companies contributing to a fund to secure computer networks. While that may not come to pass, one thing is clear. Someone will be spending an awful lot of money to increase security over the internet, and much of that money will most likely come from Congress. Although the report is only a set of recommendations, the fact that it was prepared at the request of the White House to deal with an issue of national security, is a pretty good indication that new regulations and funding will be sought from the legislature. One company that stands to gain from increased government spending is RSA Security, which designs security solutions to help authenticate the identity of people, devices and transactions used over the internet. As the government seeks to make it harder to access its databases, a company such as RSA, which has received many awards for its third-party authentication devices, will be at the head of the line to help the cause. While business IT spending may be taking a hit right now, one way to drum up business is to land the U.S. Government as a customer. While there is no guarantee that RSA will be landing a massive government contract, the possibility adds bullish intrigue to a stock with limited downside. The fact is that the Government will be increasing security, so firms such as RSA and Symantec will most likely get a piece of the pie. RSA traded in the 50s regularly during the internet heyday, and was as high as $19 earlier this year. While the stock has dropped precipitously during the last 9 months, it is positioned in a business with a great deal of potential, as spending on its product is likely to greatly increase over the next 24-36 months. While $19 may not be achievable during that time frame, a 100- 200% increase in the current price of $3.84 seems reasonable. The stock has already found support over $2 and has begun to turn upward, with a 63% gain in the last three days. We recommend protecting a long position in the stock with a purchase of a protective put, using the April 2.50 put (QSD-PZ) currently offered at 0.55. Option 1: Purchase the stock at the current level. For every 100 shares of stock that is purchased, purchase 1 April 2003 2.50 put, currently offered at 0.55. This will ensure the purchaser of the ability to sell the stock at $2.50 until the third week of April next year. By then there should be progress on the White House cyber-security plan and those stocks that will benefit should show some life. The purchaser will limit upside potential by the cost of the put, however the 0.55 increases the entire purchase price per share by a relatively small amount. If the stock drops from its current level to zero, the put and stock owner will be able to sell the stock at $2.50, which will be a loss of $1.34, plus the cost of the put, for a total loss of less than $2. however, if the sock hits our target, the only cost is the 0.55 paid for the put Option 2: Purchase the stock without the put for protection, risking the entire share price of approximately $4.00 per share. Option 3: If the stock does not appear bullish as the time to expiration nears, the stockholder can sell the put at its current bid and sell the stock. If the stock is below $2.50, the option holder can exercise the put and sell the stock for $2.50 **************** 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: ***** MSFT $47.29 -0.49 (-0.49 for the week) Microsoft has held its support level above $47, as the point and figure bullish support line has proven amazingly consistent. However, with the falling tech indices, it appears that MSFT will have a hard time reaching our $53.50 target in the short term. While the risk/reward ratio in the trade is still favorable from a mathematical standpoint, we would rather not let our options decay any further while waiting for a tech turnaround. If we do get one, MSFT will most likely be back on the call list, as this strong company will most likely lead the rally. --- LLL $53.83 -3.67 (-3.15) It looks like we tightened that stop on LLL just in time to protect the gains accrued since we began coverage. With the war bid coming out of most of the Defense stocks this morning following Iraq's offer to allow weapons inspectors back in, LLL gapped down to $56.50 this morning and sold off throughout the day, ending with a loss of more than 6%. Open positions should have been stopped out on the opening tick, and with the sharp selloff and easing of the war fears, we need to wait for the stock to build a new base before considering new positions. For now, we're dropping LLL as a successful bullish play in a difficult market. PUTS: ***** AET $38.45 -0.79 (-0.80 for the week) Aetna has experienced a technical breakdown, establishing a triple bottom PnF breakdown with the trade of $40 on September 12. This was followed by rumors that the company would issue an earnings warning this week. The stock dove on that rumor, but gave us an early snapshot of support levels when the buyers came in and took the stock back above its July low of $38.30. AET has found support there since that action, and we will take our small profit on the play and close it. The emphatic buying at lower levels is not what we like to see in a put play and there are plenty of other candidates in the current downtrend to focus on. --- CTX $49.20 -0.70 (-0.60 for the week) Centex has continued to fail on rebound attempts over $50, however also seems to be finding support from its 50-dma of $48.99. These current support and resistance levels have the stock moving sideways and we would rather wait for a more significant breakdown. Option premiums decay fast in sideways moving stocks, and the current across the board volatility increase, due to today's big drop in the Dow, may give us an opportunity to close the position at higher premium level. We will close the play and wait for a breakdown in the 50-dma, or the Dow Jones Home Construction Index (DJUSHB) for a sign to get back into the sector from the short side. --- CMA $54.51 +0.49 (+1.01) Despite the weakness seen throughout most of the market on Tuesday, shares of CMA quickly rebounded from the reactionary dip to the $54 level and then traded flat for the majority of the day. The bearish pressure seems to be easing, and with the daily Stochastics turning up out of oversold territory, prudence demands that we close the play before it moves significantly against us. There are several better bearish plays currently on the playlist, so we want to focus our attention there. Use any opening weakness tomorrow to exit open positions. --- FDX $44.40 +0.43 (-0.10) FDX bucked the trend in the broad market on Tuesday, and although it drifted lower throughout most of the day, the fact that it refused to fill its opening gap hints at some underlying strength. Even the DOW Transports ended the day in the red, and this gives us another comparison that shows relative strength in shares of FDX near the $44 level. With earnings set to be released Thursday morning, we want to take advantage of the expected opening weakness tomorrow to exit any open positions. --- GE $27.70 -0.20 (+0.65) With the broad markets showing significant weakness again on Tuesday, GE stubbornly refused to break below the $27 level. Aggressive day-traders could have pocketed a nice gain on the stock's decline from its opening high near $29, but it is starting to look like the near-term downside is limited. Following the warning from JPM tonight, the broad markets are likely to open in the red tomorrow. Take advantage of the opening weakness to exit open positions at a more favorable level and then look for a higher-odds play in which to deploy your gains. --- MTG $43.29 -5.41 (-11.94) If you thought Monday's sharp decline in shares of MTG was exciting, then today's 11% decline on extremely heavy volume was really a treat. Yesterday, MTG warned and was subsequently downgraded and the fallout from that news continued to be felt throughout Tuesday's trading session. In just the past 2 days, MTG has shed nearly $12, and with those solid gains accrued, let's just close the play and harvest those gains before we get an oversold rebound. With the markets likely to open in the red tomorrow, we can wait for the opening dip before closing open positions. But harvest those gains on the first sign of strength. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue AZO 74.94 0.70 -0.31 Great relative strength INVN 34.53 0.39 -1.73 Still holding up LLL 53.83 0.50 -3.67 Drop, stopped out MSFT 47.29 0.18 -0.49 Drop, sideways movement TRMS 46.18 -0.30 0.35 up on a down day PUTS AET 38.45 0.09 -0.79 Drop, profits and holding AGN 51.67 0.21 -1.54 Looking great short AVY 59.28 -0.09 -0.63 Failed at $60 BRL 66.32 -0.20 -0.68 New, room to fall CMA 54.51 0.51 0.49 Drop, underperformer CTX 49.20 0.15 -0.70 Drop, trapped between levels FDX 44.40 -0.68 0.43 Drop, earnings coming up GE 27.70 0.80 -0.20 Drop, new support at $27 LTR 48.62 0.13 -1.41 New, rollover to $40 MTG 43.29 -1.20 -5.41 Drop, $11.64 profit MXIM 25.48 -1.07 -0.89 New, like it's 1999 PNRA 24.24 -0.48 -0.28 New, supply at $25 TIN 43.52 -0.29 -0.94 New, below July lows TXU 42.40 0.61 -1.97 Red engulfing ------------------------------------------------------------ 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 ******************** AZO $74.94 -0.31 (+0.52 for the week) Relative strength is the name of the game for AZO. On a day the Dow lost 176 points, AZO lost less than half a percentage point, after setting a new relative high this morning. The stock has still held above point and figure support, which continues to rise on each pullback. The stock experienced a triple top breakout on September 10 and came within 0.02 of adding another "X" to the chart this morning. While the extreme selling in the broader markets prevented AZO from reaching new highs, the fact that it held up so well on a day that saw a significant head and shoulders break in the Dow is encouraging. Zack's recently added AZO to its recommended list as a #2 ranking. This was before the triple top breakout. The continuing series of higher highs and higher lows looks bullish and the stock is one of the few issues which can brag about a 14% gain since the beginning of the year. We will remain long on AZO, with a stop loss of $71.00, just below the 200-dma of $71.60. Look for new entries on a re-test of the 200-dma, in the case of continued market weakness, or a trade over $76, where the stock found intraday resistance. --- TRMS $46.18 +0.35 (-0.02 for the week) Trimeris has held its support level, put into place at the beginning of September. At that time the stock dipped just below $43. The last pullback stopped at $45, creating a higher low. On a day when the broader markets tanked heavily, TRMS actually went up. It got as high as $47.65, before finishing the day at $46.18, up 0.35. This strength, and evidence of newfound support at a higher level, improves our risk/reward ratio. The upside target of $50 is $3.82 away, while there now appears to be support just $1.18 below. Today Trimeris announced that they have submitted a New Drug Application to the FDA for approval to market Fuzeon. They have requested priority review status for the drug formerly known as T-20, which if granted, could allow the review to be completed within six months. There is already more demand for the drug than current supply capabilities can fill. Trimeris, along with its partner Roche, also announced completion of the next manufacturing hurdle, validation of the first three commercial batches of the active ingredient in Fuzeon. They will be presenting favorable data about Fuzeon and T-1249, their pipeline drug, at the end of the month at the ICAAC conference in San Diego. With nothing but good news, and strong technical support, we like the long play on TRMS and see entry points on a re-test of $45.00 support, or the current level if the broader markets rally. With expiration only a few days away, new entries should look to October contracts. --- INVN $34.54 -1.74 (-1.22) Iraq's announcement that they would allow the weapons inspectors back into the country unfettered took a bite out of the war bid that had been established in many of the Defense and Security oriented stocks, and the Defense index (DFI.X) plunged 4% on Tuesday. This dropped the index back under the $580 support/resistance level despite the fact that Iraq's definition of 'unfettered' is apparently far different than that of the rest of the world, keeping the war rhetoric from the Bush administration echoing louder than ever. INVN showed its advantage in this space on Tuesday, by finding support (although just barely) near the $34 level. With its business focus on explosives detection, INVN should not be as susceptible to the effect of reduced war fears, so we're looking at this pullback as an attractive entry point into the play. Look for bullish conviction tomorrow to show itself with the stock rebounding from the $33-34 level, helped once again by the 10dma ($33.51). Keep stops in place at $32.50, as a close below that level would indicate the bullish move has run out of steam. ************** NEW CALL PLAYS ************** None ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's • $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees • Easy screens for spreads, collars, or covered calls! • Contingent, Stop Loss, Trailing stop, or OCO • 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************* PLAY UPDATES - PUTS ******************* AVY $59.28 -0.63 (-0.72 for the week) Avery Dennison has made a valiant effort to reverse its fortunes since breaking below its 200-dma (currently $61.09) last Thursday. The stock has failed each time. In addition to the 200-dma failure, the stock has broken below the $60 level and a look at the short-term chart shows that its attempts to break back above this level have also failed. The stock has established a tightly defined descending channel since rolling over at $65 in August, and each attempt to break the channel falls further away from the top trend line. The stock is sitting right on its bullish support line on the point and figure chart and a trade of $59 would constitute a break in support. The trade of $60 already established a new sell signal, and the weakness in the attempts to cross back over that level indicate that $59 is probably not far away. The bearish vertical count remains $55, but will go to $53 with a trade of $59. Our initial target on the play is $54, where the stock bottomed in July, and where there is also PnF support. New entries should look for a trade of $59 and focus on October contracts, as September expires this Friday. --- AGN $51.67 -1.54 (-1.38) Another day, another loss. That seems to be the daily mantra for shares of AGN. Monday's consolidation day was just the setup for another great entry this morning. AGN gapped up at the open along with the rest of the market, and that provided aggressive investors with yet another attractive entry point as the stock rolled over just below the $54 resistance level. That rollover led the stock down to a fresh multi-year closing low, with the only tangible nearby support being the July intraday lows near $49.50. Today's decline added another 'O' to the PnF chart, extending the bearish price target to $40. Near-term, the stock is becoming a bit extended to the downside though, so we would look to harvest partial gains tomorrow on a dip down near the $50 level, and then look to re-enter following the next failed bounce. With more and more resistance piling up overhead, we'll look to take on new positions on a rollover near the $54 level. Note that we don't want to give back the gains in the play, so we are lowering our stop to $54.50 tonight. --- TXU $42.40 -1.97 (-1.90) It seems there is no tangible buying interest in Utility stocks, as demonstrated by the UTY index taking out another level of support ($255) on Tuesday. Adding to the pressure on Monday was Dominion Resources warning for 2003, resulting in a 14% haircut so far this week. TXU finally succumbed to the selling pressure today, shedding nearly 4.5% on increasing volume. As long as the downward trend continues, we'll continue to ride it lower. With the stock now solidly below the 50-dma ($44.19), look for the $44-45 area to provide substantial resistance on any attempted rallies. Speaking of rally attempts, we could be setting up for one in the near future, as TXU is rapidly approaching its next solid level of support at $42, which is just above the 50% retracement of the rally off the July lows. Should shares attempt to rebound from that level, look to harvest partial gains in the play and then look to re-enter on the next rollover from resistance. Lower stops to $45, which is just above today's intraday high. ************* NEW PUT PLAYS ************* PNRA - Panera Bread - $24.24 -0.28 (-0.74 for the week) Company Summary: Panera Bread owns and franchises bakery-cafes under the Panera Bread and Saint Louis Bread Co. names. The company is the leader in the emerging specialty bread/cafe category due to its unique bread combined with a quick, casual dining experience. As previously reported, as of April 20, 2002, 390 Panera Bread bakery-cafes (including one specialty bakery-cafe) were operating in 30 states (117 company-owned and 273 franchised bakery-cafes). (source: company release) Why We Like It: Panera has been on the verge of a technical breakdown for the last several days. It appears that breakdown has now arrived. The stock had found support at $25 as far back as July, when the broader markets were in the throws of a significant collapse. It ventured below $25 on two occasions, only to find buyers both times. Recently it has revisited this previous area of support. The difference this time is that rather than hitting $25 on a couple of large drops, it has stepped down to this level with a series of lower highs and lower lows - a very bearish sign. The other significant difference is that rather than finding buyers at this level, PNRA has now found additional sellers. PNRA tested the waters below $25 on Thursday and found some buyers. Not so on Friday, Monday and Tuesday. Friday's drop below $25 found the buyers at that level overwhelmed by the sellers and the stock has been pinned underneath ever since. Each of the last three trading sessions, it has experienced a failed rebound to that level, and closed on a lower low. The pattern gets more bearish everyday and the supply at $25 is now providing a ceiling on the stock A look at the longer term charts shows Panera on the verge of an even larger technical breakdown, having dropped below support at $24.61 on the weekly chart and about to break its December 2001 low of $24.00. The stock was profiled in this past weekend's Ask the Analyst column, highlighting past support levels, which can be viewed with this link http://www.OptionInvestor.com/ask/091502_1.asp. The new addition to these charts would be the current overhead supply at $25. Below $24, the next level of support is $20, going back to November of 2001, and then $15 below that. The current bearish vertical point and figure count is $14. OI sees the current level as ideal for short entries. The stock has managed to break above $25 intraday the last three days, but has been unable to hold these rallies. We will place our stop at $26.50, just above Thursday's high, as this would signal renewed support. BUY PUT OCT-25 UPA-VE OI= 809 at $2.35 SL=1.20 BUY PUT NOV-25 UPA-WE OI= 488 at $3.10 SL=1.60 Average Daily Volume = 883 K --- MXIM - Maxim Integrated Products - $25.48 -0.89 (-2.42 for the week) Company Summary: Founded in 1983, Maxim Integrated Products (MXIM) designs, develops, manufactures, and markets a broad range of linear and mixed-signal integrated circuits (ICs) for use in a variety of electronic products. Maxim circuits "connect" the real world and the digital world by detecting, measuring, amplifying, and converting real-world and communications signals, such as temperature, pressure, sound, voice, or light to the digital signals necessary for computer and DSP processing. (source: company release) Why We Like It: We made a nice profit the last time we played this stock and we're going back to the well again. Maxim has suffered the same fate as many of the other chip stocks. As consumer demand has dropped with the slow economy, so has demand for the semiconductor industry. Add to this the continuing slowdown in IT spending by businesses, and there isn't much left in terms of demand for MXIM's product. The Semiconductor Sector Index (SOX.X) has set another 52-week low and is now trading at its lowest level since 1998. This is the fourth 52-week low in the last six weeks. Maxim has followed suit, with its latest decline taking it down to levels not seen since June 1999. The bottom continues to fall out of the sector, and support is hard to find. On Monday Bank of America and Prudential cut 2002 and 2003 earnings estimates on a combined 15 semiconductor stocks, citing weakness in the consumer segment. Maxim experienced a spread triple bottom point and figure breakdown with its trade of $27. This type of breakdown is sometimes considered a "bear trap," where a single "O" is followed by a rally, as the last sellers are exhausted. Not to worry in this case, as the trade of $26 added another box to the column and got us through the trap. The stock has also formed a descending channel on the PnF chart, which is headed for $18, coinciding with the bearish vertical count of $17, although some type of bounce is likely before that point. We will target $20 initially, as there is bound to be some round number support, as well as technical support from February and March 1999. We will lower our stop loss and let it run if it breaks that level. Place stops at $28.50, just above Monday's high of the day. BUY PUT OCT-25 XIQ-VE OI= 835 at $2.40 SL=1.20 BUY PUT NOV-25 XIQ-WE OI= 1257 at $3.20 SL=1.60 Average Daily Volume = 8.96 mil --- BRL – Barr Laboratories $66.32 -0.68 (-0.85 this week) Company Summary: Barr Laboratories is a pharmaceutical company engaged in the development, manufacture and marketing of generic and proprietary prescription pharmaceuticals. Barr markets approximately 85 pharmaceutical products, representing various dosage strengths and product forms of approximately 35 chemical entities. BRL's product line focuses principally on oncology and female healthcare categories, including hormone replacement and oral contraceptives. The company's Duramed subsidiary develops, manufactures and markets a line of prescription drug products in tablet, capsule and liquid forms. Why We Like It: With virtually every sector of the market ending in the red on Tuesday, it was like a smorgasbord, looking for attractive downside plays. While it hasn't broken down quite yet, the Pharmaceutical index (DRG.X) is looking particularly top-heavy, as it is resting just above critical support at the $284 level. What is particularly telling is that each rally attempt over the past few weeks has resulted in a lower high, with the 20-dma (currently $296) continuing to provide resistance. Add to this the fact that the DRG index broke back under its 50-dma (just above $287) on Tuesday, and it looks like the bears may be coming out of their brief period of hibernation. BRL had a nice run to the upside throughout most of the month of August, but with the DRG sector falling and BRL now solidly below the 200-dma ($67.68), the bears are coming back out to play. Particularly interesting is the series of lower highs and lower lows that the stock has posted over the past few weeks, and with the stock resting precariously on the $66 support level, we have a couple of solid action points to work with. Momentum traders will want to enter the play as BRL falls under the $65 support level (just below this week's intraday lows), preferably with the DRG index confirming this weakness with a break under the $284 support level. Should we get an oversold rebound first, look to fade that rally attempt by entering on a rollover from resistance, first at $67 and then possibly as high as $68.50. Initial stops are in place at $69. BUY PUT OCT-65*BRL-VM OI= 86 at $3.10 SL=1.50 BUY PUT OCT-60 BRL-VL OI=356 at $1.65 SL=0.75 Average Daily Volume = 573 K --- LTR – Loews Corp. $48.62 -1.41 (-1.64 this week) Company Summary: Loews Corporation is a holding company with subsidiaries engaged in property, casualty and life insurance (CNA Financial Corporation); the production and sale of cigarettes (Lorillard, Inc.); the operation of hotels (Loews Hotels Holding Corporation); the operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling), and the distribution and sale of watches and clocks (Bulova Corporation). Why We Like It: In case you haven't noticed, there has been a confluence of factors lining up to keep the Tobacco stocks under pressure. From increased tariffs cutting into sales, low cost competition requiring greater add revenue, and of course the constant drumbeat of litigation, investors seem to be losing their appetite for this group of stocks. LTR went on a BIG PnF Sell signal back in May and June, and that vertical count had the bears eyeing a drop all the way back to the $19 level. While that seems a bit extreme, it is interesting to note that the column of 'X's created by the rebound off the July lows came to a halt right at the $53 level, which is where the violated bullish support line would be right now. Since topping out, LTR has been on a steady decline, posting a continuous series of lower highs and lower lows. Despite an attempted rebound this morning with the rest of the broad market, LTR reversed just below the 20-dma ($51.23) and proceeded to fall back under its 50-dma ($49.11). That brought the stock down to the top of its gap from August 8th, and if the stock falls into that gap, it should at least fill it down to the $46.75 level. Of course, once below that level, the bears will be eying the $45 level and then the $41 level as potential bearish targets. Use an intraday rally to resistance near $50 to establish new positions on the rollover, or else wait to enter on a drop below $48.25. Initial stops are set at $51.25, just above strong resistance. BUY PUT OCT-50 LTR-VJ OI=117 at $2.85 SL=1.50 BUY PUT OCT-45*LTR-VI OI= 16 at $0.95 SL=0.50 Average Daily Volume = 603 K --- TIN – Temple-Inland Inc. $46.52 -0.94 (-1.47 last week) Company Summary: Temple-Inland is a holding company that conducts all of its operations through its subsidiaries. Its principal subsidiaries include Inland Paperboard and Packaging, Inc., Temple-Inland Forest Products Corporation, Temple-Inland Financial Services Inc., Guaranty Bank and Guaranty Residential Lending Inc. TIN's business is divided among three groups: the Paper Group, which manufactures corrugated packaging products, the Building Products Group, which manufactures a wide range of building products and manages the company's forest resources of 2.1 million acres of timberland, and the Financial Services Group, which consists of savings bank, mortgage banking, real estate and insurance brokerage activities. Why We Like It: While it seems clear that the housing bubble is starting to deflate, pure plays on the Home Construction companies doesn't seem to be the best way to go. Instead, stocks of the companies providing the raw materials and financing products seems to be where the weakness is first presenting itself. And that makes sense with last week's news of record foreclosures, and this week's news of the extremely high delinquency rate on FHA loans. Not only that, but we're exiting the peak building season anyways, and that is going to cause a slackening in demand for products like paperboard, lumber and other associated building materials. Apparently investors have been figuring that out, as shares of TIN have been accelerating their downward move over the past couple weeks. First the bears took out the $50 support level and then today, they pressured the stock under the July low ($46.87). The breakdown under $50 created a bearish triangle breakdown on the PnF chart, and once the $46 support level breaks, support at $44 and then $42 should be tested in fairly short order. Look for an oversold rebound over the near term to provide for an opportunity to enter the play as that rebound fails, either at the $48 resistance level, or even a bit higher, near strong resistance at $50. Should the rebound fail to materialize, consider momentum-based entries as TIN falls under $46. Initial stops will be set at $50.50. BUY PUT OCT-50 TIN-VJ OI= 0 at $4.40 SL=2.75 BUY PUT OCT-45*TIN-VI OI=10 at $1.70 SL=0.75 Average Daily Volume = 527 K ------------------------------------------------------------ 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 Tuesday 09-17-2002 Copyright 2002, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: Traders Corner: ********************* PLAY OF THE DAY - PUT ********************* MXIM - Maxim Integrated Products - $25.48 -0.89 (-2.42 for the week) Company Summary: Founded in 1983, Maxim Integrated Products (MXIM) designs, develops, manufactures, and markets a broad range of linear and mixed-signal integrated circuits (ICs) for use in a variety of electronic products. Maxim circuits "connect" the real world and the digital world by detecting, measuring, amplifying, and converting real-world and communications signals, such as temperature, pressure, sound, voice, or light to the digital signals necessary for computer and DSP processing. (source: company release) Why We Like It: We made a nice profit the last time we played this stock and we're going back to the well again. Maxim has suffered the same fate as many of the other chip stocks. As consumer demand has dropped with the slow economy, so has demand for the semiconductor industry. Add to this the continuing slowdown in IT spending by businesses, and there isn't much left in terms of demand for MXIM's product. The Semiconductor Sector Index (SOX.X) has set another 52-week low and is now trading at its lowest level since 1998. This is the fourth 52-week low in the last six weeks. Maxim has followed suit, with its latest decline taking it down to levels not seen since June 1999. The bottom continues to fall out of the sector, and support is hard to find. On Monday Bank of America and Prudential cut 2002 and 2003 earnings estimates on a combined 15 semiconductor stocks, citing weakness in the consumer segment. Maxim experienced a spread triple bottom point and figure breakdown with its trade of $27. This type of breakdown is sometimes considered a "bear trap," where a single "O" is followed by a rally, as the last sellers are exhausted. Not to worry in this case, as the trade of $26 added another box to the column and got us through the trap. The stock has also formed a descending channel on the PnF chart, which is headed for $18, coinciding with the bearish vertical count of $17, although some type of bounce is likely before that point. We will target $20 initially, as there is bound to be some round number support, as well as technical support from February and March 1999. We will lower our stop loss and let it run if it breaks that level. Place stops at $28.50, just above Monday's high of the day. BUY PUT OCT-25 XIQ-VE OI= 835 at $2.40 SL=1.20 BUY PUT NOV-25 XIQ-WE OI= 1257 at $3.20 SL=1.60 Average Daily Volume = 8.96 mil ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's • optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's • 8 different online tools for options pricing, strategy, and charting • Access to options specialists via email, phone or live chat online • Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** TRADERS CORNER ************** It’s about Time By John Seckinger jseckinger@OptionInvestor.com Wilbert Delbert Gann was born on June 6th, 1878 in Lufkin, Texas and is considered a pioneer in the field of technical analysis. Mr. Gann used pattern, price, and time to project changes in both trend and market direction. W.D. Gann first became interested in commodities as a kid, carefully watching his father who worked as a cotton farmer near Texarkana. Later in life, Mr. Gann worked in a brokerage firm during the day and attended business school at night. In fact, it wasn’t until he was 41 before he quit his job and went on his own. W.D. Gann began publishing The Supply and Demand Letter, used to constantly predict price change in both stock and commodity markets. It is rumored that Gann’s predictions in the 1920’s were 85 percent accurate, and that he correctly predicted the 1929 crash. Other rumors included Gann opening an account in 1908 with $300 in cash and turning it into $25,000 during a span of three months. Another trading account was rumored to be opened with $130 and blossomed to $12,000 in the same 30 days. In 1923, it is thought that Gann turned $1,000 into $30,000 trading cotton over a period of 60 days. Is this a chapter from Ripley’s Believe it or not? I may not have the answers; nevertheless, W.D. Gann does deserve to be further examined due to his unique insights involving price and time. Note: There were roughly five institutional traders in Chicago that obsessively followed Gann, all extremely confident that W.D. Gann was on to something; however, I do not know how well these traders did while following W.D. Gann. The significant discovery W.D. Gann is associated with includes time cycles dating back to over 100 years. This was done to watch for past market action to be repeated. Moreover, Mr. Gann called the fifth year of each decade the ‘year of ascension’ when looking at the All Ordinaries Index and The Dow Jones Industrial Average. Dates used included 1905 to 1995. Mathematics and number theory was critical to the success of Gann, giving much weight to ‘squaring time and price’ and his ‘squares’ of 52, 90, and 144. Pattern, price, and time, to Gann, clearly are not independent of themselves. In fact, Mr. Gann was quoted as saying, “when time and price coincide, change is imminent.” To Gann, the study of patterns consists of the construction of minor, intermediate, and main trend-indicator swing charts (bar charts) and closing price reversal patterns. Pattern study itself is defined as the study of market swings. Price study consists of Gann angle analysis and percentage price retracements, consisting of swing-chart price targets, angles, and percentage retracement points. Lastly and most important is the study of time, which looks at swing timing, cycle timing, and historically recurring dates. Time study involves natural and social cycles and uses swing charts, anniversary dates, cycles, and the square of price to measure time. With Gann’s dedication to number theory, it should not be surprising to learn that Gann connected pattern, price, and time through geometric angles. The relationship above is expressed as a 1 by 1 Gann angle. Note: A 45-degree angle has a tangent equal to one. Gann angles are drawn between a significant bottom and top (or vice versa) at various angles. Deemed the most important by Gann, the 1 x1 trend line is used as a criteria for both bull and bear markets. Gann felt that a 1 x 1 trend line provided major support during an uptrend. When the trend line is broken, it signifies a major reversal. A bull market is signified if prices are rising and are above the upward sloping 1 x 1 trend line. Conversely, a bear market is indicated when prices are falling and are below the downward sloping 1 x 1 trend line. Gann understood the use of horizontal support and resistance lines, but he used his Gann angles for diagonal support and resistance. If the 1 by 1 Gann angle wasn’t used, he would use the 1 by 2 angle, drawn via two units of time (right) and one unit either up or down (price). Gann also used the following angles: 1 x 8 - 82.5 degrees 1 x 4 - 75 degrees 1 x 3 - 71.25 degrees 1 x 2 - 63.75 degrees 1 x 1 - 45 degrees 2 x 1 - 26.25 degrees 3 x 1 - 18.75 degrees 4 x 1 - 15 degrees 8 x 1 - 7.5 degrees Below is a chart of Real Networks (RNWK), used for illustrative purposes. The red line represents the 1x1 Gann Angle, the green lines represent the 1x2 and 2x1 angles, the aqua lines represent 1x3 and 3x1 angles, the blue lines represent 1x4 and 4x1 angles, and the purple lines represent 1x8 and 8x1 angles. Gann was a strong believer that stop-loss orders should be used at all times. Another belief of Gann’s was giving Saturday and Sunday a specific point value, since this was a factor of time and could not be overlooked. Gann also believed that minor trends in the marketplace should be used to learn more about the intermediate and main trends. Gann noted that the only way a minor trend could turn down was to cross a minor bottom. Note: A minor top on a monthly top is always a minor top on the weekly, daily, or hourly chart. As far as Gann Angles are concerned, W.D. Gann had roughly 18 geometric forms explaining his angle theory. One of interest is squaring the range from a high price and using the intersection of the Gann Angle (1 x 1) and 50 percent of price to form major support/resistance level. Looking at the chart below, the dashed horizontal line is the 50% price area, while the vertical lines represent time increments. Notice how a minor low was formed as price and time comes together. From the minor high, 1 x 1 Gann Angles are drawn. This is also used as the minor lows. My intention was to give the reader a quick insight to the life and theories of W.D. Gann. I do believe that Gann’s approach to time cycles is very important, and should not be discounted. One book recommended is James A. Hyerczyk’s Pattern, Price & Time. It is my impression that enough traders follow Gann theory to make it credible; however, it should only be used as a tool at first until one become comfortable with Gann’s unique approach to trading. The following quote sums up Gann pretty well: "Water seeks its level," quoting Mr. Gann. "You can force it higher with a pump, but when you stop pumping it requires no force to cause it to return to its former level. Stocks and Commodities are the same. They can be forced above their natural level of values to where lambs lose all fear, become charged with hope and buy at the top. Then stocks are permitted to sink to a level where hope gives way to despair and the most rampant bull becomes a bear and sells out at a loss. My discover of the time-factor enables me to tell in advance when these extremes must, by the law of supply and demand, occur in stocks and commodities." ------------------------------------------------------------ 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 ------------------------------------------------------------ ********** 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
Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.
Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.
To ensure you continue to receive email from Option Investor please add "email@example.com"
Option Investor Inc