The Option Investor Newsletter Tuesday 10-08-2002 Copyright 2002, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: The Market Giveth and The Market Taketh Away – and Giveth again! Futures Markets: 775 & Dock Strike Index Trader Wrap: A bull is "banking" on a rally Market Sentiment: Still in the Shallow End Weekly Fund Screen: Conservative Hybrid Funds Updated on the site tonight: Swing Trader Game Plan: A bear couldn't "bank on it" Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 10-08-2002 High Low Volume Advance/Decline DJIA 7501.49 + 78.65 7623 7331 1939 mln 1325/1425 NASDAQ 1129.22 + 9.82 1144 1110 1840 mln 1572/1711 S&P 100 401.62 + 5.47 408.57 393.49 totals 2897/3136 S&P 500 796.32 + 11.04 808.86 779.50 RUS 2000 338.77 + 0.48 341.04 333.77 DJ TRANS 2115.35 + 56.78 2131 2059 VIX 46.46 - 2.72 VIXN 62.32 + 2.04 Put/Call Ratio 0.90 ************************************************************ The Market Giveth and The Market Taketh Away – and Giveth again! By Mike Parnos This morning the S&P futures were positive throughout the pre- market period – finishing about 10-points above fair value signifying a rather strong positive opening. It looked like the wishful thinkers were going to have a day to remember. And that’s exactly how it started. Chart of the DOW: Watching the DOW bounce around a 290 point trading range was like watching a tennis match. I felt like Linda Blair in The Exorcist. The eternal optimists were happy as the DOW moved up to the 7530 level early. Then, before you can say, “Gee, this may be a bottom,” it gave back 60 points to 7470. We’re just getting started. The DOW then decided to test the high and move back up to over 7520. The air was a little thin and so was the buying, so down it went – about 90 points -- until it reached its intra-day low of 7331 at about noon. Then, while the sellers were at lunch, the DOW reversed direction, showed some strength, and slowly made its way up to the high for the day – 7623 shortly before 3 p.m. But, as usual, it was too good to be true. Profit takers stepped in and snatched back over 75 points and the DOW finished at just over 7500. A decent day, but let’s not break out the cheerleader uniforms just yet. The DOW may have finished positive (18 of the DOW 30 were up), but the broader market showed decliners beating advancers by 1425 to 1325. The NYSE volume was up a little from yesterday at 1.94 million shares and the DOW 78-point gain snapped a four-day losing streak. __________________________________________________________ The NASDAQ chart was very similar – starting strong, giving it back, testing the high, tanking down, moving to the day’s high and giving back most of the positive move, leaving only a gain of 9.21. Decliners on the NASDAQ led decliners 1711 to 1572. Chart of COMPX: After four losing days in a row, today could be interpreted as a faint light at the end of the tunnel, but, then again, we may as well be waiting for the Tooth Fairy to show up. I hope he does, because many bulls have, not only lost their teeth, but lost their shirts as well. The earnings have been more positive than negative, but it’s going to take more than that to change the direction of the market. BBH (Biotech Holders) made a nice move up, broke through resistance at $80, ran up to $80.80, but came back down to finish just below the $80 level. We’ve been keeping an eye on BBH in my columns, tracking the stock for the past month. Chart of BBH: It’s been hovering around $80 and, one of these days, is going to bust out. The direction? Flip a coin. But, if you are looking for a straddle or strangle candidate, you might check this out. If you have any questions on the right way to put on a straddle or strangle, feel free to contact me. I go into these strategies in depth in my Option 101 and Traders Corner articles that can easily be found in the OptionInvestor archives. What’s Up Docks? Retail index was up about 5%. Partially as a result of the news that the dock workers are scheduled to return to work tomorrow. They’re debating on whether it’s justified to invoke the Taft- Hartley act to force the end of the work stoppage. Today, the dock-workers were bored so they were driving their trucks around in circles blowing their horns in support of their union. What can I say? Some bulbs don’t burn as bright as others. Inventories are already low at many retailers because they’re trying to run lean and mean. Without the ability to replenish their already lean inventories, they’d be running mean – without the lean – and without sales. The potential devastating effect on our sensitive economy prompted George W. to take his attention away, at least temporarily, from his saber rattling, to do something productive for the economy. Some CEO of a toy company was interviewed on CNBC. He was crying the blues because his products might not be able to get to the U.S. market in time for the Christmas season. Some big option bets were being placed on Ford Motor Co. (F) as the AMEX January 5 calls and November 5 calls were the most actively traded today. Why? Today Ford traded at a 52-week low of $7.51 before finishing at $7.75. That’s a nasty looking chart. Pepsi (PEP), after tremendous option volume on Monday, beat the street’s estimates and was up $5.32 today to finish at $41.10. It has some serious resistance to get through at $41-42. If it does, the next resistance level is at $45. Remember, Pepsi owns a large chunk of YUM – which owns KFC, Pizza Hut, Taco Bell and a lot of snack foods. If you’ve read my columns, you can appreciate why PEP is one of my favorites. When I go on a diet I always get two letters – one from PEP and the other from Hostess. They want to know what’s wrong and why I don’t love them any more. Morgan Stanley trimmed estimates for car sales for 2003. Tobacco stocks rebounded Monday from getting nailed on Friday, but today these same stock’s sails lost a few puffs. MO was down $2.36 and CSCO keeps going down as analysts keep reducing their estimates. Support & Resistance Levels Dow Jones Industrial Average (INDU) – support at 7330; resistance at 7700 Nasdaq Composite (COMP) – support at 1080; resistance at 1160 S&P 500 (SPX) – support at 775; resistance at 825 Tomorrow’s Earnings Announcements Tomorrow’s trading should be interesting. Among the companies that will be announcing earnings are Rambus, Yahoo, YUM, Abbot Labs, Commerce Bancorp, Winn-Dixie, Sun Trust, Genentech, Sonus Networks, and Redback Networks. Happy Trading! Do your homework and make sure you know, and limit, your risks before you click those “buy” and “sell” buttons. That’s the beauty of options. They can do almost anything if you know how to use them. Regards, Mike Parnos Contact me at: mparnos@OptionInvestor.com *************** FUTURES MARKETS *************** 775 & Dock Strike By Alan Hewko This article will be rather short tonight. Due to shortness of time, I must omit the "Recap of Last 24 hours" section I've been doing. However, you can read my several comments from today that were made in the Market Monitor if you wish. Monday open: 10 Point ES (Emini SP Futures) gap DOWN at 9:30 AM caused a rally from the open. Tuesday open: 10 Point ES gap UP at 9:30 AM resulted in it being Faded (was Sold into) rather quickly after the open. Tuesday's opening strength was largely due to Pres. Bush's speech last night and his tone of "war being an action I would rather avoid if possible", and the rumors on the West Coast dock strike ending. As mentioned several times, SP 500's July 24th Low was 775-777. This 775 number was an area that was either 1. Going to bring in Shorts taking Profits, - or - 2. If it was firmly lost (much like the Dow 7500 support was lost); who knows how large the selling might have become. A Dow -300 type day could not have been ruled out. Tuesday at 10:30 AM, ES had a double top at 797-798, and just couldn't climb through that ES 800 number that we've talked about so very often. It was steady hard selling the next 90 minutes. ES lost its supports at 795-6, 793, 787, 783-5, 780, until finally coming very close to that Magic Number of 775. At exactly 12 Noon Oct 8th, ES was 777s and I guess Shorts decided that number was "close enough" to the 775 level. If the whole market was waiting to cover at 775, beat the rush and cover a few points higher. Dow Industrials For the 4th day in a row, The Dow traded 200 points off its day highs. Early in the morning, Dow was 7525, and near 12 noon it was 200 points lower at 7325. Another reason that 12 noon saw Shorts starting to cover in my view as the last four days, the market did reverse at that -200 from day's high level. The below ES (Emini SP500 Futures) chart tells the story better than I can with words. Chart: E-Mini S&P 500 (intraday chart for Oct. 8th, 2002) At 2:55 PM, ES made day highs at 810, stopping at the prior resistance of 809-812. Monday's day high was also 809-810 area, and that made a logical "Double Top" area for some Longs to take profit. What added fuel to the afternoon rally was the West Coast dock strike news. The workers indicated they will go back to work for 30 days under the old contract, while at the same time Pres. Bush invoked the Taft-Hartley act requiring an 80 day return to work. Confusion reins on what exactly will happen. Look at the reaction in the RLX Retail Index. WEDNESDAY THOUGHTS: Dow closed right at 7500. ES (SP500 Futures) closed over the Key 800 level at 801. Technically speaking, SP500 has now formed a double bottom at 775. Dow today touched a support level of 7325-50. An easy way to sense Market direction for Wednesday I believe is watching the same two numbers that have been spoken about many times this past week: ES (Emini SP500 Futures) 800 and Dow 7500 I'm not going to try and out-think how the market views this Dock Strike ending. I'll let those two numbers tell me. Today, in the Market Monitor, at 2:55PM (ES 810, Dow 7625), I had made the comment of exiting Longs at that level, and/or Opening a scalp short. Thought being "Buy the Rumor, Sell the News" relating to Pres. Bush on TV near the end of day when he formally gave us the News on invoking Taft-Hartley as the market had been Buying this Rumor. That short was good for above 10 ES Points, 100 Dow points but Flat seems to make sense going into Wednesday; and watching those two numbers of ES(SPX) 800, Dow 7500. Alan Hewko futures@OptionInvestor.com PS: There's another article tonight on using Futures to Hedge Option positions as many of you had emailed questions relating to that. Check it out here. ******************** INDEX TRADER SUMMARY ******************** A bull is "banking" on a rally The major market averages snapped a four-day losing after this afternoon's news that President Bush would seek a court injunction to force the reopening of West Coast ports for an 80- day "cooling-off" period. While this may be partially true, I'm a technician and believe it was the rebound in the banks that hinted of a more bullish day in the making and something that traders and investors will need to follow in the coming sessions. In last night's Index Wrap this was "the sector" that I thought might cast the "swing vote" in today's action and while the major market averages did drip red like an explosive ink bomb inside a money bag, both of the banking index (BIX.X) 248.44 +4.62% and (BKX.X) 638.53 +4.31% sustained gains above yesterday's lows and seemingly pulled the markets higher. Other financial groups like the Broker Dealer Index (XBD.X) 335.63 +4.58% and Insurance (IUX.X) 236.53 +4.08% showed strong gains today. Now this makes one wonder if bears aren't trying to get off the hook easy. At least it does to me. While I would admit that some banks and insurance company's might see a reprieve if dock workers were able to get back to work, I'm a bit confused how the "other" financial group like the broker/dealers would benefit. Who knows? Maybe there's a bunch of "buy orders" sitting on some of those large ships off the coast of California that are yet to be unpacked. After today's trading, it becomes somewhat apparent to me that it will be the "financials" that hint of broader market direction as these are the groups that seemed to hold gains early and build throughout the day and pull the major averages higher. It certainly wasn't the Semiconductor Index (SOX.X) 215.92 -1.83%, North American Telecom Index (XTC.X) 311.62 -2.71%, Utility Index (UTY.X) 227.10 -4.69% or Gold/Silver Index (XAU.X) 62.79 -3.07% helping a move higher. In last night's wrap, we looked at a monthly interval chart of the S&P Banks Index (BIX.X). The components of this index are more "regional" banks and don't have as great an exposure to large investment banking deals and global markets as do components of the KWB Bank Index (BKX.X). From a bulls perspective, I think a market rally has potential and I'm going to "fine tune" things a bit as it relates to the BIX.X. My brief hypothesis is that if the BIX.X can break above today's high, the BIX has rally potential to 267 and under such a rally, could help lift the broader market averages. S&P Banks Index Chart - Daily Interval There has been little "leadership" from any type of economically sensitive group in recent weeks or months. While one day is no reason to be calling a trend, its the banks and the financial sectors that showed some DIVERGENCE from the major market averages today and perhaps is the group that BULLS and BEARS should monitor near-term with their index trades. While the Dow Industrials (INDU), SPX, OEX, NDX, and QQQ all broke their morning lows, it was the recently beaten down banks that held their lows and built gains as the session wore on. Some may think I'm a bit "crazy" for identifying the banks as a leadership group, especially the tried and true bear. But did a bull or bear question our 09/11/02 intra-day update as it relates to the BIX.X? http://members.OptionInvestor.com/archive/intraday/2002/091102_3.asp I would once again ask subscriber to visit our Swing Trade Section tonight as we're trying to get the newsletter out in a timely fashion and I've discussed all the major indexes there once again while I'm filling in for Jim Brown. In this section, I want to quickly look at a point and figure chart of the Dow Industrials. This is a rather "simple" index to understand as it only has 30 components. It also helps perhaps to put into perspective "risk" as it relates to the bullish %. While the bullish % is make up of just 30 stocks, it makes sense then that each stock gets one equally weighted "vote" when described by the bullish %. In essence each stock's point and figure chart is "worth" 3.33% (30 components times 3.33 = 99.99, which is pretty close to 100%). As such, tonight's reading for the Dow Industrials Bullish % ($BPNDX) from www.stockcharts.com is 9.99%, meaning just 3 of the 30 components currently have a "buy signal" associated with its point and figure chart. The three stocks currently showing a "buy signal" are Citigroup (C) $27.84 +4.15% (would be negated with a trade at $26), Johnson & Johnson (JNJ) $58.49 +3.15% (would be negated with a trade at $51) and Procter & Gamble (PG) $89.30 +0.4% (would be negated with a trade at $87). Today, the Dow Diamonds (DIA) $75.39 +0.86% achieved their bearish vertical count of $74.00, when the DIA traded a session low of $73.40. On September 30th, the DJX.X traded its bearish vertical count of $75.00 and has been hanging around current levels of $75.01 for the past week. With the Dow Bullish % ($BPINDU) at 9.99% and "oversold" the point and figure chart may give traders some perspective of "risk" to a point and figure buy signal where the bullish % tells a bear he/she is at a HIGH RISK LEVEL, and where some bearish vertical counts have recently been achieved. Dow Diamonds (DIA) Chart - $1 box If the DIA were a stock, I'd look at the low 9.9% bullish % reading and understand that risk is HIGH for bears holding short. With the DIA and DJX both reaching bearish vertical counts, it becomes more difficult to assess further potential downside. As such, this the only major index right now that is trading anywhere close to its bearish vertical count and ties in with an "oversold" bullish %. A trade at $81 (9.45% from current levels) would be the first sign of strength. Near-term, the first major index I'd look for strength would be the Dow Industrials. The first index that shows some signs of a rebound would be the financials, particularly the S&P Banks Index (BIX.X). 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 **************** Still in the Shallow End by Steven Price I've been discussing the levels in the Dow (7500), S&P 500 (800) and S&P 100 (400) that I felt would be pivotal points that could send us in one direction or another. For some reason, these indices have failed to co-operate with my plan. Actually they have only underscored their importance as pivot points and support and resistance levels, confounding me slightly in the process. The Dow finished above 7500 (7501.49); the OEX (S&P 100) finished above 400 (402.88) and the S&P 500 (SPX) finished below 800 (798.55). After yesterday's close below the aforementioned levels, I was looking for intraday resistance at those points, in order to reinforce my bearish sentiment. That did not happen today. Instead, all of the averages broke through those levels and then two of them found support as the market sagged toward the end of the day. Does this mean I'm bullish? Not a chance - at least not yet. But what it does mean is that I haven't gotten the sign I was looking for to pile on the shorts. I want to know there is a ceiling to my short positions before I put them on in entirety. While I have been bearish for the last couple of months, we are at a point where the drop has slowed. It is true that we have continued to establish a series of lower highs and lower lows, but a look back at the Dow shows an awful lot of noise between 7400 and 7500 in the falls of 1997 and 1998. The SPX also shows some consolidation at that point in time, although it is 100 points higher, around 900. The SPX, however, has yet to break its July intraday low of 775. The OEX activity is similar to that of the SPX. My point is, the screw seems to be tightening, and I'm not going to bet the farm until I get the signals I am looking for. OK, now that I have presented both sides of the argument, the market still "feels" awfully bearish. The rally in the banking sector, with the S&P Banks Index (BIX.X) gaining 10.99 to close at 248.44, looks like short covering; or possibly short profit taking, as there is still nothing but bad news coming out of the group. More layoffs and bad loans have plagued the banks and unless bankrupt companies start having garage sales to pay off their debt, there doesn't appear to be a rosy immediate future for lenders. The series of lower lows remains in tact and the sector was probably due for a bounce after the BIX lost 16% in the previous four trading sessions. The Retail Index (RLX.X) also got a boost, gaining 11.86 to close at 265.54. This group had also lost 12% in the last three weeks, as September sales continued the trend of coming in under previous estimates. The west coast port lockout also hurt the stores, as merchandise sitting on ships could not be sold. News that the President was getting involved in the dispute, helped boost the group today. The announcement that he would invoke the Taft-Hartley Act, re-opening the docks for 80 days (which conveniently ends just after Christmas), should continue to give the retailers a boost tomorrow. However, it does not solve the problems that led to the sell-off in the first place - people aren't buying merchandise, due to increased layoffs and a poor economy. Friday should be a big day for the sector, as we will get the final retail numbers for September and a look at the preliminary University of Michigan Consumer Sentiment report. Sentiment will give us an idea just how consumers are faring and what can be expected for the holiday shopping season. A look at the final market data for the day looks pretty positive, but doesn't really tell the story of the late afternoon fade. At one point the Dow was up almost 200 points, before falling back and landing right above 7500, for a gain of 78.65. The SPX was up almost 25 points, before falling back and closing just under 800, for a gain of 13.27. The OEX was up over 12 points, before landing just over 400, for a gain of 6.73. Overall, the rally didn't feel like such a rally by the end of the day. I am still looking for that intraday resistance before jumping into the deep end, but until then I will be wading in the short, I mean shallow, water. The S&P Retail Index(RLX.X): The retailers finally got a bounce, as the president got involved in the west coast port lockout. President Bush said he would invoke the Taft-Hartley act, keeping the docks open through the holiday shopping season (he didn't mention the shopping season, but that was the effect). The group was led higher by Wal-Mart (+2.25), Target (+2.06) and Kohl's (+2.83). This was a nice boost, after Sears reduced earnings estimates on Monday. Unfortunately, the President can't do much about shoppers staying out of the malls because they are worried about their jobs. The end of the week will bring us September's retail sales numbers, but we already know they will be rather low, as a host of companies have already said that numbers will be below expectations. the RLX has now bounced at its July support level of 250, but I expect that level to be re-tested before the end of the year. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10679 52-week Low : 7331 Current : 7501 Moving Averages: (Simple) 10-dma: 7699 50-dma: 8351 200-dma: 9458 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 775 Current : 798 Moving Averages: (Simple) 10-dma: 821 50-dma: 882 200-dma: 1027 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 811 Moving Averages: (Simple) 10-dma: 843 50-dma: 818 200-dma: 1224 Market Volatility The VIX gave back some of yesterday's pop, which had put it just below the 50 level, getting as high as 49.71 intraday and closing at 49.18. the slow and steady rise in market volatility has mirrored the drop, although the drop has occurred at a faster rate. The last several times the VIX has hit 50, we have experienced a broad market rally shortly thereafter. However, it has made it into the upper 50s or 60 before the rally ensued. I am still looking for the VIX to break 50 on another downswing in the Dow and S&P, before we begin to hit higher ground. The VXN has mirrored the movement in the VIX, with the upper 60s, or possibly 70 being the target before a Nasdaq rally. CBOE Market Volatility Index (VIX) = 46.46 –2.72 Nasdaq-100 Volatility Index (VXN) = 31.16 –1.16 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.90 635,529 574,415 Equity Only 0.71 465,468 328,736 OEX 1.09 40,933 44,452 QQQ 0.66 35,734 23,822 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 27 - 3 Bull Correction NASDAQ-100 15 - 2 Bear Confirmed Dow Indust. 10 + 3 Bull Correction S&P 500 20 - 4 Bear Confirmed S&P 100 20 + 0 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 1.50 10-Day Arms Index 1.40 21-Day Arms Index 1.49 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 1324 1426 NASDAQ 1581 1708 New Highs New Lows NYSE 22 10 NASDAQ 351 414 Volume (in millions) NYSE 2,231 NASDAQ 1,831 ----------------------------------------------------------------- Commitments Of Traders Report: 10/01/02 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 There has not been much change in the positions of Commercials, who reduced both longs and shorts by about 2,000 contracts each. Small traders are also relatively unchanged, with reductions of about 1,000 contracts to both the long and short sides. Commercials Long Short Net % Of OI 09/10/02 426,230 470,537 (44,307) (5.0%) 09/17/02 476,224 503,268 (27,044) (2.7%) 09/24/02 425,276 442,661 (17,385) (2.0%) 10/01/02 423,661 440,133 (16,472) (1.9%) Most bearish reading of the year: (111,956) - 3/6/02 Most bullish reading of the year: ( 16,472) - 10/01/02 Small Traders Long Short Net % of OI 09/10/02 166,696 85,259 81,437 32.3% 09/17/02 182,243 116,377 64,866 21.7% 09/24/02 124,232 73,506 50,726 25.7% 10/01/02 123,371 74,704 48,667 24.5% 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 reduced both longs and shorts, but by a relatively small percentage, giving up 600 long contracts and 1,700 shorts. Small Traders also made few changes to their overall positions, getting slightly longer overall, by about 600 contracts. Commercials Long Short Net % of OI 09/10/02 53,309 58,745 (5,436) ( 4.9%) 09/17/02 72,522 75,815 (3,293) ( 2.2%) 09/24/02 46,637 54,613 (7,976) ( 7.9%) 10/01/02 46,000 52,976 (6,976) ( 7.0%) 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 09/10/02 14,024 10,494 3,530 14.4% 09/17/02 15,288 14,142 1,146 3.9% 09/24/02 11,163 9,421 1,742 8.5% 10/01/02 11,896 9,575 2,321 10.8% 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 left long positions unchanged, while reducing shorts by 10%. Small traders reduced longs by 1,000 contracts, while adding the same amount to the short side. Commercials Long Short Net % of OI 09/10/02 22,946 14,936 8,010 21.1% 09/17/02 26,863 21,187 5,676 11.8% 09/24/02 18,951 10,074 8,877 30.6% 10/01/02 18,969 8,903 10,066 36.1% 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 09/10/02 7,568 10,129 (2,561) (14.5%) 09/17/02 13,393 11,637 1,756 7.0% 09/24/02 7,939 9,453 (1,514) ( 8.7%) 10/01/02 6,809 10,503 (3,694) (21.3%) 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 FUND SCREEN ****************** Conservative Hybrid Funds This week, we screen for the best low-risk domestic hybrids using Morningstar's Fund Selector online tool. In general, these funds emphasize current income but maintain some exposure to stocks for their long-term capital growth potential. We'll be searching for hybrids that normally have near 20% of assets in stocks with the remainder invested in fixed income (and money market) securities. Although conservative in strategy, these funds will exhibit some fluctuations in share price. So, if you are unwilling to accept this moderate volatility, you may not want to invest. Likewise, if you seek maximum capital growth over the long run, then these conservative hybrid funds may not be appropriate. They are more suited to investors seeking a high level of current income, with some growth of capital potential (or as an inflation hedge). In addition to low-equity stake funds, we may also look at other specialized funds that apply covered call, long/short, or market neutral strategies to manage portfolio risk. These unique funds can be among the least volatile offerings in the domestic hybrid funds group. Since many of the online screen tools haven't been updated through September 2002, we'll rely on Morningstar's fund screener, where you'll usually find the most current mutual fund information online. Screening Process We began our search process by selecting the following criteria, using Morningstar's Fund Selector tool as follows: Morningstar Category = Domestic Hybrid Minimum Initial Purchase < or = $3,000 Morningstar Star Rating = 4 or 5 Morningstar Risk Rating = Low Funds with Morningstar Risk equal to Low are among the best 10% of their relative category peer group in terms of limiting risk (volatility and downside risk). So in our case, we're limiting the universe to the lowest-risk funds in the hybrid fund group. This stringent criterion produced 35 results, which were then sorted by highest Morningstar Star Rating. Funds with 5 stars are summarized below for your convenience. Screen Results w/ Morningstar 5-Star Ratings: Calamos Market Neutral (CVSIX) Concorde Income (COINX) Fidelity Freedom 2000 (FFFBX) Fidelity Freedom Income (FFFAX) Fifth Third Strategic Income (MXIIX) Frank Russell LifePoint (RCLCX, RCLEX) James Market Neutral (JAMNX) Merger (MERFX) Scudder Lifecycle Short (BTSRX) Scudder Retirement VII (KRFGX) Vanguard LifeStrategy Income (VASIX) Vanguard Wellesley Income (VWINX) The above dozen funds make for a good short list to begin with. By their fund names, we see that there are some funds with low stock allocations, a couple market neutral funds, and a merger arbitrage fund, a good pool of low-risk hybrids. We then sorted the screen results by highest YTD return through October 7, 2002 and found that six funds have managed to report positive total returns in 2002. Leading the pack with a +10.9% return in 2002 is James Market Neutral Fund (JAMNX) followed by Fifth Third Strategic Income (MXIIX), up 5.8% this year. Other funds with net gains in 2002 include Concorde Income (COINX) up 5.3%, Berwyn Income Fund (BERIX) up 5.1%, Scudder Retirement VII (KRFGX) up 3.4%, and Calamos Market Neutral (CVSIX) 3.1% higher. Next we scored the results using Morningstar's Score tool based on customized criteria (low beta, low standard deviation, high alpha, high Sharpe Ratio, and low expense ratio) to see how the tool would score these funds using our customized risk criteria. The highest scoring funds were Berwyn Income Fund (BERIX) and Vanguard Wellesley Income Fund (VWINX), tied with scores of 40. Fifth Third Strategic Income Fund (MXIIX) scored 38 points, to rank in third place. James Market Neutral Fund (JAMNX) ranked fourth with a score of 36. In the next section, we tell you which funds are our favorites. Our Favorite Funds While Vanguard Wellesley Income Fund (VWINX) is among the best run balanced funds in the nation, it normally allocates 35%-40% to stocks, well above what we are looking for here. If you can tolerate the higher potential volatility the fund might produce, then it may be well worth your while to have a closer look. At 0.33%, the $8 billion fund has one of the lowest expense ratios in the hybrid category. The fund has only a 2.2% YTD loss thru October 7, 2002, compared with a loss of 14.4% for the category average and 29.4% for the S&P 500 index. Sibling Vanguard LifeStrategy Income (VASIX) has the "desired" stock allocation of approximately 20% of assets and invests in other Vanguard index funds to produce an income portfolio with some growth potential. Since December 31, LifeStrategy Income Fund has lost just 4.6%, ranking in category's top decile (top 10%). Its trailing 3-year and 5-year annualized total returns also rank in the top decile for performance (with low relative risk). Compared to the 14.7% average annual loss by the S&P 500 index during the last three years, LifeStrategy Income Fund has done very well, producing an annualized 3-year total return of 3.1% for shareholders. While the market (S&P 500) is down 3% on an annualized basis over the past five years, this "conservative" fund sports a positive 4.9% average total return. Because it invests in its own Vanguard index funds, total expense is low. Berwyn Income Fund (BERIX) is another favorite. Like Vanguard Wellesley Income Fund, Berwyn Income Fund seeks current income with some potential capital appreciation by normally investing the bulk of assets in fixed income securities. It limits the equity stake to 30% of assets, and requires that common stocks currently pay cash dividends. According to Morningstar, Berwyn Income sports a trailing 3-year average total return of 7.3% as of October 7, 2002, 22.1% better than the S&P 500 index, and ranking in the category's top decile. Since December 31, the fund has risen in value by 5.1%, compared with the negative 14.4% total return for the hybrid fund average. A low 0.69% expense ratio adds to its appeal. At 2.23%, the expense ratio for James Market Neutral Fund (JAMNX) isn't cheap. However, this tiny $10 million market neutral fund boasts a positive YTD return of 10.9% thru October 7, 2002, true to its objective of providing positive returns regardless of the direction of the market. It invests in undervalued common stocks and "sells short" overvalued common stocks while maintaining high levels of liquid assets (cash) for collateral needs. For the trailing 3-year period thru October 7, 2002, James Market Neutral Fund produced a positive annualized total return of 8.8%, 23.5% better than the market (S&P 500 index) and ranking the fund in the category's top 4% per Morningstar. The category lost 3.6% on average over the same period. Like James Market Neutral Fund, Calamos Market Neutral (CVSIX) is in positive territory in 2002, and offers a strong return to risk tradeoff for conservative investors. The $571 million fund has a lower expense ratio (1.50%) and solid long-term track record, but is currently closed to new investors. Conclusion You may also want to have a closer look at Fifth Third Strategic Income Fund Advisor Shares (MXSFX), Concorde Income Fund (COINX) and Fidelity Freedom Income Fund (FFFAX). They also have strong return and risk characteristics within the hybrid fund category. Conservative investors seeking a low-risk hybrid fund have some strong options here. For more information, visit the respective fund family's website. Steve Wagner Editor, Mutual Investor firstname.lastname@example.org ************************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 *********************** A bear couldn't "bank on it" Crud. Things were looking good for being short in the Swing Trader Model this morning after the early morning rally began to fade and the major indexes actually broke to new lows. There was just "one problem" in my eyes and that was the bid that continued to hold in the financials and slowly built throughout the session. 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 10-08-2002 Copyright 2002, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: GSK Dropped Puts: FLIR, MRK, TECD Daily Results Call Play Updates: ITMN New Calls Plays: MDT Put Play Updates: WHM, GM, PHM New Put Plays: HAR, BCR **************** 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: ***** GSK $40.10 +0.41 (-0.55 for the week) We didn't like the intraday action on GSK, feeling it should have seen more of a push through $40 to the upside, as the Dow and Pharmaceutical Index (DRG.X) rallied strongly in mid afternoon. It was turned back on Monday at $40.50, as well. On the positive side, it did find support at its 50-dma of $39.02, rebounding from an intraday low of $39.23. While the stock looks as though it could be at an entry point after the bounce from the 50-dma, we are no longer sure about the strength of GSK, and have decided to close the play within 0.39 of where we entered. If readers want to hold the play for a move back toward the 200-dma of $44.01, we have no argument, but the stock has not shown the action we were looking for and we will invest our "call money" elsewhere. PUTS: ***** FLIR $30.63 +2.41 (-2.10) The tighter this bear market spring gets wound, the more explosive the eventual release of that spring. After reaching down to just above $27 in yesterday's volatile session, shares of FLIR got a nice pop at the open this morning. Following a bit of sideways trade, the battle was resolved in favor of the bulls with the stock pushing up to close near its high of the day, just over our $30.50 stop. This play treated us well, and those that took advantage of the capitulation spike lower yesterday afternoon could have booked a $7+ gain on the play, depending on the quality of their entry. We'll leave this one with fond memories as we search for another pleasing ride. --- MRK $46.00 +1.87 (+1.74) When we added MRK to the Put list over the weekend, we were expecting a pending breakdown due to the growing list of earnings warnings in the Drug sector. On Monday, MRK broke to a new recent low, but then rebounded strongly with the rest of the market on Tuesday. Due to the fact that it failed to break down and instead found support near $44.50, we're going to protect ourselves and drop the play tonight. Look to exit any open positions on an early dip on Wednesday. --- TECD $25.03 -0.17 (-0.50) When we added TECD to the Put list a couple weeks ago, our initial target was for a drop to the $25 level, with a secondary target down near $20 if it really broke down. Despite the weakness in the broad market in recent days, TECD continues to find support near $25, and this looks like a warning to us that here is a good point to harvest gains on the play. The market is trying to find a bottom, and a decent short-covering rally could be favorable to TECD. Let's remove that risk, harvest those gains and move on to the next play. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue GSK 40.10 0.06 0.41 Drop, weak rally ITMN 31.49 -0.74 1.29 entry point, again MDT 27.46 -1.55 1.01 New, 200-dma break PUTS BCR 51.70 -0.58 -1.22 New, below congestion FLIR 30.63 -4.29 2.41 Drop, profits GM 33.60 -0.79 -2.28 Rolling downhill HAR 48.60 -1.27 -1.49 New, new, low fidelity MRK 46.00 -0.23 1.87 Drop, sector upgrade PHM 38.62 -1.61 1.51 not strong enough TECD 25.03 -0.27 -0.19 Drop, profits WHR 43.33 -1.94 1.55 Failed PnF rebound ************************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 ******************** ITMN $31.39 +1.11 (+0.39 for the week) ITMN continued its pullback further than we would have liked. However, it bounce right at its 200-dma and looks like a stock we would enter long at this level. That's our way of saying we should have waited for the pullback, but we like the current price for new entries. The stock followed a similar pattern to that of the Biotechnology Index (BTK.X), which also found its legs, but is far below its 200 and 50 dmas. However, unlike the Biotech Index, ITMN has continued its series of higher highs and higher lows, a good sign of a stock on the rise. The last two days have brought additional positive news in ITMN, so we are still very interested in this long play. Intermune has an alliance with Maxygen to develop a once a week treatment for its Actimmune drug, currently used to treat congenital diseases in children, and given three times per week. Actimmune has also shown effectiveness in the treatment of idiopathic pulmonary fibrosis and is currently being tested for use in treating liver fibrosis and ovarian cancer. The idea of being able to give a medicine once a week, as opposed to three times, is very appealing to doctors, as it requires less attention from patients to keep up with a regimen. The testing has gone so well, that ITMN has given Maxygen a $1 million milestone payment for successfully achieving drug performance criteria. ITMN also announced a similar pact with Inhale Therapeutics Systems to develop a new Hepatitis C treatment, using Intermune's Infergen and Inhale's PEGylation expertise. Conservative traders can wait for another successful re-test of the 200-dma of $30.23, however, we like new entries at the current level and will leave our stop loss at $29.00, as this would show a distinct break below the 200-dma. ************** NEW CALL PLAYS ************** MDT - Medtronic, Inc. $44.18 +0.93 (+0.98 this week) Company Summary: As a medical technology company that provides lifelong solutions for people with chronic disease, MDT offers therapies to restore patients to fuller, healthier lives. Reading like a medical journal, applications for the company's primary products include bradycardia pacing, tachyarrhythmia management, atrial fibrillation, heart failure, coronary and peripheral vascular disease, cardiac surgery, spinal and neurosurgery and neurodegenerative disorders. Why We Like It: Lehman upgraded their outlook for the major U.S. large cap Pharmaceutical group from Negative to Positive on Tuesday morning, keeping the Pharmaceutical index (DRG.X) from plunging through important support near the $275 level. That lent a bid to most of the Medical sector throughout the day, and that bullish sentiment could very well continue throughout the rest of the week. There are few stocks (even in defensive sectors) that can be described as being in an uptrend, but MDT is definitely one of them. The stock has been consistently posting higher lows and higher highs since the July lows, and has achieved a couple of important technical milestones this week. After pushing through the $43 resistance level, MDT decisively crested its descending 9-month trendline on Tuesday and then fractionally crept above the 200-dma ($44.11) at the close. Additionally, the recent trade at $44 confirmed the bullish condition of the stock, by putting the PnF chart back on a Buy signal. There is mild support now at the $43 level, which becomes quite strong down at $42. The current volatile market action ought to give us an attractive entry on an intraday dip and rebound from somewhere between these levels over the near term before the bulls take a serious run at the first serious resistance level between $45-46. Due to the staggered resistance that reaches from $6 up through $48, we would prefer buying the pullbacks due to the greater ease of managing risk. Place stops initially at $42. *** October contracts expire in less than 2 weeks *** BUY CALL OCT-42 MDT-JV OI=3954 at $2.25 SL=1.00 BUY CALL OCT-45 MDT-JI OI=3245 at $0.70 SL=0.25 BUY CALL NOV-42*MDT-KV OI=8337 at $3.20 SL=1.50 BUY CALL NOV-45 MDT-KI OI=7144 at $1.65 SL=0.75 Average Daily Volume = 4.45 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 ******************* WHR $43.33 +1.55 (-0.40 for the week) WHR bounced with the broader markets intraday, and wound up tacking on $1.55 at the end of the day. Its intraday chart, however, shows an interesting story. The stock broke down on the point and figure chart at $44, which is also just below its 200-dma of $44.15. While we could expect some rebound after dropping $2 in three days, today's rebound was stopped dead just under that $44 breakdown level, reaching an intraday high of $43.80, before sinking into the close. The failure at that level looks as though there is now resistance where the stock previously found support. This is common and usually requires a re-test of the level, which we got today. The failure provides a good point for new entries, as long as the market continues its retreat. We are at a pivotal level, with the Dow closing around 7500, the SPX around 800 and the OEX around 400, so we will keep an eye on overall market sentiment before initiating new shorts. --- GM $33.60 -2.28 (-2.82) When we added GM to the Put list a couple weeks ago, it was on the expectation that the recent string of strong auto sales was unsustainable. Our first confirmation came with the news that the company's September sales fell by 13%. That was good enough to drive the stock decisively below the important $40 level. Adding fuel to the bears' argument today, the company's CEO admitted that he sees 2003 sales falling due to expectations that economies won't revive until the middle of 2003. While the company didn't change its revenue or earnings forecasts, investors took the admission as an ominous sign, dropping the stock for a more than 6% loss on very heavy volume (more than double the ADV). That drop puts GM at its lowest level since January 1993. The column of O's on the PnF chart grew again today, with the vertical count now pointing to $17 as an eventual target. Intraday resistance is now firming up near $35, with even more resistance at $36. Use the next failed rally at either of these levels to initiate new positions, lowering stops to $36. Keep in mind that we are now approaching GM's earnings announcement on October 15th, so there is only one more week left to play. --- PHM $38.62 +1.51 (-0.52) After the brutal selloff in Housing stocks in the past several sessions, the group was due for a bit of a rebound and that's just what materialized off the lows on Tuesday. After slightly undercutting Monday's low, PHM caught a bid near the $36.50 level and advanced smartly into the closing bell, posting a 4% gain on the day. But that doesn't change the fact, that the stock (along with the overall $DJUSHB sector) is mired in a persistent and powerful downtrend due to a growing belief that the Housing and Refinancing bubbles are in the process of deflating. Despite the short-covering in PHM, the stock ran into strong resistance just below $39. That doesn't mean that the bulls won't be able to push through it tomorrow, but without some sort of catalyst, it looks like only the latest opportunity to enter new bearish positions. The company is set to release earnings on October 22nd, and with the PnF chart still bearish to the $32 level, there is very likely more downside left in the play. Look to enter new positions on a rollover near $39, or possibly as high as $41, which is the site of much stronger resistance. Stop is currently $41.50. ************* NEW PUT PLAYS ************* HAR - Harman International - $48.60 -1.49 (-2.76 for the week) Company Summary: Harman International Industries, Incorporated is a leading manufacturer of high-quality, high fidelity audio products and electronic systems for the consumer and professional markets. The Company's stock is traded on the New York Stock Exchange under the symbol: HAR. (source: company release) Why We Like It: As layoffs have increased and the economy has shrunk, high-end high fidelity audio products are not at the top of most consumers shopping list. At least not above food and household items. With the retail industry seeing a drop off in sales over the last several months, the holiday shopping season does not look very promising. Everyone from Wal-Mart to Federated (owner of Bloomingdale's and Macy's) has seen sales below previous expectations for the last several months and the port lockout did not help the industry. While the ports have been re-opened through Christmas, one of the main ongoing effects is the delay in getting the ships back overseas to catch up with holiday loads. Even if they manage to overcome that roadblock, the trend in retail sales is still below expectations. HAR has experienced a classic head and shoulders technical pattern, with an added punch. The neckline and 200-dma actually run very close to one another. Today's breakdown broke both of these levels, in addition to the 50-dma, which was looming just below. The neckline break carries with it a downside measuring objective of $42. The point and figure chart also shows a new sell signal on the intraday trade of $48, on a double bottom breakdown, or a descending triple bottom breakdown, depending on how it is viewed. The PnF bearish vertical count of $42 coincides with the downside measuring objective of the head and shoulders. While one technical indicator is always nice, having two indicators point to the same target is even better. There is a bullish support line at $44, which could be a speed bump on the way down, but that will not deter us from using $42 as our initial target. Of course, even if the stock gets held up at $44, it will still be good for a gain of more than $4. Conservative traders can wait for a failed rebound underneath the 200-dma of $49.40 for an ideal entry point, but if we don't get that chance, then a break below today's low of $47.81 would be an alternative. OI sees the current level as acceptable for initiating the play. Place stops at $52, just above Monday's high. *** October contracts expire in less than 2 weeks *** BUY PUT NOV-50*HAR-WJ OI= 50 at $4.20 SL=2.10 BUY PUT NOV-45 HAR-WI OI= 10 at $1.90 SL=1.00 Average Daily Volume = 297 K --- BCR - C. R. Bard, Inc. $51.70 -1.22 (-1.82 this week) Company Summary: C. R. Bard, Inc. is engaged in the design, manufacture, packaging, distribution and sale of medical, surgical, diagnostic and patient care devices. Hospitals, physicians and nursing homes purchase approximately 90% of the company's products, most of which are used once and discarded. BCR's major product group categories are: vascular diagnosis and intervention, urological diagnosis and intervention, and oncological diagnosis and intervention. In addition, the company maintains a fourth product group, surgical specialties. Why We Like It: Carnage has been the name of the game lately in many of the previously high-flying Health Care stocks. Lab-testing companies LH and DGX have been plunging in recent sessions, largely due to the Q3 warning from LH, which resulted in a more than 33% one-day hair cut for the stock. This has cast a pall on many of the stocks involved in medical testing and diagnostics industry. Shares of BCR had been trading between $53-56 for much of the past 2 months but broke down in a big way on Tuesday, losing the $53 support level. This is historically significant, as the stock traded in a similar pattern in May and June before breaking down with the rest of the market, eventually trading as low as $46 before recovering with the rest of the market. While there is some mild support near the $51 level, once below that level, BCR could quickly seek out its July lows. Now that the stock has started to break down, any rebound will have to contend with strong overhead resistance in the $53.50-54.00 area. Momentum traders can consider new positions on a drop under $51, while more cautious traders will want to enter on a failed rally below $54. We are initiating coverage with our stop set at $54.25. Note that BCR is set to announce earnings on October 16th, so this will be a short-term play. We'll be dropping coverage ahead of the earnings release. *** October contracts expire in less than 2 weeks *** BUY PUT OCT-55 BCR-VK OI=256 at $3.80 SL=2.25 BUY PUT OCT-50 BCR-VJ OI=523 at $0.90 SL=0.50 BUY PUT NOV-50*BCR-WH OI= 30 at $1.80 SL=1.00 Average Daily Volume = 335 K ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Tuesday 10-08-2002 Copyright 2002, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: PUT - HAR Traders Corner: USING INDEX FUTURES TO HEDGE AN INDEX OPTION POSITION Traders Corner: Open To Close ********************* PLAY OF THE DAY - PUT ********************* HAR - Harman International - $48.60 -1.49 (-2.76 for the week) Company Summary: Harman International Industries, Incorporated is a leading manufacturer of high-quality, high fidelity audio products and electronic systems for the consumer and professional markets. The Company's stock is traded on the New York Stock Exchange under the symbol: HAR. (source: company release) Why We Like It: As layoffs have increased and the economy has shrunk, high-end high fidelity audio products are not at the top of most consumers shopping list. At least not above food and household items. With the retail industry seeing a drop off in sales over the last several months, the holiday shopping season does not look very promising. Everyone from Wal-Mart to Federated (owner of Bloomingdale's and Macy's) has seen sales below previous expectations for the last several months and the port lockout did not help the industry. While the ports have been re-opened through Christmas, one of the main ongoing effects is the delay in getting the ships back overseas to catch up with holiday loads. Even if they manage to overcome that roadblock, the trend in retail sales is still below expectations. HAR has experienced a classic head and shoulders technical pattern, with an added punch. The neckline and 200-dma actually run very close to one another. Today's breakdown broke both of these levels, in addition to the 50-dma, which was looming just below. The neckline break carries with it a downside measuring objective of $42. The point and figure chart also shows a new sell signal on the intraday trade of $48, on a double bottom breakdown, or a descending triple bottom breakdown, depending on how it is viewed. The PnF bearish vertical count of $42 coincides with the downside measuring objective of the head and shoulders. While one technical indicator is always nice, having two indicators point to the same target is even better. There is a bullish support line at $44, which could be a speed bump on the way down, but that will not deter us from using $42 as our initial target. Of course, even if the stock gets held up at $44, it will still be good for a gain of more than $4. Conservative traders can wait for a failed rebound underneath the 200-dma of $49.40 for an ideal entry point, but if we don't get that chance, then a break below today's low of $47.81 would be an alternative. OI sees the current level as acceptable for initiating the play. Place stops at $52, just above Monday's high. BUY PUT NOV-50*HAR-WJ OI= 50 at $4.20 SL=2.10 BUY PUT NOV-45 HAR-WI OI= 10 at $1.90 SL=1.00 Average Daily Volume = 297 K ************************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 ************** USING INDEX FUTURES TO HEDGE AN INDEX OPTION POSITION By Alan Hewko After last night's "Index Futures Basic Information" article, I had received a few emails asking for more information regarding the use of Index Futures to HEDGE an existing OEX options position (or DIA options, etc). As always, real world examples work the best. Using Index Futures to Hedge a - WINNING - Option Position ---------------------------------------------------------- Near Monday's close, OI staffer Jeff Bailey had suggested: Buying Long OEX puts at OEX Cash 399 (aka - when the OEX index trades at 399). Assume you followed that trade and took them home into Tuesday's open. On Tuesday morning the market had gapped up higher (reasons why are not important for this article). Today, Tues. Oct 8th - 9:30 AM open, OEX Cash was approx. 401, but you felt this Gap Up would sell off, which it did. Everyone had been talking about the strong SP500 support at 775-77. ES (Emini SP500 Futures Chart) - intraday for Oct. 8th. OEX Chart - intraday for Oct. 8th. Sure enough at 12 Noon, OEX was 393, ES (Emini SP Futures) were at 777s (very close to what you felt would be a likely large support area). On the other hand, you also knew that if by some chance the ES were to lose that large 775-777 support then the market could have had a Dow -300 point Meltdown day. At this very important Market Index support pivot, you could have HEDGED your OEX Puts in this fashion: Keep the existing winning OEX puts --- AND Go LONG ES (Emini SP500) Futures at 778 By doing this, you have "Locked In" your winning Put profits no matter what happened. In today's case, the market confirmed that 778 was indeed a "bottom" but by this Hedge, there is NO PANIC or need to make a snapshot decision as you are fully Hedged. After 5-10 minutes of the market confirming that 778 was a very likely Bottom, you decide to take OEX put profits. ES is now 781, OEX is 394.2 Sell to close (take profits) on the winning OEX puts from 399. At that point you have 2 choices to make: 1. Either go totally flat by Selling to Close your ES long from 778 at 781 (for a gain of + 3) --- OR 2. If you have now become Bullish, thinking that 778 very likely was a great entry for a long position, there's no rush to buy OEX calls as you are already LONG in this ES position from 778. As the afternoon developed, ES traded as high as 810; but let's assume you exited the ES long before that at 805 for a Gain of 17 points (as you knew that ES 805 was a trade pivot several times before). It will vary from one futures broker to another, but based on average margins, that 17 point ES gain intraday would have been approx. gain of 50-100%! And add in the several points from the winning OEX put makes for a very nice trade. The point of hedging an Index option position with Futures is that a great many times, the market gets to a very key support or resistance number - it may Hold, it may Fail - NO ONE KNOWS with 100% certainty. Hedging at those important levels, especially when holding a winning Option Position is smart trading. Other good moments to hedge : 1. Right before an important economic number. 2. Before an important earnings report. 3. Able to hedge in the Overnight markets later in the evening, or very early in the morning (when the Options and Stock market is Closed) as Futures trade 22.5 hours a day. Using Index Futures to HEDGE a --- LOSING --- option position: -------------------------------------------------------------- Example: You are flat but bearish and buy OEX Puts. 5 minutes later some amazing Good news comes out and the market goes vertical upward. You know how difficult it will be to quickly Exit those Puts as the spread will become very wide, the Option Market Makers will be playing their usual "games" on fills. My thought would be this: The second you see that Good News and realize in your gut that you were Very Wrong - don't worry about those losing Puts for a moment, and instead, HEDGE by going LONG ES Futures (or Dow, or NDX futures). You are now hedged, so no matter how high the market goes, you won't lose more money. You now have a few moments to decide the merits of this News. Is it going to hold? Is the Market near an important upper level? etc. Hedging in this fashion affords you the TIME to think more clearly vs. making a panic decision ! Read that above sentence again. If you decide it truly is Great News, exit the losing puts, and hold onto the winning ES Futures Long. Using one Index Futures contract to HEDGE another type of Index Futures Contract ----------------------------------------- SOME BASIC INFORMATION FIRST: On an average day, ES (Emini SP500 Futures) moving 1 point will equal a 10 point YM (Dow Futures move) by a 1:10 ratio. 5 ES points = 50 YM points; 10 ES points = 100 YM points, etc. ES (SP500 Futures) is $50 per SPX point. YM (Dow $5 Futures) is $ 5 per DOW point. Roughly speaking, the Margin on each ES and YM contract is approximately the same. If you held 1 ES contract for a 10 point ES move, you make $500 profit on that trade. (10 SPX points x $ 50 = $500). If you held 1 YM contract for a corresponding 100 point YM move, you also make $500 profit. (100 DOW points x $ 5 = $500) So in other words, if you bought 1 ES -or- 1 YM contract at the exact same time that rally started, on an AVERAGE day, your net gain would be about the same ($500). HEDGING Example: You are bearish and Short YM (Dow Futures) at 7700. Position: YM Dow Futures: Short 1 contract at 7700 ES SP Futures: No position You are right, and three hours later, YM is at 7500, ES are 800. Currently, your position has a YM gain of 200 points. Yea! You know that these two levels are serious support (ES 800 and Dow 7500). The market has stopped selling and is going sideways for 10-15 minutes. You realize that IF these key support levels give way, the selling might really pick up again providing you with even more Short gains. Obviously, no one can know with total certainty. So you decide to HEDGE your existing YM short by buying a ES contract. Remember, (and this is important) ES and YM roughly move the same DOLLAR amount. Trade: Buy to Open (go Long) 1 ES (Emini SP Future) at 800 Current Position: Prices: YM 7500, ES 800 YM Dow Futures: Short 1 contract (from 7700) ES SP Futures: Long 1 contract (from 800) This does 2 things: Locks in your 200 point YM profit (which would be $1000), and allows you some TIME to decide whether or not those key supports will hold or not. 15 minutes later, the market is going up on Short covering from those key support areas and you decide to exit your YM short and (in this example), to exit the ES long as well at the same time. Exiting the 2 positions and going Flat: Buy to Close (Cover) 1 YM contract at 7550 for Gain of + 150 Sell to Close 1 ES Contract at 805 for Gain of + 5 Net Profit on both Trades is still the same $1000 (150 YM x $5) + (5 ES points x $50) = $1,000 Naturally, you could also have confirmed that those levels were indeed a Bottom, exited the YM Dow short at 7550 and held onto the ES long from 800, perhaps selling it a level above 805 for additional profit. So what did this accomplish you might ask? I had the same $1000 profit both times. Well, let's see what might have happened if those key supports did not hold (similar to the market action we saw this past Monday). Backing up to above Current Position: Prices: YM 7500, ES 800 YM Dow Futures: Short 1 contract (from 7700) ES SP Futures: Long 1 contract (from 800) This time, let's say those supports did NOT hold; and the market started to sell off very hard. Simply exit the HEDGE long portion of the trade and continue to stay YM (Dow Short): Trade: Sell to close (exit the long from 800) ES at 798 Profit -2 Current Position: Prices: YM 7480, ES 798 YM Dow Futures: Short 1 contract (from 7700) ES SP Futures: No position The selling continued into the close once those supports were lost and you decide to take profits on the short and go Flat. Prices: YM 7420, ES 792 Trade: Buy to close (Cover) 1 YM (Dow) contract at 7420 Gain +280 Position: Flat ES, Flat YM Profit: YM + 280 dow points x $ 5 = Gain $1400 ES - 2 SPX points x $ 50 = Loss of $100 Net Profit: $ 1300 (1400-100) In this case, we made $300 more using what I call the "Hedge and Release" trade. We hedged at a known key support, and then released the hedge when it became obvious the market was going in the way we originally wanted it to, in this case - down. If you have any questions or comments on this Hedging with Futures article, please email them at futures@OptionInvestor.com Alan Hewko ************** TRADERS CORNER ************** Open to Close By John Seckinger jseckinger@OptionInvestor.com It all comes down to pattern recognition. Tonight, the focus is on three patterns learned while trading in Chicago. Moreover, a trader will be rewarded with a a good night’s sleep. As the title implies, these three trading strategies should be used from near the opening bell until 4:00 p.m. Day traders only. I would not advise keeping positions overnight when using either of the three strategies about to be mentioned; however, some traders differ. If longer-term technical patterns confirm the daily trend, keeping a position overnight could make sense. I am just usually not comfortable doing it, especially since these patterns only work with a five-minute chart. Positions I keep overnight are ones that initiated from a monthly, weekly, and daily chart patterns. The three trading patterns to be covered is (1) open drive, (2) open test-drive, and (3) responsive trading. The first pattern deals with the market (or a particular security) opening up one direction and maintaining that momentum throughout the session. Pretty straightforward. The second pattern is when prices reverse to test levels under/above the opening range, only to trade in direction of the opening period for the remainder of the session. Example: First five-minutes the Dow rises from 7400 to 7500. Soon afterwards, the Dow trades back under 7400 (“testing” the opening) before keeping with the first period pattern of higher prices (Dow rises back above 7500 and closes near its highs). The last trading pattern is simply a range-bound session (read: responsiveness) and actually occurs over 70% of the time. The problem is asserting when the day is actually range-bound and not following an “open test-drive” pattern. Let us begin looking at examples. I have decided to use the S&P 100 (OEX) Index; moreover, all three patterns have occurred since September 24th. Sure, every day a pattern can be “forced,” but, for the purposes of this article, a clean recognition of a pattern is needed. The first pattern covered is “open drive,” recognizable because the opening area is not tested during the remainder of the trading session. The rebound seen after the first ten minutes does give the impression that the index will stay within a defined range; however, traders have to be disciplined. If the opening level is not tested, treat the rebound as a selling opportunity. Where should a stop be placed? There is no set rule for stops; however, I would look to contain risk roughly 2.00 above the opening level. This 2.00 cushion can then allow stops to be triggered at the opening level and take prices slightly upwards. Moreover, if the market does act responsively (traders selling resistance and buying support), look to exit near 422 and the bottom of the range. Chart of S&P 100 Index, 5 minute What would most likely have to happen in the above example for the stop to be hit? An “open test-drive” pattern. Looking below, this pattern is when prices trade opposite of the opening period (first five minute green candle) and “test” levels underneath the opening range. Then, soon afterwards, prices go back into the range and begin its ascent throughout the remainder of the session. The first few hours made it appear that the market would trade responsively; however, once above 412, prices never looked back. Obviously, this pattern can occur in a downward fashion as well. Chart of S&P 100 Index, 5 minute The hardest, but most common, pattern is the responsive scenario. Volume is usually heavy, volatility is initially high, and traders are most likely “picturing” a significant move before it happens. Looking at the example below, the OEX really doesn’t give the indication of responsive price action until 12:30 p.m. This still gives traders 3 ½ hours of “high probability trading,” which is more than enough time to capture a move in an otherwise dull, or hard to understand, market. Chart of S&P 100 Index, 5 minute There are a few things to note with the responsive scenario. First, since the overall market is in a downward trend, it makes sense that there will be less tests of opening range by longs than shorts testing areas under 412. The first spike up to near 418 was most likely stops placed by shorts, confirmed later as the opening range held firm during the last hour of trading. So, why not sell the market at 411? That is a plausible strategy, since the market could be in an “open test-drive” pattern. Patience is what makes good day traders, especially since the important aspect is getting a high-odds move (413 to 415). If a trader was to sell, it would have made more sense near 416, since prices went back into the range and there are good odds the first period low will be tested. Another question you may be asking yourself: How is the close neutral? Since the day was responsive by nature and 410.86 is above two relative lows set earlier in the session, being short into the close may not be a “high-odds” move. Would it make sense to be long? In hindsight, yes; however, responsiveness can also mean directionless. If directionless, why have a position on at the close if initiated that same session? What about the first two patterns, wouldn’t it make sense to keep a position overnight? It would, but only if longer-term trends confirmed the directional price action. Remember, for the purpose of this article, we have only looked at a five-minute chart. I would turn to a 60-minute, daily, and weekly chart before deciding if it makes sense to hold the position overnight. In a trading environment where information is processed extremely quick, asset allocation generally can begin and end all in the same session. Therefore, since the market has the appropriate liquidity, I generally worry about prices closing on their session lows/highs, only to gap higher/lower the following morning and trade with an entirely new mentality. For fun, let us look at a five-minute chart of the Dow during Tuesday’s trading. The opening range was significant, and the follow-through move higher made me think two thoughts: (1) open drive, or (2) open test-drive. Note: I usually like to wait an hour before putting on a trade, so pattern recognition now isn’t necessary. In hindsight, it was good that I allowed the Dow to trade some more. Only a few minutes later, prices reversed and the possibility of an “open drive” session was thrown out the window. Chart of Dow Jones, 5 minute As prices came back into the range, selling the market is fine; however, the objective is really only for a test of the opening low. Once under the opening low, the “open test-drive” scenario was the likely scenario. Of course, only a few hours passed and, as a trader, odds were the market was in a responsive pattern. As a trader, the thought-process was for a move back to the high during the first five minutes of trading. Remember, these patterns are only for day trading. With the Dow coming back to close below the high of the first five minutes of trading, I would close out all positions (if any were on) and get a good night’s rest. Yes, time for the homework assignment. Tomorrow and going forward, watch a five-minute chart for these three outlined patterns. If you are able to see them and trade them profitably; fantastic. Remember: Do what is comfortable, and do not try to force some of my trading strategies into your system if the patterns become difficult to master. The goal is to make money, so do what works. Just give these three patterns a chance, watching for them over the next week or so. Thanks. As the five-minute chart of the Dow illustrated, the market is extremely dynamic, at-times volatile, and hard to forecast price direction. However, with discipline, we were able to eliminate two of the three patterns and it was possible to make money from the long side during the afternoon session. Patience. ************************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”. 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