The Option Investor Newsletter Tuesday 10-22-2002 Copyright 2002, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Is this Round 10 for Bulls? Futures Markets: An "Inside Day" Tuesday Index Trader Wrap: Too much info? Market Sentiment: Cross Eyed Weekly Fund Screen: Large-Cap Funds Up Over 10% in Past Week Updated on the site tonight: Swing Trader Game Plan: Help Me I Am Seeing Red Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 10-22-2002 High Low Volume Advance/Decl DJIA 8450.16 - 88.08 8534.08 8376.15 1518 mln 1038/2198 NASDAQ 1292.80 - 16.87 1307.60 1280.66 1510 mln 1322/1904 S&P 100 452.59 - 3.65 455.20 447.96 totals 2360/4102 S&P 500 890.16 - 9.56 899.72 882.40 RUS 2000 362.66 - 5.97 368.63 362.49 DJ TRANS 2312.43 - 26.10 2354.99 2284.73 VIX 39.34 + 1.10 40.44 38.95 VIXN 53.61 + 1.27 54.41 50.98 Put/Call Ratio 0.78 ************************************************************ Is this Round 10 for Bulls? By John Seckinger jseckinger@OptionInvestor.com The Dow and the S&P 500 have set higher lows for eight consecutive daily sessions, while the 30-year bond has failed to take out a previous session's high since October 10th. Relative Strength in the Dow is currently at 58.98 on a daily basis, higher than when the blue chips were at 9077 on August 22nd. Furthermore, both contracts seem comfortable above their 50 DMA's and are beginning to eye the 200 DMA for the first time in quite awhile. Of course, there are some caveats that will be explained later. After Texas Instruments (TXN) warned that revenue and profit for the current quarter will miss expectations due to decreased demand for chips used in personal computers, traders were certainly prepared for an early morning retreat. However, even as shares of TXN fell $3.12, or 18.22%, to 14.00 and hurt the overall Oil sector (XOI down 3.45%), the overall equity markets kept the recent bullish sentiment relatively intact. Other developments on traders’ minds before the market opened included 59 companies issuing quarterly earnings. The results were as followed: 61% better than expectations, 24% in-line with estimates, and 15% were below forecasts. Let's spend a moment and look at a few notable names. Taiwan Semiconductor (TSM) was one of the companies failing to meet analyst expectations, and as a result fell seven percent to 6.95. Even though TSM is not part of the Semiconductor Index (Sox), Tuesday's weakness coupled with Texas Instrument's miss clearly gave investors one more reason to book profits in semis after a solid run-up beginning on October 8th (209 to Monday's high of 283). Speaking of the Sox, this highly-watched index fell six percent, or 17.22 points, to 265 on moderate activity. However, Monday's low of 260 remained intact. HmmmIs this a pattern? Other stocks making headlines included AT&T (T) beating earnings estimates but coming under pressure after the opening bell. Shares did manage to recover, rising from 12.05 to 13.24 before traders took profits during the last few minutes. Shares still closed higher by 0.52 at 13.05. Speaking of volatility, shares of McDonald's (MCD) announced in-line 3Q earnings and gapped higher (18.33 to 18.95). Also fortunate for bulls was the fact that MCD noted that it will continue to target EPS of $1.43 "or better" for all of 2002, excluding special charges. After the gap higher, shares traded almost vertical to 19.95. Since then, shares formed an aggressive bearish channel and closed at 18.90. Closing underneath its opening level may not be a good sign going forward. Note: This Dow component just missed its 50 DMA (exponential) by about six cents. Other securities reaching the spot light included UPS, G, and BUD. United Parcel Service (UPS) fell three percent after lower- than-expected 3Q earnings and guidance that was underneath analysts' estimates. Shares of UPS settled at 62.26 and underneath both its 22 and 50 DMA's (62.61 and 62.71, respectively). Gillette also fell under both moving averages, losing a solid 5% to 29.90 after reporting in-line net income for its 3Q. Anheuser-Busch (BUD) lost ground as well, closing lower by 1.8% to 53.97 after Morgan Stanley downgraded shares to "equal-weight" from "overweight." It was interesting that shares of BUD managed to close 17 cents above its opening level and didn't even test its 22 DMA to the downside. Of course, it was just yesterday when shares hit a new all-time high. I don't want to over simplify things, but it does make sense for companies such as BUD to do well when the economy is falling apart. However, shares have managed to remain resilient as the major equity markets recovered. Interesting. Speaking of the economy, there were no economic reports to digest on Tuesday. Tomorrow is light as well, with only the Fed's Beige Book due out. This report will hopefully outline economic conditions in the Fed's 12 districts. Moreover, it might give insight (possibly encrypt) into November 6th's FOMC Meeting. Economists currently expect no change in the fed funds rate on November 6th, and fed funds are now only 40% sure that the Fed will cut rates by 25 bps before year's end. Later this week, September durable goods orders, September new and existing home sales and the University of Michigan's consumer sentiment index are scheduled to be released. Not only does the economic calendar look better over the few days, but I would not be surprised to see market activity increase as well. Tuesday's 88 point shaving in the Dow came on volume of 1.5 billion and down volume out surpassing up volume by a 2:1 margin. Decliners beat advancers 2:1 as well, while new lows outpaced new highs 89-17. This may not be something to write home about; however, bulls certainly are not letting profit-taking turn into short selling and long liquidation. Turning to the tech-laden Nasdaq, the 16.87 point loss came also on volume of 1.5 billion shares exchanging hands. Down volume beat up volume by an 8:7 margin, while decliners outnumbered advancers 19:13. New lows beat new highs by a score of 70-35. Checking the other major indices, the S&P 500 contract fell 9.5 points to 890, OEX lost 3.65 to 452.59, and the Dow Transports fell 26 points to close at 2,312. What about the other markets that occasionally trade either in- step or inversely to equities? The dollar index (DX00Y) fell 0.17 percent to 108.04, gaining ground against the Yen and losing against the euro. Comments from Kuroda, Japan's vice finance minister for international affairs, that the Yen is declining from "excessive strength" handicapped the Yen as short players took over. I am glad we don’t talk down our currency like that. As far as the euro is concerned, strength in the overseas currency seemed to be more technical in nature, as the EUR/USD spread fell to 0.97. The August 4th low of 0.9647 should be an objective for traders. Note: A weaker dollar should not be good for equities. Also not good for equities are higher Gold prices. The XAU index rose a significant 5.79% on Tuesday to close at 63.36. This index was poised to fall under 59 and break a possible bullish intermediate trend; however, buyers clearly stepped in today and closed the index at its highest level since October 7th. The 22 DMA is above at 64.53. Other indices most likely pressuring stocks included the Utility Index (UTY) and Oil (XOI). The Utility Index did rise above its 22 DMA on Tuesday (234.4 versus and intra-day high of 237), but failed to attract buyers and ended up losing 2% to 229 and back below this moving average. The range I would watch in the UTY index is from 219 to 234. Turning to Oil, the 3.42% loss now has the index under both its 22 and 50 DMA (453 and 463, respectively) at 446; however, solid support should be found near 438. So, what should have been good for equities, but wasn't on Tuesday? Yes, lower bond prices (read: higher yields). The 30- year bond (TYX.X) saw yields rise to 5.15% on Tuesday, recording its highest close since August 8th. Has the inverse relationship between bonds and stocks dissipated? I don't think so; however, a sharp sell-off in stocks coupled with only consolidation in bonds could make me think otherwise. Resistance on a yield basis? 5.24%. Support? Look for 5.1% to attract some bids, while a close back under 5% should have traders wondering if cash will flow en masse back into the fixed-income arena. The futures market for bonds (December Bond, ticker: ZB02Z), which is quoted in price, showed another session of pit selling and concern over mortgage companies lifting their hedges (read: closing position, selling bonds) and capping any attempt of a rally. The Dec bond fell '15 ticks (Q-charts had the contract down 31, but I believe that is a bad quote) to 107'19 and closed lower for the eight consecutive session. Ever since October 10th, I have been worried about a particular hedge fund liquidating a position that was entered in hopes of a rate cut by the ECB (which didn't happen). I am starting to think of another strategy: This same hedge fund is now selling bonds short in an attempt to offset the massive losses sustained over the last few weeks. As is usually the case, the bond market loves to trade directionally. Therefore, since it would take a ton of energy to turn things around and get prices back towards 113, why not maintain the pattern of lower prices. Until prices prove us wrong, least resistance remains lower and this should help intermediate-term equity bulls. What would change the picture? How above a move back above 109'13. Time for an after-hours look. KLA-Tencor beat earnings by three cents and began to erase part of Tuesday's 10.2% collapse; however, the conference call did not go well (guided Dec EPS to 0.14 versus expectations of 0.24) and shares are currently at 28.90 and underneath Tuesday's close of 30.53. This will undoubtedly affect the Semiconductor Sector (Sox) during trading on Wednesday. Other after-market developments included Metro One (MTON) announcing that Sprint (PCS) will not sign a new contract with the company, as well as Abgenix beating earning estimates by six cents with a (0.39) report. Since Sprint represents roughly 32% of MTON's revenue, it should not be surprising that shares are lower in after hours. On Tuesday, MTON closed 5.34% lower at 9.03, and shares appear to be currently trading near 5.20 following the announcement. Seems hard to believe. Turning to ABGX, shares closed at 6.54 on Tuesday and appear to be up fractionally after the better than expected results. Additionally, Computer Associates reported earnings of 0.04 and beat estimates for a rise in profits of 0.02. Revenues also increased by 5.3%. Shares closed on Tuesday at 12.10 and appear to be higher at 13.01 in after-hours activity. Overall, the December Nasdaq futures are lower by 8 points, or 0.82%. The S&P 500 futures contract is lower by 0.50 at 891. Time for some illustrations. Beginning with a weekly chart of the Dow, it seems as though bears might begin to get confident and scare bulls into initiating positions. Why? There is a bearish trend line, 38.2% retracement from March’s high to October’s low, and the 22 weekly moving average. Before we sell the house and buy puts, let us look at a daily chart as well. Note: The red line comes in at 8605. Chart of Dow Jones, Weekly A daily chart shows a less bearish look, and actually used a 38.2% retracement as support. Furthermore, the 50% retracement at 8774 seems to correlate with many traders’ thoughts when predicting resistance. So, which chart do I put more weight in? Well, the weekly chart should have more psychological weight (8605), and if that level is penetrated it would make sense to turn to the daily and expect a move to 8774. Support should be harder to determine, and I would look at the daily chart for insight. 8400, the 22 and 50 DMA’s, and then 8000. Chart of Dow Jones, Daily Of course, the bond market might have something to say about equity direction. As stated earlier, I would focus more on support than resistance levels. Chart of the 30-year, Daily Also noted earlier is the Gold Index, outperforming during trading on Tuesday and sending the index 5.79% higher and above a solid pivot area (62.96). I would definitely place the XAU index on the radar screen going forward. Chart of Gold and Silver Sector (XAU), Daily Good luck. *************** FUTURES MARKETS *************** An "Inside Day" Tuesday by Alan Hewko futures@OptionInvestor.com ---------------------.----------------------- Quotes: 4:00 PM Cash Market Close ES 889, YM 8427, NQ 967 4:15 PM Future's Market Close ES 892, YM 8445, NQ 973 5:00 PM YM Dow Futures close : 8438 7:00 PM ES 891.50, NQ 970 Dow 8450 - 88 SP500 890 - 10 COMPX 1293 - 17 Advance/Decline by Volume was Bearish for entire day. As previously done, I shall use these abbreviations for this article, and the same "ES, YM, NQ" is used in the intra-day Market Monitor commentary: Ticker ES E-mini SP500 December futures ES02Z YM E-mini Dow $5 December futures YM02Z NQ E-mini NDX 100 December futures NQ02Z ______________________________________________________ Monday continued last week's market rally, and when Texas Instruments (TXN) warned last night after-hours followed by Japan's Nikkei taking a 300 point dive overnight off of Japan banking worries, Bears likely thought "finally we get some selling and broke out their pots of honey." For the third day in a row, the market opened with the same 10 to 12 ES points gap-down lower open. Also, for the third day in a row, the markets sold off lower from the open to a 10 AM reversal period where (once-again) Dip Buyers appeared. Once again, this 10 AM period of buying was not based on any news or specific event. However, Bears were denied a total victory as Tuesday became an "Inside Day" where Tuesday's low and high were contained within the prior day's low/high range. Chart below illustrates this rather well. ES02Z (E-mini SP500 futures) Monday and Tuesday As you can see, Tuesday was spent well within Monday's Low of 875 area, and Monday's 902 High; thus forming an "Inside Day" RECAP OF TODAY At 10 AM, ES found support at the 885-887 support area, and buyers came in for an hour before hitting ES 895-96 level (the top band of 892-895 pivot. This 11 AM ES resistance also matched the failure for the Dow to take out the psych level of 8500. Also at 11 AM brought forth a rumor there was a very large SP futures sell order being worked. From 11 AM until 3:30 PM, the markets "leaked lower" and rally attempts were sold into vs. having dips being bought. 3:30 PM ES double bottom 883, Dow cash at 8375. Shorts tried pushing ES under 880 and the Dow under 8350 and once that attempt failed, buying occurred from 3:30 PM to the close. Here's a chart of ES (Emini SP500 futures) Tuesday 9:30 AM to 4:15 PM Close Below is a Chart of: Dow Industrials (Dow 30) for Tuesday 9:30 AM to 4 PM Here is a chart of: NQ (NDX futures) from Tuesday 9:30 AM to 4:15 PM ______________________________________________________ TUESDAY AFTER-HOURS EARNINGS / WARNS Last Tuesday, Intel reported earnings and warned. Tonight, another Tuesday, found KLAC (a key semi stock) reporting earnings and warning providing the same terrible forward looking guidance as given by Intel last Tuesday. KLAC traded $31 to $32 during the day, and saw a low of $29 after-hours. MSFT closed at $52 and saw lows of $51.30 after-hours. In one week, we have warnings from 3 key semi stocks: INTC, TXU and KLAC. THOUGHTS FOR WEDNESDAY Given all this terrible tech news, one might find it surprising that at 7:30 PM; futures are roughly the same exact levels they were at prior to the KLAC warning. Futures "should have" sold off after-hours but so far, have not. One can almost hear Bears throwing their jars of honey up in the air and yelling, "What on earth will tank this market?" Removing news and sentiment for a moment, and only looking at charts; Tuesday being an Inside Day doesn't really help provide clues for Wednesday. On the bullish side, ES 880 and Dow 8350 held firm support. On the bearish side, ES 895 and Dow 8500 remained firm resistance. For Wednesday, I would suggest watching ES 890 for a sense of direction; and watching how the market treats KLAC tomorrow morning (that is, whether KLAC gets bought on the concept of "Buy the Bad news") There are times where Wednesdays become a 'reversal' period. Some traders also have found that Full Moons and New Moons also are reversal periods (proven with some degree of market history). Merely as a piece of data, there's a full moon currently. ES at 7:30 PM 891 ES supports: 872, 877, 879.50, 883, 887 ES resistance: 892, 895, 897-98, psych 900, 902, 905 Until proven otherwise, this market remains in "Buy any and all dips - along with 'ignore all bad news' " One last thought, a week ago, I had made the comment that at times, it almost 'felt' the market was being held up to support the upcoming the November elections. With those elections now so close, one can only wonder what happens after the elections are over. _________________________________________________________ Alan Hewko futures@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** Too much info? A rough count shows 61 companies reported earnings before the opening of trading, 3 during and 54 after the closing bell. Tomorrow morning will be little different with approximately 53 more companies scheduled to report. For the most part, it seemed like 2 earnings disappointments and cautious comments from Intel (NASDAQ:INTC) $15.10 -2.26%, Motorola (NYSE:MOT) $8.14 +4.22% in recent sessions long with yesterday's earnings from Texas Instruments (NYSE:TXN) $14.00 -18.2% was perhaps a good excuse for the major market averages to post their first decline in the past four sessions, and just their second decline in the past nine. Of the major indexes, only the shallowly followed Amex Composite (XAX.X) 811.88 -0.62% broke below Monday's lows on an intra-day basis. Strength from Dow components with a telecom flavor, SBC Communications (NYSE:SBC) $27.05 +5.04% and AT&T (NYSE:T) $13.05 +4.15%, helped hold the Dow Industrials (INDU) 8,450 -1.03 to an 88 point decline, and offset losses in General Motors (NYSE:GM) $35.80 -3.24% and United Technologies (NYSE:UTX) $61.29 -3.63%. While investors and traders may want to know for certain if a bottom was seen earlier this month, the only way to ever find out is to get some type of pullback and see how far the "fanny" of the bull sinks into the couch. Over time, the bullish % will tell us how firm the cushions are and how much spring the recent rally will have in it. After Monday's close, the very broad NYSE Bullish % ($BPNYA) from www.stockcharts.com reversed up into "bull confirmed" status. This follows Dorsey/Wright and Associates alert from 10/17/02 as their NYSE Composite Bullish % (BPNYSE) reversed up into "bull alert" status. The lag/difference between the two is most likely attributed to stockcharts.com adjusting the various point and figure charts of all the stocks they chart, for the affect of paid dividends, while Dorsey's systems simply measures prices paid. While the internals of the NYSE just begin to show some internal bullishness, the NYSE Composite ($NYA.X) 476.35 -1.1% edged lower today, with the Broker/Dealer sector (XBD.X) 397.27 -3.5% and energy sectors like oil (OIX.X) 262 -3.3%, oil service (OSX.X) 82.18 -2.3% and natural gas (XNG.X) 126.78 -2.2% Dow Industrials Chart - Daily Interval Today was an "inside day" as today's trading range was "inside" of yesterday's range. This can sometimes be a short-term trader's signal that the MARKET is reaching near-term agreement on price and digesting a move. A break outside of today's range can find a continuation move in the direction of the break. Aggressive bulls will play a break on a move ABOVE today's high, with a stop just below today's low, while aggressive bears will trade a break BELOW today's low, with a stop just above today's high. I would currently maintain a bullish stance toward the Dow Industrials above the 7,962 level. S&P 500 Index Chart - Daily Interval Chart The SPX has found resistance for 2-day's now near the "psychologically" round number of 900. I'd expect some aggressive bears to try and leverage off that level, with a stop just above 900 as further risk becomes 914. With two deep cyclicals in International Paper (NYSE:IP) $38.10 -1.8% and DuPont (NYSE:DD) $41.75 -1.06% reporting earnings, traders should at least monitor both of these stocks near-term. Traders will note that DD is trading just BELOW downward trend from its 03/20/02 high of $49.80. A break above that trend has its 200- day SMA in play $43.37. Such a move could plant a seed of bullishness into the economically sensitive Cyclicals. Another cyclical we talked about yesterday had shares of 3M (NYSE:MMM) $128.79 -0.16% trading tough and holding onto the bulk of yesterday's gains. Again... 3M is just $2 away from trading a 52-week high and overhead supply is limited. The S&P 500 Bullish % ($BPSPX) was a net gain of 9 stocks to point and figure buy signals today, with the bullish % growing to 45% from Monday's 43.2%. S&P 100 Index Chart - Daily Interval Hmmmmm.... the OEX continues to trade tough, but tonight I'm on the lookout for a potential "trap" above longer-term downward trend. The only reason that I'm on the lookout is that a company I like to follow that tends to LEAD a broader market advance and LAG a broader market decline had conglomerate SPX Corporation (NYSE:SPW) $92.08 -17% getting clobbered today after reporting "in line" earnings, but said core growth in 3 of its 4 core business units was slowing. This is some DIVERGENCE that I want to note. One way for a bull to protect against a potential trap is to see it first, follow with a tight stop (under the 50-day SMA of 441 would be fine). The OEX saw a net gain of 2 stocks to point and figure buy signals today as bullishness grows to 49%. In simplistic terms, 49 of the 100 stocks currently show a point and figure buy signal associated with their chart. NASDAQ-100 Index Tracking Stock (AMEX:QQQ) - Daily Interval The QQQ and the NASDAQ-100 (NDX.X) are perhaps the "toughest trade around." Somehow, this group has so-far been able to navigate around the land-mines of tech earnings disappointments and hasn't really gotten clobbered. About all a bull can do that hasn't taken some profits at $24.21 is hold on tight and follow with a stop under the 50-day SMA. Volume had been drying up a bit after the reversal volume of 124.8 million on 10/11/02. Volume picked up a bit and the Q's really didn't budge. Here too we see an inside day and should volume continue to build, but the Q's continue to consolidate, hold onto your hat and get ready for a break. Shares of Cisco Systems (NASDAQ:CSCO) $11.22 +2.46% traded strong today. Traders cited past history of a Cisco earning's warning coming well before when an earning's warning should have come by now with Cisco scheduled to report November 6th. The bullish action in Cisco was said to have been short-covering by bears that may have been trying to front-run a possible quarterly earnings warning. Tonight, semiconductor equipment maker and NASDAQ-100 component KLA-Tencor (NASDAQ:KLAC) $30.55 -10.14% reported EPS (excluding one-time gain) of $0.23, which was in line with consensus. However, the company did give December quarter guidance for revenues of $330 million and EPS of $0.14. This would be below current consensus of $381 million and $0.24. Shares of KLAC fell $1.50 from their close to $29.45. Other semiconductor equipment makers and NASDAQ-100 components had Applied Materials (NASDAQ:AMAT) $13.09 -6.7% sliding lower to $12.69 in after-hours trading, while Novellus (NASDAQ:NVLS) $26.84 -5.98% edged lower from their close at $26.00. If I'm BEARISH on any index right now, it would be the NASDAQ- 100. For those familiar with the "inside day" trading technique, I'd look to use it tomorrow with a bearish trade in the Q's on a break below $23.65, stop $24.40 and target $22.95 near-term. For a NASDAQ-100 Index trader, the trigger would be a break below 950, target 905 (50-day is at 916, but 900 also psychological) and stop above 980. The NASDAQ-100 Bullish % ($BPNDX) saw a net gain of 3 stocks to point and figure buy signals today and bullishness builds to 49%. Even if you're just a technology stock/index trader, MONITOR both IP and DD tomorrow. Both of these companies will have BIG IT spending budgets someday when earnings hit the bottom line. 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 **************** Cross Eyed by Steven Price When the Dow began sinking this morning, it looked as though it had finally run out of steam. The news from Texas Instruments last night got us rolling downhill, and there wasn't much good news to slow the descent. Then a funny thing happened on the way down. We set another higher low. In fact, we bounced right at the 61.8% retracement level of the July-October drop. While a continued Dow rally still has quite a few resistance levels to get through in the 8700-8750 range, it does seem to be building some legs with the series of higher intraday lows. We still finished down on the day by 88 points, but the pullback was certainly not catastrophic, and stayed within the current ascending trend. Also in the plus column, the bullish percentages in the major indices continue to climb. The NYSE bullish percentage (which reflects the number of stocks in the NYSE currently giving point and figure buy signals) has bounced from a low of 26% for the third straight time and is now in bull-confirmed status. The last two bounces have taken the percentage to 64% in March and 46% in August. It now stands at 32%, so it would imply that NYSE stocks still have some room to run. Of course, the bears would claim a trend toward lower extensions on the bounce. The NDX has been on a bullish percentage run from 16% to 46%. It is beginning to look extended, but still has a little room to the bearish resistance line at 58%. The Dow has rebounded from 8% to 50%, and is also looking extended, with only a few percentage points left to bearish resistance at 58%. The Nasdaq Composite also gave something back today. However, it held over its 50-dma, in spite of the Texas Instruments (TXN) stating it expects a 10% revenue decline in the current quarter. It will be interesting to see whether the market can shake off more bad news in the semis, after Cymer (CYMI) missed expectations after the bell and had some ominous statements regarding the chip sector. The company said, "The semiconductor industry has apparently entered the second decline of a double- dip downturn, which will have a negative impact on our fourth quarter operating results." it expects 4th quarter revenues to decline by 20-25%. CYMI had given up over $2 in after hours trading. KLA-Tencor (KLAC) also reported after the bell, and initial enthusiasm that the company had beat earnings wore off quickly when it was revealed that there was a one-time gain of $9 million included in the earnings. KLAC was off almost $2 after hours. The reason these companies may be important to the overall market rally is the effect they will have on the action of the semiconductor sector. I pointed out in last night's market Wrap that the chart of the Semiconductor Sector Index (SOX.X) looked eerily similar to the way it did in August, when its rally was unable to hold a break above its 50-dma for more than a day. The index was trading in large percentage moves, similar to its current action. The failure at the 50-dma seemed to foreshadow a failed market rally at that point, as the semiconductor sector reflects technology demand and spending. The SOX closed above this average on Monday, but once again was unable to hold that level for more than a day. This evening's news from CYMI and KLAC should send the SOX lower in the morning, in what could be another sign of a failed rally in the broader markets. Telecoms got a boost after AT&T and Bell South both posted better than expected earnings. However, even though AT&T posted its first profit in a year, revenue was still down 8.3%. This was due in part to a decrease in long-distance sales, data services and cable television customers. BellSouth saw a 5.7% decline in revenue, as the Baby Bells have been hurt by a shift to email and corporate customers have delayed technology spending. There are an awful lot of reasons the market should not be going up. Therefore it is hard to "buy into" this rally. However, the current trend is up, and if the SOX can't manage to derail that trend, then we won't stand in its way. The fact that the NYSE bullish percentage has so much room to run seems in contrast with the extension of the NDX and Dow. So, what can we make of it? We will no doubt continue to see wild swings as earnings are dumped on us each day during the month of October. Conservative investors may want to sit out "whipsaw" season, and aggressive investors playing with risk capital may want to widen their stops to allow for the swings. It is getting harder to predict the next day's action, but we will try to surf the wave the best we can. I normally advocate letting profits run and cutting losses, but in this environment, it seems that taking profits when you can may be the more prudent action. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10679 52-week Low : 7286 Current : 8450 Moving Averages: (Simple) 10-dma: 8042 50-dma: 8256 200-dma: 9355 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 775 Current : 890 Moving Averages: (Simple) 10-dma: 855 50-dma: 877 200-dma: 1012 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 963 Moving Averages: (Simple) 10-dma: 915 50-dma: 916 200-dma: 1189 The Semiconductor Index (SOX.X): Back in August, the SOX was unable to hold its gain over the 50-dma for more than a day after a massive rally. That was the first domino to fall, as the broader markets gave back their gains and more after the July- August rally. It seems history is repeating itself. yesterday the SOX broke through its 50-dma for the first time since August, only to be met with a big disappointment after the bell. Texas Instruments warned last night that it was expecting a 10% revenue decline this quarter and sent the SOX down 17.22 points, or 6%. After the bell today, Cymer, which makes lasers for use in the production of chips, said it expects a 20-25% decline in fourth quarter revenue, which should send the index even lower in the morning. Chip equipment maker KLA-Tencor also reported earnings after the bell that met expectations, but it wasn't enough for investors who drove the stock down after hours, along with Cymer. 52-week High: 657 52-week Low : 214 Current : 265 Moving Averages: (Simple) 10-dma: 253 50-dma: 278 200-dma: 438 Market Volatility The VIX has closed under 40 for the last three days, indicating some of the fear in the market place is starting to evaporate, but just slightly. However, it is staying close to 40 and most likely will do so until we see a settling down of the current whipsaw activity. While volatility stays high with big intraday moves, I see it as more a measure of fear of the downside, since triple digit gains actually bring it down. With earnings season still in bloom, it may be a while before we get to the other side of 35. Anything over 30 is still historically high, and it appears traders are fully aware that we are not out of the woods yet. CBOE Market Volatility Index (VIX) = 39.34 +0.43 Nasdaq-100 Volatility Index (VXN) = 53.61 +1.27 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.83 502,085 416,553 Equity Only 0.66 408,794 269,690 OEX 1.46 13,086 19,100 QQQ 0.67 50,553 33,894 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 34 + 2 Bull Confirmed NASDAQ-100 49 + 7 Bull Alert Dow Indust. 53 +10 Bull Confirmed S&P 500 45 + 7 Bull Alert S&P 100 49 + 7 Bull Alert Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 0.98 10-Day Arms Index 0.78 21-Day Arms Index 1.14 55-Day Arms Index 1.25 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 875 1853 NASDAQ 1271 1857 New Highs New Lows NYSE 19 40 NASDAQ 54 77 Volume (in millions) NYSE 1,784 NASDAQ 1,714 ----------------------------------------------------------------- Commitments Of Traders Report: 10/15/02 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 Not much change for the commercials, who added 2,000 long contracts and 4,000 shorts, for a net increase of 1600 short contracts, but not much % change. Small traders increased both positions for a net overall increase of only 300 long contracts. Commercials Long Short Net % Of OI 09/24/02 425,276 442,661 (17,385) (2.0%) 10/01/02 423,661 440,133 (16,472) (1.9%) 10/08/02 427,070 445,135 (18,065) (2.1%) 10/15/02 429,448 449,138 (19,690) (2.2%) 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 09/24/02 124,232 73,506 50,726 25.7% 10/01/02 123,371 74,704 48,667 24.5% 10/08/02 131,486 81,010 50,476 23.7% 10/15/02 134,507 83,714 50,793 23.37% 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 made little change to the long side, but reduced shorts by almost 4,000 contracts. Small traders, on the other hand, left long positions virtually unchanged, while more than doubling their short contract positions; adding a total of almost 7,000 short contracts. Commercials Long Short Net % of OI 09/24/02 46,637 54,613 (7,976) ( 7.9%) 10/01/02 46,000 52,976 (6,976) ( 7.0%) 10/08/02 45,384 55,504 (10,120) (10.0%) 10/15/02 45,578 51,969 (6,391) ( 6.6%) Most bearish reading of the year: (15,521) - 3/13/02 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 09/24/02 11,163 9,421 1,742 8.5% 10/01/02 11,896 9,575 2,321 10.8% 10/08/02 10,735 5,721 5,014 30.4% 10/15/02 10,185 12,478 2,293 10.1% 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 increased long positions by 1,400 contracts, reducing shorts by 2,000. Small traders reduced the long side by 1,800 contracts, while slightly increasing shorts. Commercials Long Short Net % of OI 09/24/02 18,951 10,074 8,877 30.6% 10/01/02 18,969 8,903 10,066 36.1% 10/08/02 19,550 11,823 7,727 24.6% 10/15/02 20,914 9,630 11,284 36.9% 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 09/24/02 7,939 9,453 (1,514) ( 8.7%) 10/01/02 6,809 10,503 (3,694) (21.3%) 10/08/02 7,890 9,645 (1,755) (10.0%) 10/15/02 6,040 10,329 (4.289) (26.2%) 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 ****************** Large-Cap Funds Up Over 10% in Past Week These large-cap funds have returned more than 10% for investors in the recent rally and have done well compared with their fund category peers over longer time periods. Our objective here is to identify some funds that have performed well recently and as such may offer strong potential in the next advance. We'll use data through October 21, 2002 as provided by Morningstar. Screening Process We began our fund search using the "Top 25 Funds" tool available online at www.smartmoney.com. The tool quickly ranks the top 25 funds in each Morningstar category by 1-week, 4-week and 13-week performance as well as longer time periods. We simply asked the tool to give us the top 25 funds in the large-value, large-blend and large-growth categories for the trailing 1-week period as of October 21, 2002. The stock funds with returns in excess of 10% in the last 5 days are shown below, excluding those that focus on a specific sector or industry. For example, ProFunds Ultra Basic Materials (BMPIX) is categorized by Morningstar as large-cap value but focuses its investments in the basic materials sector. 1-Week Return: Large Cap Value Funds 11.1% Dreyfus Premier Strategic Value A (DAGVX) 11.0% Gabelli Blue Chip Value AAA (GABBX) 10.4% Dean Large Cap Value C (DCLCX) 10.4% Potomac Dow 30 Plus Inv (PDOWX) 10.3% Dean Large Cap Value A (DALCX) 10.1% Hartford Value Opportunities Y (HVOYX) 1-Week Return: Large Cap Blend Funds 13.9% Rydex Titan 500 (RYTNX) 13.7% ProFunds UltraBull (ULPIX/ULPSX) 11.6% Neuberger Berman Focus (NBSSX/NBFAX/NBFCX) 10.5% Legg Mason Focus (FOCTX) 10.5% Rydex Nova Inv (RYNVX) 10.5% Midas Special Equities (MISEX) 10.4% Rydex Nova Adv (RYNAX) 10.3% Potomac U.S. Plus Inv (PSPLX) 1-Week Return: Large Cap Growth Funds 13.7% Martin Capital U.S. Opportunity (MCUSX) 12.1% New York Equity (NYSAX) 11.4% Pin Oak Aggressive Stock (POGSX) 10.4% Jundt Opportunity C (JOPCX) 10.4% Fidelity Advisor Dynamic Cap App (FARAX/FRMBX/FRECX) 10.3% Conseco 20 (CTWBX/CTWAX) 10.2% Conseco 20 (CTWCX/CTWYX) There were several large-cap growth funds that invested solely in NASDAQ (OTC) stocks. They were excluded as well since the NASDAQ market is dominated by tech stocks and behaves more like a sector fund than a diversified equity fund. If you seek that particular exposure great but our target markets this week are the Dow Jones 30 index of blue-chip stocks and the more broadly diversified S&P 500 index of large company stocks. You can see that some "load" funds making the top 25 list had one or more class shares. If you are interested in one of these load funds and use a financial advisor, you may want to ask him/her to help you determine which share class may be right for you. Class A shares have front loads but typically have the lowest operating expenses. Next, we entered the symbols into Morningstar's Fund Compare tool online (www.morningstar.com) to allow us to compare these choices on their portfolio characteristics and relative returns, risk and expense. We found only two "3-star" rated funds and two "2-star" rated funds in this group, with the remaining funds receiving one star or not in Morningstar's system yet. So, this fund group has had a rough time through the market downswing but may be bouncing back strongly in the short-term. In the next section, we tell you which two funds we like the best out of this group of 1-week top performers. Fidelity Advisor Dynamic Capital Appreciation Fund Fidelity Advisor Dynamic Capital Appreciation Fund seeks capital appreciation by investing primarily in domestic stocks, but also may invest in foreign securities. It's targeted to investors in "tax-qualified" retirement plans and non-profit organizations so its management approach may result in the realization of capital gains without consideration of tax consequences to shareholders. While the fund does not have a particular investment style, it typically invests in both value and growth stocks, giving it a blend/core style. J. Fergus Shiel joined Fidelity in 1989 and since then has served as an analyst, portfolio assistant and a portfolio manager. He has run the Dynamic Capital Appreciation Fund since January 1, 1999. Above is a chart for the Class B shares indicating strong returns over the past week. Through October 21, 2002, the Class B shares are up 10.4% for the trailing 1-week period, 3.5% better than the S&P 500 index return and ranking it in the top 2% of its category (large-cap growth funds). Again, it may be best to think of this fund as a blend fund that sometimes leans towards value and other at times towards growth. Over the last three years, the Dynamic Capital Appreciation Fund, Class B shares have produced a negative annualized return of 5.5% for investors, compared to a 10% annualized decline by the market as measured by the S&P 500 index. Although a negative number, it was good enough to rank the fund in the top 6% of the Morningstar large-cap growth category. So, by dynamically altering the style (value to growth) of the fund, Shiel has done a good relative job of preserving capital. As the fund's 64.5% return in 1999 indicates, Shiel is capable of running with the pack in bull markets. The fund's 10.4% gain for the trailing 1-week period suggests he'll do it again in the next advance. He may be one to bet on if you feel we are in the early stages of the next bull market and want this dynamic style drift. For more information or a fund prospectus, call 1-800-522-7297 or go to Fidelity's website at www.fidelity.com. Legg Mason Focus Trust Legg Mason Focus Trust (FOCTX) seeks long-term growth of capital by investing primarily in common stocks and securities that are convertible into common stocks. Robert G. Hagstrom, CFA has run the Focus Trust since its inception date, April 17, 1995. He is a portfolio manager and senior VP with Legg Mason Fund Adviser, his employer since April 1995. Previously, Hagstrom was general partner with Focus Capital Advisory. Collectively, Hagstrom has 14 years of investment experience. In stock selection, Hagstrom looks for companies with promising long-term prospects, strong financial positions and shareholder- oriented management. He only invests in companies deemed to be undervalued at the time of purchase but that may include growth stocks at value prices, giving it more of blend/core fund style. Morningstar rates the fund against other large-cap blend styles. Above is a chart for the no-load shares indicating strong returns over the past week. Thru October 21, 2002, the Focus Trust has a 10.5% weekly return, 3.6% more than the S&P 500 index and ranking it in the top 1% of the large-cap blend category per Morningstar. Hagstrom stumbled in 2000 pulling down the fund's trailing 3-year returns and ratings, but his positive 2.4% annualized return over the trailing 5-year period through October 21, 2002 was 2.6% more than the market (S&P 500 index). That was good enough to rank it in the top decile of the large-blend category. The fund's strong relative performance over the past five years has been associated with high volatility, however. When Hagstrom gets it right, as he did in 1998, Legg Mason Focus Trust can run with the bulls. The fund's 41.5% return that year ranked it in the category's top 1%. However, when Hagstrom gets it wrong as he did in 2000, the fund can rank among the laggards. The fund's 22.5% loss that year ranked in the 99th percentile of the large-cap growth category per Morningstar. The fund is only for those investors who can tolerate those types of fluctuations in pursuit of above-average returns over time. For more information or a fund prospectus, call 1-800-822-5544 or go to Legg Mason's website at www.leggmason.com. Conclusion Investors looking for a fund that owns the "blue-chip" stocks comprising the Dow 30 index may want to have a look at Potomac Dow 30 Plus Fund (PDOWX). It seeks to provide daily investment returns that correspond to 125% of the performance of the Dow Jones Industrial Average. It is up 10.4% over the past week. If you prefer a fund that seeks to provide investment results corresponding to 150%-200% of the performance of the S&P 500 index, there are other funds to consider, such as the Potomac U.S. Plus Fund (PSPLX) and Rydex Titan 500 (RYTNX). Potomac's fund leverages the S&P 500 by 150%, while Rydex's fund seeks a return that is twice that (200%) of the S&P 500 index. These funds use futures and options to obtain the desired "leverage." For complete information or fund prospectus, go to the Potomac Funds or Rydex Funds websites. 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 *********************** Help Me I Am Seeing Red The TXN earnings warning knock that smile of the face of the bulls but the impact was only temporary. The Dow slipped to -153 intraday but managed a heroic bounce just before the close. It was a good fight but it still left all the indexes showing red for the day. 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 10-22-2002 Copyright 2002, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: ERTS Dropped Puts: C Daily Results Call Play Updates: PNRA, UNH, FNM New Calls Plays: TRMS, QCOM Put Play Updates: GM, KSS New Put Plays: HD **************** 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: ***** ERTS $66.60 -5.54 (-3.54 for the week) Electronic Arts took it on the chin today after fellow game maker THQ Inc. (THQI) cut its 2003 sales and earnings guidance, due to "macroeconomic conditions" affecting holiday sales of its games. The company said it expects sales growth of 10-15%, as opposed to previous estimates of 20-25%. Soundview defended ERTS, saying THQ's weakness was more due to its lineup of games than general sales trends. It also said that THQ's problems should not affect ERTS's fundamental strength. Banc of America echoed the same sentiment, saying it still expected top games to sell well this holiday season. Still, the warning spooked investors, who dumped stocks in the sector, including ERTS. We would have been closing the play ahead of earnings on Thursday, anyway. The stock did find buyers above our stop loss of $66 and could rebound if it posts decent earnings, and its comments are not as bearish as THQ's. For those readers wanting to give it a chance, there is plenty of bounce room, but keep in mind that there were also some sector downgrades following THQ's guidance. PUTS: ***** C $35.53 +0.01 (+0.55) Investors seem to have digested all the bad news C dished out with its earnings report last week, and the stock seems to have stabilized near the $35 level. Even with the broader Brokerage sector off by more than 3.5% on Tuesday, C managed to actually inch higher by a penny. Certainly, the stock ought to fall on a fundamental basis, but the lack of selling pressure hints that there is still more upside, simply awaiting the next broad market rally. Rather than wait for our $36.50 stop to be violated, we're pulling the plug tonight. Use any weakness in the morning as an opportunity to close open positions. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue ERTS 66.60 2.01 -5.54 Drop, earnings Thursday FNM 70.00 -2.04 0.14 strong on down day PNRA 32.32 -1.36 -0.39 Still rising QCOM 36.96 0.95 0.07 New, cell chips strong TRMS 51.50 1.51 -0.03 New, Got the breakout UNH 98.94 -0.58 -0.38 Gathering steam PUTS C 35.53 1.08 0.01 Drop, sideways movement GM 35.80 2.82 -1.20 rejected at resistance HD 35.80 -0.53 -1.20 New, run is over KSS 54.35 0.15 -0.80 retail cut backs ************************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 ******************** PNRA $32.39 +0.03 (+1.44 for the week) Panera has continued its climb, in spite of the broader market pullback. The company continues to show improved same store sales and expand its business. Ever since PNRA broke through the $30 barrier, it has put together a series of daily higher highs and higher lows. On Friday the stock broke the $30 barrier and then found intraday support at that level. Monday found a break above $31 and then intraday support there, as well. By the end of the day on Monday, PNRA had also broken the $32 barrier. On Tuesday, the stock continued its run, testing $32 and then finding resistance at $33. The intraday chart suggests new support at $32. A look at the point and figure shows each of the stocks recent pullbacks bouncing two boxes higher than the previous rebound. In this case, that would put PNRA at $37, which would be a fresh double top buy signal. After four straight days of gains, including a break through of the 200-dma of $30.52, a pullback can be expected at some point. New entries should look for a pullback above that 200-dma to initiate long positions. The alternative entry from this level would be a break above resistance on the daily chart at $35. Conservative traders can wait for a break above resistance at $36, which is resistance on the point and figure chart. --- UNH $98.94 -0.38 (-0.79 for the week) United Healthcare has been riding the coattails of its recent earnings release to trade over $100 the last four trading sessions. The stock has been unable to achieve a close above that level, but has also been resistant to the market pullbacks as the Dow has run into resistance following its recent run. UNH has set a new 52-week intraday high with its trade of $101.00 the last two days The stock has found resistance at that level, but the recent consolidation around $100 appears as though the stock is forming a new base $10 higher than its last consolidation point. With a recent 53% increase in third quarter profits and raised guidance, the stock is still one of the strongest in a market that has seen lower year over year earnings for many sectors. The current point and figure bullish vertical count is $110, which would be our eventual target on the play. Our initial target is $105 and we would now look for a close over $100 as a signal that the stock has found support at that level. If we get that close then new long entries can be initiated at that time. Significant intraday support over $100 can be used as an indicator as well. We expected some type of pullback after the recent $10 surge over the last two weeks, but the stock appears too strong to give us a better entry point above the $97 support level. The HMO Index has also run into resistance around the 600 level and traders can look at a break above 605.02 (recent high) in the HMO.X for confirmation of long entry in UNH. --- FNM $70.00 +0.14 (-1.89) After marching as high as $72 early on Monday, shares of FNM weakened into the close, ahead of some important earnings results out of the housing sector this morning. As expected, profits were up strongly for the Home Builders in the last quarter, as predicted by the huge rise in Housing Starts last month. While the Housing stocks sold off on profit-taking on Tuesday following those strong earnings reports, FNM managed to hold its ground, finding strong support near $69.50. Recall that we have a strong breakout in progress on the PnF chart, which is currently pointing to an upside target of $76 (also the site of the 200-dma). The pullback to support over the past 2 days looks like a solid entry point ahead of the next move higher. Aggressive traders can continue to use intraday dips into the $68-69 area as new entry points. Alternatively, look to enter the play on a successful breakout over the $72 resistance level. Keep stops set at $67.50. ************** NEW CALL PLAYS ************** TRMS -Trimeris - $51.50 -0.03 (+1.59 for the week) Company Summary: Trimeris, Inc. is a biopharmaceutical company engaged in the discovery and development of novel therapeutic agents for the treatment of viral disease. The core technology platform of fusion inhibition is based on blocking viral entry into host cells. Trimeris has two anti-HIV drug candidates in clinical development. FUZEON, currently in Phase III clinical trials, is the most advanced compound in development. A New Drug Application (NDA) and Marketing Authorisation Application (MAA) have been submitted for FUZEON with the US FDA and the EU EMEA, respectively. Trimeris' second fusion inhibitor product candidate, T-1249, has received fast track status from the FDA and is in Phase I/II clinical testing. Trimeris is developing FUZEON and T-1249 in collaboration with F. Hoffmann-La Roche. (source: company release) Why We Like It: Trimeris is not new to OI, but the breakout above $50 is. We have played the stock long before, only to watch the sinking tide keep it anchored. Recent developments, however, have moved it from our Watch List to the official call play list. The stock had bumped its head up against $50 numerous times since May, without being able to hold above that level. It most recently tested that level in August, and since then it formed a spread triple top on the point and figure chart, which required a trade of $51 for a breakout. We got that breakout on Monday, with the stock trading as high as $51.99 intraday on Tuesday. Trimeris is currently working on two HIV drugs called fusion inhibitors. The first of the two, Fuzeon, is on schedule for release in 2003 and is the first drug of its kind. There is already a tremendous amount of pent up demand for the drug, which can be used on patients that have developed resistance to current therapies. In fact, some of the issues faced by Trimeris and its partner, Roche, involve whether the companies can produce enough of the drug to meet demand. Fuzeon has been estimated to have the potential for $1 billion per year in revenue. The drug has also been shown to reduce HIV in those patients already taking other therapies. Trimeris announced on Friday that the FDA had granted priority review status for the new Drug Application for Fuzeon. The priority review designation establishes a target six-month review period for the drug, which was submitted for review on September 16. That would indicate a decision by March, 2003. Priority designation is granted to drugs that address unmet medical needs, offering a significant improvement in the safety or effectiveness of the treatment, diagnosis or prevention of a serious or life- threatening disease. Fuzeon acts to prevent HIV from entering cells, unlike current therapies that interrupt its duplication. The stock does have some resistance up at $53.20 from the middle of May, but as the flagship drug is now close to production, that resistance may no longer be a factor. We like the pullback to, and show of support at $50 after the breakthrough, as evidence that the stock has now found a higher range. While OI will enter the play at the current level, traders can also look for a pullback above $50 to initiate a call purchase. Conservative traders can wait on the sidelines until the stock trades $53.25, in order to avoid the chance of resistance at the May levels. Place stops at $48.00. BUY CALL NOV-50*RQM-KJ OI= 1127 at $4.70 SL=2.35 BUY CALL NOV-55 RQM-KK OI= 337 at $2.00 SL=1.00 BUY CALL DEC-50 RQM-LJ OI= 20 at $6.40 SL=3.70 BUY CALL DEC-55 RQM-LK OI= 7 at $3.80 SL=1.90 Average Daily Volume = 523 k --- QCOM – Qualcomm, Inc. $36.96 +0.07 (+0.76 this week) Company Summary: Based on its proprietary CDMA technology, QCOM is engaged in developing and delivering digital wireless communications services. The company's business areas include integrated CDMA chipsets and system software and technology licensing. QCOM owns patents that are essential to all of the CDMA wireless telecommunications standards that have been adopted or proposed for adoption by the worldwide standards-setting bodies. Currently, QCOM has licensed its CDMA patent portfolio to more than 80 telecommunications equipment manufacturers around the world. Why We Like It: While Semiconductor stocks got slammed on Tuesday following the disappointing earnings report from TXN. But there was actually a bright spot in all the carnage, and that was the company's comments that they like the future prospects for its wireless business, as growth in this area was better than expected. That was enough to keep the buyers active in shares of QCOM, which has already had one heck of a run in the past 2 weeks. Languishing down near $28 in early October, the stock blasted out of its 6-month consolidation pattern on robust volume. After gapping over the 200-dma near $33.50 last week, QCOM pushed through the important $35 resistance level and just kept on going. The current vertical count from the PnF chart is pointing to an upside target of $60, but let's just take it one step at a time. Our first upside target will be a bit more modest, first at $40 and then near $44. After such a strong rise, we will likely see QCOM take a bit of a breather, and watching how the stock performs on that pullback will give us confidence to buy that dip. Look for a dip to intraday support at $35 or even down to the $34 (top of the gap from last Tuesday) to find strong buying interest. So long as the buyers appear, then a rebound from those levels would make for a great entry into the play ahead of QCOM's earnings report, currently scheduled for November 7th. Set stops initially at $33.50. BUY CALL NOV-35 AAW-KG OI=19788 at $3.50 SL=1.75 BUY CALL NOV-37*AAW-KU OI= 8724 at $1.95 SL=1.00 BUY CALL NOV-40 AAW-KH OI= 3779 at $0.95 SL=0.50 BUY CALL DEC-37 AAW-LU OI= 88 at $3.30 SL=1.75 BUY CALL DEC-40 AAW-LH OI= 181 at $2.15 SL=1.00 Average Daily Volume = 15.4 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 ******************* GM $35.80 -1.20 (+1.49) In the surreal market environment we find ourselves in, it seems like bad news is being ignored, while any good news (however rare) is greeted warmly by the bulls as an excuse to buy. That certainly seemed to be the case with shares of GM on Monday, as the stock blasted higher by nearly 8%. This was in response to comments made by GM officials where they expressed doubts about achieving their goal of capturing 29% of the US market for new cars this year, citing heavy competition from Japanese and Korean auto makers. Sounds strange, doesn't it? That sharp rally had us considering a drop for the play last night, but the drop to close under our $37.25 stop kept it alive for one more day. It's a good thing too, as selling pressure today had GM falling back under the $36 level and still looking top-heavy. While failed rallies below our stop still make for solid entries, what we really want to see is a drop under support to give us confidence that there is solid downside available. Traders looking to enter on a breakdown can target a break under today's intraday lows ($35.50) or else more significant support down at $34. Until the $34 level breaks, we'll leave our stop at $37.25. --- KSS $54.35 -0.80 (-0.80) The waiting game continues, as shares of KSS continue to vacillate around the $55 level. In just the past 2 days, shares of the midWest-based Retailer have traded below $53 and above $56, only to keep gravitating back near $55. That's three consecutive Doji candlesticks, reflecting investors' indecision. While support has so far held up near the $52.60 level, the current chart pattern appears to be pressuring the stock for a breakdown soon. Over the past week, the highs have been dropping, and this is likely due (at least in part) to the looming resistance provided by the descending 20-dma (currently $57.44). The $292 level in the Retail index (RLX.X) is continuing to provide resistance for the entire group, which appears ready to roll over on the next piece of bad news. Failed rallies in the $55-56 area will make for the best entries on a risk/reward basis. Traders looking to enter the trade on a breakdown below support will want to wait for a drop under $52.50 (just below Monday's intraday low) before taking a position. Lower stops to $57.50 tonight, just above the 20-dma. ************* NEW PUT PLAYS ************* HD – The Home Depot $29.57 -0.28 (-0.84 this week) Company Summary: A home improvement retailer, The Home Depot operates more than 1100 stores throughout the United States. The do-it-yourself warehouse retail stores offer building materials, home improvement products and related furnishings. Additionally, the company provides lawn and garden products and an assortment of services to both individual home-owners and independent contractors. Why We Like It: One of the biggest stories on Tuesday was the stellar earnings reports from some of the major Home Builders, such as CTX, PHM and RYL. Following the strong Housing numbers that came out last week, these strong earnings were really no surprise, and investors responded by taking profits. Could this be an indication that this quarter represented the best for the Housing sector? While we don't know the answer to that question, the continuing deterioration in the economy is going to continue to keep a limit on consumer spending. Falling interest rates have led to a surge in home refinancing, and with interest rates starting to tick upwards, we could see a significant decline in this refinancing, which has been one of the key sources of consumer funds in an environment of persistent economic and equity market weakness. Add the possible slowing in the housing market and less available consumer funds, and the fundamental picture doesn't look promising for the Home Improvement Retailers like HD. The stock has been in a sharp downtrend since May, with brief pauses for short-covering. The latest short-covering rally appears to have run its course, with the stock starting to roll over again, this time from the vicinity of $30. Once again, the rollover is taking place right at the descending trendline. HD is still on a PnF Sell signal, with the vertical count pointing to an eventual downside target of $13. That may be more than we should reasonably hope for, but at a minimum, the stock appears destined to test its October lows in the $23-24 area. Use failed rallies in the $30-31 area as aggressive entry points, or else initiate momentum entries on a breakdown under the $29 intraday support level. We are starting the play with our stop set at $32. BUY PUT NOV-32 HD-WZ OI=1201 at $3.40 SL=1.75 BUY PUT NOV-30*HD-WF OI=6459 at $1.70 SL=0.75 BUY PUT NOV-27 HD-WY OI=4133 at $0.70 SL=0.25 Average Daily Volume = 14.5 mln ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Tuesday 10-22-2002 Copyright 2002, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: CALL - TRMS Traders Corner: It's your Option ********************** PLAY OF THE DAY - CALL ********************** TRMS -Trimeris - $51.50 -0.03 (+1.59 for the week) Company Summary: Trimeris, Inc. is a biopharmaceutical company engaged in the discovery and development of novel therapeutic agents for the treatment of viral disease. The core technology platform of fusion inhibition is based on blocking viral entry into host cells. Trimeris has two anti-HIV drug candidates in clinical development. FUZEON, currently in Phase III clinical trials, is the most advanced compound in development. A New Drug Application (NDA) and Marketing Authorisation Application (MAA) have been submitted for FUZEON with the US FDA and the EU EMEA, respectively. Trimeris' second fusion inhibitor product candidate, T-1249, has received fast track status from the FDA and is in Phase I/II clinical testing. Trimeris is developing FUZEON and T-1249 in collaboration with F. Hoffmann-La Roche. (source: company release) Why We Like It: Trimeris is not new to OI, but the breakout above $50 is. We have played the stock long before, only to watch the sinking tide keep it anchored. Recent developments, however, have moved it from our Watch List to the official call play list. The stock had bumped its head up against $50 numerous times since May, without being able to hold above that level. It most recently tested that level in August, and since then it formed a spread triple top on the point and figure chart, which required a trade of $51 for a breakout. We got that breakout on Monday, with the stock trading as high as $51.99 intraday on Tuesday. Trimeris is currently working on two HIV drugs called fusion inhibitors. The first of the two, Fuzeon, is on schedule for release in 2003 and is the first drug of its kind. There is already a tremendous amount of pent up demand for the drug, which can be used on patients that have developed resistance to current therapies. In fact, some of the issues faced by Trimeris and its partner, Roche, involve whether the companies can produce enough of the drug to meet demand. Fuzeon has been estimated to have the potential for $1 billion per year in revenue. The drug has also been shown to reduce HIV in those patients already taking other therapies. Trimeris announced on Friday that the FDA had granted priority review status for the new Drug Application for Fuzeon. The priority review designation establishes a target six-month review period for the drug, which was submitted for review on September 16. That would indicate a decision by March, 2003. Priority designation is granted to drugs that address unmet medical needs, offering a significant improvement in the safety or effectiveness of the treatment, diagnosis or prevention of a serious or life- threatening disease. Fuzeon acts to prevent HIV from entering cells, unlike current therapies that interrupt its duplication. The stock does have some resistance up at $53.20 from the middle of May, but as the flagship drug is now close to production, that resistance may no longer be a factor. We like the pullback to, and show of support at $50 after the breakthrough, as evidence that the stock has now found a higher range. While OI will enter the play at the current level, traders can also look for a pullback above $50 to initiate a call purchase. Conservative traders can wait on the sidelines until the stock trades $53.25, in order to avoid the chance of resistance at the May levels. Place stops at $48.00. BUY CALL NOV-50*RQM-KJ OI= 1127 at $4.70 SL=2.35 BUY CALL NOV-55 RQM-KK OI= 337 at $2.00 SL=1.00 BUY CALL DEC-50 RQM-LJ OI= 20 at $6.40 SL=3.70 BUY CALL DEC-55 RQM-LK OI= 7 at $3.80 SL=1.90 Average Daily Volume = 523 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 ************** It's your Option By John Seckinger jseckinger@OptionInvestor.com Hedging, Investing, Trading, Speculating, and Leveraging. All of these can describe options on futures. With interest rates significantly climbing, the recent environment seems perfect to introduce trading options on bond futures. As a retail trader, I have used the bond options pit for trading purposes on a variety of occasions, and this contract could be just the trading vehicle you were looking for. First, let us give the specifications of options on U.S. Treasury Bond Futures. The underlying instrument is a Chicago Board of Trade (CBOT) Treasury bond futures contract, having a face value of 100,000 for one contract. The tick size of option contracts are 1/64 of a point ($15.625/contract), and the exchange uses 1-point strikes ($1,000) for the nearby contract month; consisting of at-the-money, four strikes above (example: 110, 111, 112, 113), and 4 strikes below. 2-point strikes ($2,000) are listed outside this band. Back months are also listed in 2-point strike price intervals. Note: The daily price limit is 3 points ($3,000/contract) above or below the previous day's settlement premium (expandable to 4 1/2 points). Limits are lifted on the last trading day. The front month (which is usually the most actively traded contract) plus the next three contracts of the quarterly cycle (Mar, Jun, Sep, Dec) is used for option contracts. If the front month is a quarterly contract month, no monthly contract will be listed. The monthly option contract exercises into the current quarterly futures contract. Options cease trading in the month prior to the delivery month of the underlying futures contract. Options cease trading at noon on the last Friday preceding by at least five business days the last business day of the month preceding the option contract month. Last, but not least, trading hours are as follows: 7:20 a.m. to 2:00 p.m. Chicago time, Monday through Friday, with evening trading hours of 5:20 - 8:05 p.m. (CST) Sunday through Thursday. Project A Afternoon session hours are 2:30 - 4:30 p.m. Chicago time, Mon-Thu and the Project A Overnight* session hours are from 10:30 p.m. - 6:00 a.m., Sunday through Thursday. Trading in expiring contracts closes at noon on the last trading day. The nice thing is that options on futures contracts can be purchased and sold through regular brokers (most stock brokers can handle these). Contract trading is done for a fixed fee (commission) per contract ranging somewhere between $25 and $100 per contract (in and out). To offset this risk, a trader can "hedge" by buying or selling a futures contract or options on the futures contract. Whatever they make or lose in the spot (actual, current market), they can lose or make up in the financial market to offset the difference. People who do not hedge, but play in the market for profit, are speculators. The ratio of hedgers to speculator is approximately 3:1. Speculators are very useful in ensuring that active, liquid markets exist. Ok, enough of the specifications. The real question is, Does it make sense to trade options on bond futures? As an option trader, one has to be intrigued with a contract that has (1) good liquidity, (2) increase in volatility, and (3) can be traded at more times during the day (or night) than options on equities. Another nice feature of trading bond options is that prices tend to become more directional than most equity options. What does this mean? It has been my impression that options on bond futures have a tendency to maintain a trend for a longer period of time than equity options. This can be seen on a day-to-day basis (read: less "noise" to stop out traders) or when assets begin to shift in/out of stocks and out/into bonds. Chart of 30-year bond, Daily Looking at a chart of the 30-year bond (ZB02Z), odds are that prices do fall towards 107 or slightly below before finding support. With that said, the November 107 puts are trading near '21 (21/64ths) and are set to expire at 6:00 p.m. this Friday. The 108 puts last traded at 45 as of 2:09 p.m. on Monday, October 21st. Going out into December, the 107 puts are at 125 while the 108 puts are currently priced near 154. Here is another thought. How about a neutral options position that involves selling one or more out-of-the-money call options and selling one or more out-of-the-money put options. For example, with the Dec T-bond futures at 108, you could sell the 112 call and the 102 put. If the price of December T-bond futures is anywhere between 102 and 112 when the futures contract expires, you get to keep the entire premium you collected from the options you sold. Using December Options, this position would cost roughly 17 plus 33, for 50 ticks. Note: The ticker symbol for calls is CG, while PG is used for puts. Also, if you cannot find option quotes, please check www.cbot.com for more information. What risk is involved? Well, if bond prices begin to rise, a trader could sell an additional put option at a higher strike price (example, sell 108 puts, then possibly 109 puts, etc.). If the price of T-bond futures gets close to 112, you would buy back the 112 call option, because you don't want to take a chance that it might go in-the-money. What about if bond prices continue to fall? If T-bond futures moves from 107 down to 106, you could sell an additional call option at one strike price lower than before. If prices fall to 104, traders might want to think about buying back the 102 puts just in case. The key is to allow time decay to eat away at the options you sold (so you can keep the premium you collected). If a trader was more aggressive, the 112 calls and 106 puts could be used for the above example. That would cost approximately 33 plus 102, for 135 ticks. With the Dec T-bond right at the 38.2 percent retracement level and underneath a regression line that began back in mid-March, maybe it makes sense to buy volatility? With the contract at 107'27, I would first look at buying the Dec 108 straddle (108 puts/calls). This straddle is priced at 154 (puts) + 158 (calls) for 312 ticks. What would be the objective on the straddle? I would use 110 and 106 as first resistance and support levels, with 112 and 102 as the main objective. Of course, it will all depend on how fast the contract makes it to these levels. If the Dec T-Bond trades 110 or 106 and uses these levels as psychological resistance or support, look to roll out of the position. There are a few things to note about the current asset allocation out of bonds and into stocks. One includes the steep yield curve (five year versus 30 year) which has not begun to fall back towards more historical levels. Currently 190 basis points wide, the 200 daily moving average is 142.1 basis points wide. If you are wondering what 190 bps wide means, a glance at the current cash yields makes it easier to understand. The 30-year is yielding 5.14%, while the five-year is at a 3.24% yield. 514 minus 324 is 190. Note: The 5-year high is 209, set recently. I do expect support at 180 and 160, but that doesn't necessarily have to mean lower bond prices. It should mean higher volatility, however. The next point centers around the 1,341-point rise in the Dow. This obviously cannot, and has not, been ignored by bond holders. Assets are clearly rolling out of bonds and into equities, creating the possibility of a fundamental shift for traders of fixed-income securities. Does this mean that buying the straddle makes more sense than a more neutral strategy? I would believe it would make more sense to buy a straddle; however, the 312 premium does get a tad pricey. When I trade bond options, I don't have price profit objectives (example: 400, etc.); instead, I prefer to use prices in the underlying contract as reason to exit. However, I do use option prices when exiting via stop losses. So, what about yield options? Using the 30 Year Treasury Yield Index (^TYX), the option chain really isn't that interesting. Volume is almost non-existent, and Open Interest is too limited to really gauge investor sentiment. On the other hand, volume on Ten-Year Treasury Note options (open auction) set a daily volume record on August 14 at 332,996, and set a daily open interest record on August 23 at 2,040,367. I could not find daily overall volume for 30-year options. If a trader wanted to, he/she could use the Flexible Treasury Option Series. The minimum size to initiate a Request for Quote (RFQ) in an unopened Flexible Treasury Option series (currently without open interest) is 100 contracts, each having a face value at maturity of $100,000 ($200,000 for 2-Year T-Note Flexible Options). I don’t have that kind of capital. Good luck. Questions are welcomed. ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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