The Option Investor Newsletter Thursday 10-31-2002 Copyright 2002, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Longest October on Record Futures Markets: Best one month for the Dow in 15 years as the Dow gains 11% in October. Index Trader Wrap: Flat line Market Sentiment: A Scary Story Weekly Manager Microscope: John P. Hussman: Hussman Econometrics Advisors Updated on the site tonight: Swing Trader Game Plan: The Real Test Begins Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 10-31-2002 High Low Volume Advance/Decline DJIA 8397.03 - 30.40 8493.92 8336.34 1.85 bln 1776/1417 NASDAQ 1329.71 + 3.00 1347.58 1323.09 1.68 bln 1746/1589 S&P 100 451.23 - 1.37 457.21 447.52 Totals 3522/3006 S&P 500 885.80 - 4.91 898.83 879.75 RUS 2000 373.49 - 0.68 376.71 373.05 DJ TRANS 2260.07 - 17.20 2301.41 2249.54 VIX 35.91 - 0.17 36.70 35.14 VXN 52.00 + 1.70 53.67 51.52 Total Vol 3,767M Total UpVol 1,922M Total DnVol 1,751M 52wk Highs 118 52wk Lows 146 TRIN 1.75 PUT/CALL 0.87 ************************************************************ Longest October on Record I know that is not a real fact but it sure seemed that way. I felt like I have been waiting for today to come for months. The year end for many large funds has passed and all the dressing up for statements is over. Unfortunately the waiting is not over. Normal, whatever that means to you, probably will not return to the markets until Thursday of next week. Dow Chart Nasdaq Chart What a day to be a fund manager. The economic reports are the worst in months and you have to buy stocks to appear fully invested and ready for the new bull market. It is like getting caught doing something wrong in front of your friends in high school and being told to report to the principal's office before going to class tomorrow. You have to keep up pretenses for the rest of the day to avoid losing face with your crowd but knowing that you are going to get serious licks by the principal the next morning. I am obviously dating myself and speaking from personal experience. They probably don't give "licks" any more in high school but I racked up 17 consecutive days once in the mid 60's. Back to the point. Funds that were forced to go long today to save face are likely to get whacked at the open tomorrow. The terrible economic news is eventually going to strike home and Friday could be the start of that process. The day began with a GDP for Q3 that at 3.1% was far below consensus of 3.7%. Inventories rose only $1.9 billion which indicates that businesses are not expecting any recovery anytime soon. This was down from $4.9 billion in Q2. This paints a lower profit picture for Q4 since lack of inventory prevents sales growth. What GDP growth there was came from auto sales which were 22.7% of the growth. Economists have been saying that the quarter began with a bang and ended with a sigh. The majority of the gains came in July when growth spurted to +4% for several weeks on the back of summer auto sales but slowed to the current estimates of only 1.7% by quarter end. This paints a very negative picture of the current economy. Auto sales have dried up. Mortgage applications fell -20% last week and it was the third weekly drop in a row. The housing bubble is bursting and the refinancing wave is over. Estimates of GDP for the 4Q are less than 2.0%. Several analysts pointed to a 6% jump in business equipment and software as evidence of a recovery but they forgot about the one time sale that Microsoft held when it changed its licensing method. Remember the record bounce in MSFT earnings reported this month from that one time event. Ditto for the internal GDP numbers. Take that away and the overall number would even be worse. The Chicago PMI also fell significantly below estimates of 49.5 to 45.9 and indicating a signification contraction in the Midwest economy. This is the lowest level since January and as the second month in negative territory signals the end of a seven month recovery. The PMI also showed continued weakness in payrolls. The combined GDP, PMI and higher than expected Jobless Claims numbers today paint a dreary picture for Friday's critical reports. The PMI is a leading indicator for the more important ISM numbers and the ISM was already showing negative growth last month at 49.5. The nonfarm payrolls, estimated at -15,000 for tomorrow, could also be at risk despite a slight rise in help wanted ads. We will also see the Personal Income and Spending and Construction Spending on Friday. October vehicle sales could be the last nail in the coffin. It will be a very full morning. The Dow finished the month about 30 points from posting the best October on record, ever. Coming in second best was no small feat with a +10.6% gain. This was the best monthly gain for the Dow since Jan-1987. Unfortunately, every time the Dow has posted a double digit gain since 1926 the following month showed a high single digit drop. Every time! That does not mean November is a guaranteed drop but I would not bet against it based on the fundamentals. The outlook for the 4Q is so bad that even food stores are issuing warnings. Albertsons said it expected profits to drop based on a steeper than expected drop in sales. It also cut expectations for the entire year. Wal-Mart was blamed in part for stealing business from food chains but even Wal-Mart has warned that sales are falling. The wild card here is the Fed meeting on Wednesday. If there was no impending Fed meeting the market numbers would already be more scary than anything that will come knocking on your door tonight. There are so many conflicting guesses about the Fed's move that the outcome is far from clear. The market has priced in more than a 25 point cut but almost zero chance of a 50 point cut. There are many analysts that think the Fed will not cut at all and will stick with the "current stimulus is adequate" mantra and not risk scaring investors with an "oh my gosh, it is really bad" type of reaction. Since there has been no Fedspeak leaning toward a rate cut there is a feeling they will hold pat and put pressure on the ECB to cut rates first. The Fed does not want to weaken the dollar any more unless the ECB follows suit. Not cutting next week would put the pressure on them. Many feel they will cut 25 points to show they feel our pain even though it would have zero impact on the economy for at least six months. At 1.75% we already have the lowest funds rate in decades and according to all published Fed comments they feel it is sufficient to fuel the recovery. This is the way it is shaping up for me. A .25% cut is priced into the market already. A .25% cut would leave the markets depressed and we could see a negative reaction. A .50% cut would bring out concerns of deeper problems than we can see and while there might be an immediate bounce in the markets it should not last more than a couple days before current fundamentals take hold again. With no rate cut we could get the instant drop as the current expectations are taken out of the market but then a rebound as the Fed will go on the campaign trail to promote the "current stimulus is adequate" story. Whatever will happen is of course still four trading days away. This means the verbal battle will continue in the press with everyone getting their 15 min of face time on TV. They will rationalize the drop in consumer spending and try to spin the kinder gentler slow growth economy as "recovering" instead of dipping. The confusion is going to keep investors on the sidelines and without positive Fedspeak there will be plenty who will close positions and move to the sidelines to avoid the possible unknowns. Add into this the gains in the last two weeks as mutual finds stacked their portfolio decks and you have a very good chance of that house of cards collapsing. Friday could be explosive or implosive. If the economic reports come in better than expected then the initial reaction will be to celebrate but they will then start discounting the chances of a rate cut. Mass confusion. If the reports are worse than expected the hopes for a rate cut will rise but the economic fundamentals will have worsened. We have not seen any strong impact from the last 12 cuts and one more is not likely to do any better. What we are going to have is four more days of trading confusion with a probable downward trend. Remember, a 25 point cut is already priced in and everything else is just smoke. You have to ask yourself why anyone would risk the precious capital they have left by going long in front of the Fed meeting. Also, remember the Fed needs to save its ammo for a response to a future terrorist attack and in case the war in Iraq goes badly. They do not want to be in the same shape as Japan with a zero interest rate, no more bullets and the economy still falling. Now that I have totally confused you I think that you should also remember that the election is on Tuesday. Incumbents typically do badly when the markets are crashing on election day. That sets up another possibility of artificial manipulation that only conspiracy theorists will admit to. Can we please just fast forward to next Thursday and end the pain of uncertainty? No such luck I am afraid. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** Best one month for the Dow in 15 years as the Dow gains 11% in October. by Alan Hewko futures@OptionInvestor.com Three new pieces of market bearish news this morning each caused the market to SELL, but as we have seen so many times since Oct. 10th, the "Bad News dip is Bought". ________________________________________________________________ Quotes: 4:00 PM Cash Market Close ES 883, YM 8368, NQ 991 4:15 PM Future's Market Close ES 881, YM 8347, NQ 991 5:00 PM YM Dow Futures close: YM 8339 7:00 PM Futures: ES 881s, NQ 987s Dow 8397 - 30 SP500 886 - 5 COMPX 1330 + 3 Advance/Decline by Volume was sideways to slightly bearish most of the day, and dipped lower going into the close to its day lows. Abbreviations used by the Futures Market: Ticker $ move per index pt ES = E-mini SP500 December futures ES02Z $ 50 per ES pt YM = E-mini Dow $5 December futures YM02Z $ 5 per YM pt NQ = E-mini NDX 100 December futures NQ02Z $ 20 per NQ pt A side note first: It's amazing how quickly we become so used to certain technology. Not very many years ago, 56K dialup was what I used. For the last two days, I've been without my cable modem. I live too far away for DSL, so cable modem is my only one choice. Naturally, we've all experienced 1-2 hours of our ISPs being down, etc; but when you are without your broadband connection for two full days, it does make you realize how we take them for granted. [grins] It appears I didn't miss much the last two days, simply more up and down sideways action as the market is still buying bad news. Today is the last day of the month, but much more importantly, today is fiscal end of day for most mutual funds. Their tax-loss selling is over, and their "dressing up their funds" is over. I don't think anyone can dispute that fund's activities the last two weeks has had a large impact on the markets. At times this may have caused some very "illogical" behavior. October earnings are now done, with some companies still to report in November. The Elections and FOMC are next week. The Economic reports we have seen the last two weeks are mostly rather bearish. HOWEVER - the trading rule of "Trade what you see on the tape, and not what the markets SHOULD be doing" rings true. Today being another great example of that rule. At 8:30 AM today, there were two very bearish reports, the Jobs report and GDP. Both of them were worse than expected. Below is an ES chart to show the initial fast downward reaction to them. Chart: ES02Z (E-mini SP500 futures) Thur. 8:30 AM As you can see, ES tanked from 890 to 885 in moments after its release, and on no additional news, buyers bought the dip again. Market went rather sideways as it then headed into the other large report of the day, the 10:00 AM Chicago PMI numbers. PMI was expected to come in at 49, and came in at 45 (bearish). Once again, you can look at the below ES chart right after 10:00 AM to see the market's reaction. Chart: ES02Z (E-mini SP500 futures) Thur. 9:30 AM - 4:15 PM Once again, the market sold off. Once again, dip buyers were lurking; and 'they' actually took them higher (and day Highs) AFTER those three very bearish reports had come out as the day highs occurred slightly after 10:00 AM. Logic took hold, and the market drifted sideways and lower into its day lows near 3:30 PM (a common short-covering reversal time period) and Shorts covered for about 15 minutes. There have been times when right at 4 PM, at the closing of the cash market; 'smart money' knows a reversal is about to occur and starts shorting Futures to hedge all the Long Stock they own. Sometimes there's a fast violent reversal shortly after 4 PM in the futures, but that really didn't occur today. Here's the other two charts for today: Chart: Dow Jones Industrials Thursday 9:30 AM - 4 PM Chart: NQ02Z (E-mini NASDAQ futures) Thur. 9:30 AM - 4:15 PM Let's see what this week has done so far: Chart: ES02Z (E-mini S&P 500) Four-day Chart ES / SPX is still trapped in the 875 to 900 range. Nothing has changed there. Market has failed on the upside several times this week, which needed ES to hold over 900, Dow to hold over 8500-8550, NQ to hold over 1000. By the same token, large support at ES 875 and Dow 8200 was tested and held. _______________________________________________________________ THOUGHTS FOR FRIDAY Charts continue to outweigh sentiment. Those three bearish reports today "should have" truly seen the Dow doing a -200 type of day. It did not. Was the fiscal year-end today for mutual funds a role in today's trading? Most likely. MSFT and the Dept. of Justice have some news release Friday at 4:30PM it appears. No idea what that means, ES and NQ will be closed, but YM will be open. SOX Semi index is still very strong despite continued bearish news from the chip sector. MSFT is now hitting some strong chart resistance at 54. If it breaks higher, 57-58 is next overhead resistance; if it breaks down, back to the 52 level. The market is either forming bullish consolidation at the highs, or is getting ready to form a bearish distribution top. Nasdaq closed up 13.5% for the month of October, its 2nd best ever October gains. One almost gets the feeling that traders now expect the market to retrace now that October fund "games" are over with. For the last two weeks, instead of doing what everyone expects the markets have found a way of doing the exact opposite. Traders have a word called the "Greenspan put" meaning whenever the market really got in trouble, the FOMC would bail them out by cutting rates. By the same token, we now seem to be trading on an "Election Put" meaning 'they' are holding the market up until the elections are over. Bearish is the word that comes to mind for both Friday and post- FOMC action; HOWEVER, the market could care less what I think, so I'll continue to let the tape dictate. Remember, it is STILL "buy the dips" and "buy the expected bad news" and that sentiment has not changed. Happy Halloween to one and all. Instead of looking at charts for three hours tonight, may I suggest going out tonight and having some fun - you have earned it [grins]. Alan Hewko As always, any questions or comments, please email them to futures@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** Flat line The major indexes traded relatively unchanged today despite a plethora of economic data that showed the US economy growing at a 3.1% annual rate in the third-quarter, but may be cooling down rapidly if the geographic region around Chicago, as depicted by the Chicago PMI and 45.9% reading there, is any indication of a slowdown in manufacturing activity on a broader scale in the United States. After spending seven months above the 50% level, September's readings of 48.1% and now October's reading of 45.9% has the Chicago PMI showing contraction in the manufacturing sector for two consecutive month. While this regional index tends to be volatile, it does make the case for a Fed easing next month. It's perhaps that thought that had Treasuries finding buyers yet again today and driving yields lower. The longer-dated 10-year December futures (ty02z) 114'230 +0.39% and 30-year December futures (us02z) 110'210 +0.39% outpaced the gains of the shorter dated 2-year (ty02z) 107'187 +0.02% and 5-year (fv02z) 113'235, which I interpret as investors willing to take on some risk in the longer-dated as they seek out higher yields. The benchmark 10-year YIELD ($TNX.X) fell to 3.91% as this bond's YIELD has now retraced 50% of its YIELD move from the October lows (3.56%) and recent highs of 4.273%). How stocks, as depicted by the major indexes, have been able to hold near their highs as cash has been rotating back toward bonds is anyone's guess. The only explanation that I can come up with is that investors oversold stocks anticipating a much weaker Q3 GDP growth rate, and while economists were expecting 3.6% annualized growth, the preliminary 3.1% reported today wasn't all that bad. So far this week, the major market indexes are actually little changed. The S&P 500 Index (SPX.X) is down -1.3% on the week, while the Dow ($INDU) is off -0.6%, S&P 100 ($OEX.X) is lower by -0.9%, NASDAQ Comp.($COMPX) is down -0.2% and the NASDAQ-100 (NDX.X) is off -0.6%. Only the smaller cap Russell-2000 Index ($RUT.X) has managed to show a gain so far, and that's a very modest 0.3%. Dow Industrials Chart - $50 box There was no "meaningful" movement in the Dow Industrials from an institutional perspective today. While the dip lower to 8,336 was close to a 3-box reversal lower, there were enough buyers (demand) to keep things in check. Conversely, today's high of 8,493 fell 7-points short of marking an X at 8,500. It can be very informative when you as a trader actually "hand chart" the supply/demand charts as you begin making some observations, even on a short-term daily basis. Today's action hints that there may be juuuuust enough supply and not enough demand to have the Dow trading a recent relative high of 8,500 and perhaps somehow, someway, the MARKET really feels that the bearish vertical count of 7,850 is achievable. Just a thought, but what IF the FOMC did NOT make a change in interest rates next week? I'm not saying that would happen, but I could imagine the Dow trading 7,800 if stock buyers are buying on the conviction of a 25-basis or even 50-basis point rate cut. Time will tell, but current analysis would be ... "near-term weakness and vulnerable to 7,850," while Longer-term bullish above 7,850. I've also noted in the past that I like to monitor various index components. In today's market monitor and in recent sessions I've mentioned Procter & Gamble (NYSE:PG) $88.45 -0.5% as a bearish candidate stock after it gave a triple-bottom sell signal at $87. The stock fell quickly to the $85 level, which was PG's bullish support trend. With that observation in mind, a BEAR in a Dow Industrials trade might then be alert to support at the Dow's bullish support trend if it should be tested in the future. Today's action saw no net change take place in the Dow Industrials Bullish % ($BPINDU). Bullish % remains "bull confirmed" at 56.67%, with 17 of the 30 components showing a point and figure buy signal still associated with their charts. S&P 500 Index Chart - $5 box There was some meaningful supply/demand movement in the SPX today which saw the SPX reversing back lower by 3-boxes with a trade at 880. Isn't it interesting how the SPX came sooooo close to trading 900, which similar to the Dow Industrials near 8,500, just couldn't build enough demand to have the SPX muster up 2 more points (actually, the high trade was 879.75, so 1.25 points)? Makes a trader wonder if that wasn't really a bull trap at 905 and now bears are maybe getting a little more serious. I've also started a little downward trend on the above chart. We can't put in place a bearish resistance trend until the bullish support (blue +) is broken. However, look back up at the upper- left corner of the chart. See how the eventual bearish resistance trend there (red +) could have also been visualized after a triple-bottom sell signal? Once the bullish support trend was broken at 850, THEN the bearish resistance trend was put on the chart. I've said before that BEARS are VERY EARLY in an index short, now you can really begin to see why. Stops should be placed at 910, or if more risk averse, 900, which would be the first sign of trouble for a bear. As it stands, must assess downside to the bearish vertical count of 830 or bullish support trend of 835 right now. Today's action saw no net change in the S&P 500 Bullish % ($BPSPX). Still "bull alert" at 49.00%, with 245 of the 500 components showing a point and figure buy signal still associated with their charts. S&P 100 Index Chart - $5 box There's been no "meaningful" movement in the OEX for two sessions, after Monday's 3-box reversal lower. For now, it would take a trade at 465 to really have the OEX breaking out longer- term, but if it can break three points of resistance, then it would definitely deserve a bulls money. I tell you what, If I had bought some OEX 400 calls on the 3-box reversal up at 405, I'd sure be taking some profits with so much technical resistance nearby, wouldn't you? Today's action had the S&P 100 seeing a net loss of 1 stock to a point and figure sell signal. This has the bullish % slipping back to 55%, just off Monday's and yesterday's relative high readings of 56%. There's been little change in the NASDAQ-100 Index 50-point or 25-point box. So lets have a little fun tonight, introduce more noise into the p/f chart and look at a $10 box of the NASDAQ-100. NASDAQ-100 Index Chart - $10 box I can't for the life of me explain the bullishness in the NDX, except for the fact that MSFT traded strong today and it's trade at 54 has the NASDAQ-100 heavyweight briefly breaking above its downward trending 200-day SMA of $53.63 and also triggering a spread-triple-top buy signal at $54. The $10 box chart of the NDX tells me I would want a stop at 1,010 as past double-top buy signals at 890 and 960 have seen some strong moves higher. I still like the NDX as short, but need a break at 940 on the above chart for further weakness. Today's action saw the NASDAQ-100 see a net gain of 1 stock to a point and figure buy signal. This has the Bullish % back at 55%, which has been the recent relative high reading for this indicator. It would currently take a reading of 62% to get this index into a "bull confirmed" reading. Current status remains "bull alert." Based on the above $10 box chart, I could envision a "bull confirmed" status with a trade at 1,010 and a "bear confirmed" reversal lower in the bullish % with an NDX trade at 940. Bulls can play long on a break higher at 1,010, but I personally lack conviction for a trade like that as the deeper cyclicals as depicted by the Morgan Stanley Cyclical Index (CYC.X) 430 -0.55% just don't seem to be confirming the tech bullishness. 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 **************** A Scary Story by Steven Price The bears and the bulls both got a little taste of what they were looking for today. Economic numbers were horrible, and hopes of a rate cut were fueled. The jobs data, which was expected to show 400,000 first time jobless claims last week, instead came in at 410,000. GDP, predicted to show the economy growing at a 3.6% clip, came in at only 3.1%. Auto sales, which increased 42.2% as a result of zero-percent financing, accounted for more than half of the increase in GDP over last quarter. However, on the positive side, there were some increases in business spending on equipment and software for the bulls to hang their horns on. Chicago PMI, a measure of Midwest manufacturing activity, showed contraction, registering a reading of 45.9% - short of expectations of 49.1%. Bad economy? Guess we really, really need a reduction in the fed funds rate. Are you listening Alan? The bulls are betting that he is. While the initial reaction to the numbers was a boost in the market, the Dow had given up -30.38 by the end of the day. What we are seeing is short-term bulls betting on a rate cut next Wednesday of possibly 50 basis points, while the bears are seeing economic numbers that should have a long-term negative effect on the market. Talk of a rate cut is focusing on how much, not if, we will get one. Tomorrow will bring more economic news, with the ISM index, nonfarm payrolls, October unemployment, auto and truck sales, and personal income and spending. The reaction could be more of the same. Bad news = rising market. However, anything short of a 50 basis point cut already seems priced in, so a rally should be short lived. The retail sector appears to finally be rolling over, after the combination of low Consumer Sentiment and a Wal-Mart downgrade. The Retail Index (RLX.X) has finally broken the 50-dma to the downside, and confirmed a similar move in the Retail Holders (RTH), which made tonight's put play list. Wal-Mart (WMT) commented that Halloween sales were lower than expected and given today's economic data, it doesn't appear holiday sales will be setting any records this year. Consumer spending makes up 2/3 of GDP, so a miss of 14% of the expected GDP number translates into a significant miss for retailers' targets as well. SEC Chairman Harvey Pitt is under the gun once again for his accounting board chairman pick. Pitt selected William Webster to head the oversight committee. Webster headed the audit committee of U.S. Technologies, which is facing shareholder lawsuits for alleged fraud over accounting problems. Pitt apparently knew this before he made the selection, but did not share the information with SEC commissioners, or the White House. Pitt has asked the SEC's inspector general to look into the Webster selection. According to the National Association for Business Economics, members have scaled back capital spending for the sixth straight quarter. This would seem in contrast with the business spending numbers on the GDP release. The NABE called this, "an ominous sign for the outlook for economy-wide investment." The news is nothing new, after we have been hearing the mantra of capex reductions over the last quarter. However, we now have concrete evidence of the industry-wide trend. October registered the biggest monthly gain in the Dow since 1987; however, all of that gain was simply a rebound from September's losses, falling 266 points shy of a full bounce. I don't want to sound like a party pooper, but signs continue to point negative. The Fed speculation should keep a floor under the market for the next few days, but unless we get a surprise of more than 25 basis points from the FOMC, I wouldn't be putting on full long positions in more than a few select issues. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7286 Current : 8397 Moving Averages: (Simple) 10-dma: 8412 50-dma: 8200 200-dma: 9300 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 775 Current : 885 Moving Averages: (Simple) 10-dma: 889 50-dma: 871 200-dma: 1003 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 989 Moving Averages: (Simple) 10-dma: 976 50-dma: 915 200-dma: 1166 The Retail Index (RLX.X): The Retail Index rebounded impressively from Tuesday's poor Consumer Sentiment numbers. However, a Wednesday downgrade to Wal-Mart (WMT), and slower than expected GDP were too much for the group. The RLX finally broke below its 50-dma on Wednesday and continued lower today. Heading into the holiday shopping season, things do not look bleak, as consumer spending is likely to continue is slowdown. Many stores have already lowered monthly sales projections (WMT has cut its usual same store sales projections in half), so that they can claim the numbers are on track, but the trend remains obvious. We are looking at shorts in the sector and after not even a rate cut will be able to make its way into consumers' pockets by Christmas. 52-week High: n/a 52-week Low : 252 Current : 282 Moving Averages: (Simple) 10-dma: 290 50-dma: 286 200-dma: 321 Market Volatility The VIX has clung to the mid 30s, as the market has hovered close to unchanged. With a slew of economic data today and tomorrow, followed by the FOMC rate announcement next week, we are likely to see it stay in this range, or possibly creep higher if the data continues to miss estimates. Tomorrow should be a telltale sign, seeing what premium positions traders are willing to take home after we finish two days of economic stats. If the news is positive, they may not want to get caught with time decay over the weekend. If the news is negative, don't plan on much of a weekend decline. CBOE Market Volatility Index (VIX) = 35.91 –0.17 Nasdaq-100 Volatility Index (VXN) = 52.99 +1.70 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.87 448,430 389,096 Equity Only 0.79 359,127 282,879 OEX 0.84 18,065 15,105 QQQ 1.96 29,448 57,860 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 37 + 1 Bull Confirmed NASDAQ-100 55 + 1 Bull Alert Dow Indust. 57 + 0 Bull Confirmed S&P 500 49 + 1 Bull Alert S&P 100 55 + 0 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 1.20 10-Day Arms Index 1.02 21-Day Arms Index 1.02 55-Day Arms Index 1.26 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 1484 1267 NASDAQ 1646 1512 New Highs New Lows NYSE 23 53 NASDAQ 45 70 Volume (in millions) NYSE 1,828 NASDAQ 1,748 ----------------------------------------------------------------- Commitments Of Traders Report: 10/22/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercials added to both long and short positions, however increased shorts by an additional 11,000 contracts. Small traders left long positions virtually unchanged, but reduced the short side by 11,000, taking the opposite approach. Commercials Long Short Net % Of OI 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%) 10/22/02 432,775 463,827 (31,052) (3.5%) 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 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 23.3% 10/22/02 134,641 72,681 61,960 29.8% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 Commercials increased their long contract positions by 3,400 contracts, while increasing shorts by 2,100. Small traders left longs unchanged, while reducing shorts by 3,600. Commercials Long Short Net % of OI 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%) 10/22/02 48,954 54,088 (5,134) ( 4.9%) Most bearish reading of the year: (15,521) - 3/13/02 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 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% 10/22/02 10,202 8,892 1,310 11.8% 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 In a continuing trend with other markets, commercials increased short positions by 2,000 more contracts than they increased longs. Small traders reduced longs positions by 1,600 and shorts by 1,000. Commercials Long Short Net % of OI 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% 10/22/02 22,189 13,448 8,741 24.5% 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 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%) 10/22/02 4,445 9,270 (4,825) (35.1%) 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 MANAGER MICROSCOPE ************************* John P. Hussman: Hussman Econometrics Advisors John P. Hussman, Ph.D is the chairman, president and controlling shareholder of Hussman Econometrics Advisors, investment advisor for the Hussman Strategic Growth Fund; a relatively new, unrated stock fund that has beaten the competition in its brief history. This unique stock fund seeks long-term capital growth primarily from U.S. stocks like other funds, while placing added emphasis on capital protection during unfavorable market conditions. The Hussman Strategic Growth Fund varies its exposure to market fluctuations (from neutral to aggressive) based upon the unique return/risk characteristics of each "market climate" identified. In addition to emphasizing capital protection during unfavorable market conditions, the fund may increase its exposure to equity market fluctuations through limited purchases of call options in favorable markets, though it hasn't truly had the opportunity to employ such tactics yet. Hussman introduced Hussman Strategic Growth (HSGFX) in July 2000 and since inception has produced a 21.1% annualized total return for investors as of September 30, 2002. As of October 30, 2002, the fund has produced a YTD total return of 11.3% for one of the best performances this year among diversified stock mutual funds. For complete information or a fund prospectus, call 800-487-7626 or log on to the Hussman Funds at www.hussman.net. This fund is not your typical diversified stock fund, so it would behoove you to read the prospectus carefully before investing. Manager Background Hussman received his Ph.D in Economics from Stanford University in 1992. From 1992 through 1999, he was an adjunct assistant professor of economics and international finance at the University of Michigan. His academic research has focused on "financial market efficiency" and "information economics." In the 1990's, Hussman also operated an investment newsletter offering in-depth commentary detailing his approach and current market assessment. Like many investment academicians, Hussman would eventually make the leap from academia to real investment world, launching his own mutual fund in July 2000. Investment Overview The Hussman website indicates that the Hussman Strategic Growth Fund is a diversified, no-load mutual fund that seeks long-term capital appreciation primarily from U.S. stocks, while placing added emphasis on capital protection during unfavorable market conditions. Hussman may hedge the fund's stock holdings in an effort to remove the impact of market fluctuations, but he does not establish net short positions. The fund’s exposure to large-cap, mid-cap and small-cap stocks varies over time, depending on the valuations and market action of these groups. During "very favorable" market conditions, he may increase (leverage) the portfolio's exposure to stock market fluctuations through limited purchases of call options. If you go the website at www.hussman.net, you'll see a diagram depicting various market conditions. Hussman looks at both the "valuation" of stocks and "trend uniformity." Depending on the current market climate, Hussman will position the portfolio in one of four ways, as follows: Hedge: Valuation Unfavorable / Trend Uniformity Unfavorable Positive: Valuation Unfavorable / Trend Uniformity Favorable Moderate: Valuation Favorable / Trend Uniformity Unfavorable Aggressive: Valuation Favorable / Trend Uniformity Favorable The website states that Hussman Strategic Growth Fund and its strategic income fund sibling, Hussman Strategic Total Return (HSTRX) are designed to be well-diversified "core" holdings for investors in pursuit of a disciplined long-term investment plan. Using the funds, investors can attain a balanced portfolio that includes both U.S. stocks and U.S. Treasury securities. Because Hussman will vary fund exposure to market fluctuations depending on expected return/risk at any point in time, he does not believe that investments in/out the funds should be "timed." To discourage short-term trading and minimize its impact on the fund's long-term shareholders, Hussman will impose a redemption fee of 1.50%, applied to fund redemptions within six months of purchase (even for the purpose of switching between the Hussman Strategic Growth Fund and Hussman Strategic Total Return Fund). Investment Performance According to Morningstar's analyst report, the $439 million Strategic Growth Fund (HSGFX) has been fully hedged for its entire existence (from inception through September 30, 2002). That posturing has produced excellent returns so far and low volatility relative to other U.S. equity funds. Morningstar classifies the fund as a "mid-cap blend" fund for comparison purposes. Hussman's year-to-date return of 11.3% through October 30, 2002 is 32.8% better than the S&P 500 large-cap index, and 25% above the S&P Midcap 400 index, ranking the fund in the top 1% of the Morningstar mid-cap blend category. The fund's trailing 1-year total return of 17.2% also ranks in the category's top 1 percent. Below is a summary of this fund's quarterly performance results, using data from Morningstar. Q4 2000: +12.5% Q1 2001: +6.8% Q2 2001: -1.9% Q3 2001: +3.6% Q4 2001: +5.6% Q1 2002: +8.5% Q2 2002: +3.0% Q3 2002: +2.0% You can see that the Hussman Strategic Growth Fund has had only one negative quarter since inception. As Morningstar's analyst Brian Lund points out, total returns so far have been excellent, but it may still be too early to adopt this product. Certainly those investors who have made this a $439 million fund are glad with their investment decision. How well it does when the U.S. market climate is favorable is yet to be seen, though you would have to believe it has strong potential considering that Hussman did his academic research through the bull market of the 1990's. John Hussman has also done an excellent job Morningstar says of keeping shareholders updated and informed in "real" time. That should allow shareholders to make "informed" decisions as stock market conditions change. Kudos to Mr. Hussman in that regard. With a current expense ratio of 1.99%, Hussman Strategic Growth Fund isn't cheap. Then again, no one is upset with this fund's excellent performance so far. As time goes on, and assets grow, the fund's operating expenses "should" come down. Conclusion While the Hussman website states that the Strategic Growth Fund is designed to be a well-diversified "core" holding, Morningstar suggests this fund should play a supporting role in a portfolio. I would tend to agree with Morningstar's assessment, since this fund carries special risks that most mutual fund investors don't understand (or fully appreciate). Hussman Strategic Growth Fund has the ability to hedge market risk by selling short U.S. stock indices in an amount equal to but not exceeding the value of its holdings. When market conditions are believed to be favorable, Hussman has the ability to "leverage" the amount of stock he controls to as much as 1 1/2 times (150%) the value of net assets, typically by purchasing call options on individual stocks. And, as indicated earlier, that leg of the strategy has yet been tested or proven. Still, it's hard to dispute what Hussman has accomplished so far. Hussman Strategic Growth Fund is no trick; it is a treat! Happy Halloween. Steve Wagner Editor, Mutual Investor email@example.com ************************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 *********************** The Real Test Begins October is over and the need for funds to hold their nose and buy stocks has passed. The real market should begin to appear once the economic reports for Friday are released. 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The Option Investor Newsletter Thursday 10-31-2002 Copyright 2002, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Stock Picks: Force of Habit Dropped Calls: CI, PNRA Dropped Puts: None Daily Results Call Play Updates: AZO, FRX, TRMS, WPI New Calls Plays: FCS Put Play Updates: HIG, NTRS, SPW New Put Plays: LEH *********** STOCK PICKS *********** PMCS - PMC-Sierra - $4.87 Strategy: Long stock with put insurance Technology stocks are maintaining their habit of leading the broad markets. Just as they led on the downside over the past year, 'kinky' groups like Semiconductors and the Networkers are finding favor with investors all over again. Just in the past 3 weeks, the Semiconductor index (SOX.X) is up 40% and the Networking index (NWX.X) has tacked on a whopping 47.5%. That's pretty impressive in light of the fact that we haven't yet gotten a firm indication of improving fundamentals in either sector. Clearly, short-covering is playing a major role in the rally we've seen in the past 3 weeks, and it remains to be seen if it is sustainable. More than likely we'll see a healthy pullback in the near-term, which should be met with renewed buying interest (buying interest, not further short-covering) at a higher level than the lows posted 3 weeks ago. As a supplier of high-performance integrated circuits to the manufacturers in the telecommunications industry, PMCS is wedged in the sweet spot between the Semiconductors and Networkers. So if the demand picture begins to improve, the stock could really take off. We haven't seen evidence of that improving demand just yet, and likely the only near term clue that we may get is CSCO's earnings next week. As you can see from the chart below, PMCS is going to have quite the battle with that 18-month descending trendline (currently at $6), and that will likely provide the catalyst for the next pullback towards solid support at $4. But so long as the news doesn't get any worse, investors seem to be indicating that the recent lows near $2.75 represent a practical floor for the stock. Perhaps that has to do with the fact that the company still has $2.47 per share in cash. To be sure, the fundamentals of the company are not rosy, as both of the industries it is associated with, have been decimated by the IT spending slowdown, especially in the Telecom sector. But with the company actually beating earnings estimates by a penny earlier this month, now may be the time to do a little bit of bottom fishing. Looking at the daily chart, PMCS seems to have some decent technical support in the $4.00 area, although we could see a possible dip to as low as $3.50 on a severe pullback (possibly in the wake of a less-than-favorable earnings report from CSCO). Ideally, we want to enter the play on a rebound from the $4.00 level, and if it is violated, we want to wait for a rebound back through that level before entering the play. Once the bulls get going again, the first obstacle will be to push through that formidable descending trendline at $6 and then we can start eyeing the $10 resistance level. While a rally to that level would represent more than a double on the play, if demand were to really start improving in the sector, the bulls could actually make a run on the $15 level. The play is to go long PMCS stock near $4.00 level and go long one contract of the Jan-2003 $2.50 puts SQL-MZ at $0.20 for each 100 shares you are long. There is no requirement to go long the put but it does prevent all but a very minimal loss should something unexpected happen to PMCS or the rest of the Networking industry. Option 1: If PMCS is not above $6.00 by Jan 2nd, close both positions and exit the play. Option 2: If PMCS is below $4.00 on Jan 2nd then you have the option of closing the put for a slight profit and lowering your basis in the long stock play by the amount of the put premium received or closing both positions and exiting the play. Option 3: If PMCS is above $7.00 by Jan 2nd, then close the put position for any remaining premium and set a stop loss on the stock at your entry point of $4.00 plus any short fall on the put premium. PMC-Sierra (PMCS) Weekly Chart **************** 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: ***** CI $36.14 +0.04 (-0.86 for the week) We were looking for a bounce on CI, which has held support since its big drop. CI appears to simply be moving sideways ahead of its official earnings release date tomorrow. We said in the original write-up that the news was already out, so earning's should not be much of an event, at least to the negative side. However, we didn't get the bounce and the stock has seen a series of lower highs since the drop. In keeping with our policy of closing the play before earnings, we will exit tonight. --- PNRA $32.50 +0.75 (-0.35 for the week) PNRA has been moving sideways since its run after breaking the 200-dma of $30.46 on October 18. While it has tacked on a couple of dollars, it appears to be forming a bullish flag. For that reason, readers who want to keep the play open will not get an argument from us. However, with the stock seemingly unable to hold gains above $33, we don't want to see our option premium decay further, and will walk away with the stock $1.55 higher than where we entered. PUTS: ***** None *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu Week AZO 85.77 -3.14 1.19 -0.18 1.75 trendline bounce CI 36.14 -0.92 -1.89 -0.69 0.04 Drop, earnings FCS 11.90 -0.74 0.22 0.75 0.90 New, low risk semi FRX 97.99 -0.45 1.08 1.00 –1.01 entry pullback PNRA 32.50 -0.28 0.03 -0.84 0.75 Drop, stalled TRMS 52.92 0.35 0.37 1.35 –0.43 saved by the bell WPI 27.49 0.40 0.98 0.29 –0.31 consolidating PUTS HIG 39.50 -1.70 -3.00 -1.83 –0.67 rolling again IP 34.93 -0.55 -0.23 -0.40 –0.56 below $35 LEH 53.27 -1.13 -0.58 -0.01 –1.89 New, weak into close LOW 41.73 -1.37 1.20 -0.77 –1.22 New, retail weakness NTRS 34.90 -0.08 -1.12 0.11 –0.80 slow but steady RTH 74.60 -2.11 0.15 -0.64 –1.36 New, weak economy SPW 42.01 -2.26 -1.44 0.24 0.66 bounce for entry ************************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 ******************** AZO $85.77 +1.75 (-0.18) As the mutual funds wrapped up their books for the month, they seemed to favor our AZO call play, in large part due to both the stock and company's strong performance over the past year. While the broad market failed to hold onto positive territory in the final hour of trading, AZO held onto the bulk of its intraday gains to post a better than 2% advance for the day. That rebound off the ascending trendline down near $81 looks like it is paying off again. Now significantly above that level, it is time to tighten up our stop and prevent giving back our gains in case the funds decide to sell their recent acquisitions tomorrow on the heels of what is expected to be more dismal economic news. Raise the stop to $83 tonight, which is just below yesterday afternoon's intraday low and the 20-dma (currently $83.48). If still looking to enter the play, an intraday dip and bounce from above the $83 level still looks favorable. Otherwise, look to enter on a breakout over $86.50, the site of Thursday's high. --- FRX $97.99 -1.01 (+0.84) In contrast to the rest of the market, FRX has actually seen fairly quiet trade this week. The $97 level has been providing a consistent floor, while bullish advances have been turned back below $100. Not only has the price action been rather subdued compared to the recent past, but so has volume, which has been drifting along near 75% of the ADV. This paints a mixed picture over the near term. It is encouraging to see the stock holding support, which helps to make the case that new entries on the intraday dips to support in the $96-97 area look attractive. On the other hand, we would sure like to see some upside follow through to give us the conviction that FRX has more upside in store for the bulls. Momentum type traders will want to wait for a push above $100 before stepping into new positions, but need to be cognizant of the fact that the stock won't be free and clear until clearing last week's intraday high at $101.75. Keep stops set at $95. --- TRMS $52.92 -0.43 (+1.68 for the week) In keeping with the Halloween spirit, Trimeris gave us quite a scare today. After rallying all the way to $54.60 this morning, the stock sold off with other biotechs the latter part of the day. However, after bouncing at $51, the stock found a surge of buyers once again at the end of the day. With no fundamental change in the company's planned release of Fuzeon, pending FDA approval in the middle of March, the future for TRMS still looks bright. The fact that the drug can be used with patients who have developed resistance to other HIV therapies, along with its lack of side effects, makes it likely to fulfill the promise of its high demand. Investors who are weary of today's mid-day sell-off can exit the play with a profit. However, with the renewed buying interest on the volume surge at the end of the day, we will leave the play open. The stock added another box to the PnF chart at $54, and traded at a level not seen since January 2001. The end of day rally took it back above resistance at $52 from the beginning of the week and earned it another day on the list, in spite of our concerns about the sell-off. New entries should wait for signs of support at $52, or a higher high, above $55. Our stop loss remains $50, just below today's bounce. Note that the company releases earnings on November 7, so we will be exiting ahead of that date. --- WPI $27.49 -0.31 (+1.67 for the week) Watson experienced mostly sideways movement today, as the overall market tried to make up its mind as to which direction it wanted to go. The stock has settled in since its recent run, following the announcement that it has once again expanded its product line to include three popular oral contraceptives when their patents expire. The stock has maintained the current level, and entry on a pullback is looking less likely. The stock recently broke out of a long- term, reverse head and shoulders pattern, with a measuring objective of $35. Now that the stock has left its 200-dma and 50- dma behind, the next resistance level is most likely $33, which is close to the objective of $35. It is still possible that the stock could re-test the 200-dma of $25.33, but with each day it consolidates at the current level, the stock looks stronger. New entries can enter here, now that we have seen support over $27 for the last three days. If the stock breaks below that level, then wait for the 200-dma re-test. The current bullish vertical count remains $42, with the bearish resistance line also far above at $48, leaving plenty of blue sky above. ************** NEW CALL PLAYS ************** FCS – Fairchild Semiconductor Int'l $11.90 +0.90 (+1.58 this week) Company Summary: Fairchild Semiconductor is a global company that designs, manufactures and market high-performance building block semiconductors critical for multiple end markets, with a focus on developing power and interface solutions. The company's products are used in consumer, communications, computer, industrial and automotive applications. FCS' products are organized into three principal product groups: Analog and Mixed Signal Products, Discrete Products and Interface and Logic Products. Additionally, the company produces non-volatile memory and optoelectronics. Why We Like It: After being one of the most-abused sectors for the past several months, it is refreshing to see signs of life returning to the Semiconductor stocks. To be sure, it is a bit disconcerting to see the SOX continue to rally in the face of the continuous negative stream of sector-related news, but perhaps there are a few diamonds in the rough that can provide attractive bullish plays. FCS seems to be one such stock, as it is outperforming the overall sector, and really put in a strong performance on Thursday. While the rest of the market was whipped about by the window dressing shenanigans, FCS blasted through the $11.50 resistance level that had been holding it back, and it did so on very strong volume of 3.5 million shares. That's not bad, when you consider that the SOX actually lost ground, once again falling under the $300 resistance level. What's driving FCS' strong performance is the old standby, solid earnings performance. The company beat street estimates by a penny when they announced earnings on October 17th, and they did so on revenues that rose more than 10% year-over-year. As has been the pattern lately, investors seemed to shrug off comments from the company that Q4 revenues will be down as much as 4-6%, as they were apparently expecting much worse news from the company. So long as this run continues, we might as well take a piece of the action. Ideal entries will come from a pullback to test the $11 level as support, although we'd be willing to accept a rebound from as low as $10, so long as the stock remains above its 50-dma (currently $10.06) on a closing basis. More aggressive traders can chase the stock higher on a breakout over $12.30 (Thursday's intraday high), but only if the SOX is showing strength over the $300 level. Place stops initially at $9.75. BUY CALL NOV-10 FCS-KB OI=323 at $2.30 SL=1.25 BUY CALL NOV-12 FCS-KV OI=550 at $0.70 SL=0.25 BUY CALL DEC-10*FCS-LB OI=135 at $2.70 SL=1.25 BUY CALL DEC-12 FCS-LV OI=119 at $1.20 SL=0.50 Average Daily Volume = 2.20 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 ******************* HIG $39.50 -0.67 (-8.38) Oh, if only we had been a day earlier. We initiated coverage of HIG on Tuesday, as shares of the insurer looked like they were about to break down. Apparently we weren't the only ones that thought the stock was looking weak, as it was selling off on strong volume following stronger than expected earnings reported on Monday. UBS Warburg really got the ball rolling yesterday morning with their downgrade to Hold before the open. Traders rushing for the exits pushed the stock to gap down to $42 and it then fell just below $39 before catching a very weak bounce. Traders that entered on the opening weakness got the best entry, while the rest of us have had to settle for looking for a rollover between $40-42. Even the volatility in the broad market hasn't been sufficient to lift HIG off the mat, with the intraday highs since the gap down, failing even to test the $41 level. Continue to look for failed rallies below the bottom of yesterday's gap to initiate new positions or else wait for a drop under $38.75 (just under yesterday's intraday low) to open momentum-based positions. We're lowering our stop to $42.50, just above yesterday's intraday high. --- NTRS $34.90 -0.80 (-1.66) The funds made several attempts on Thursday to dress up their windows, but in the end, selling pressure won out, in part due to apprehension about what tomorrow's economic releases will reveal about the sick economy. Banking stocks weakened again, with the BKX index sliding fractionally lower. Shares of NTRS have been dueling with the $35 support level, but lost that battle near the close with the stock finally slipping slightly lower. The pattern of lower highs and lower lows remains intact, as the stock continues to be pressured by the 2-week descending trendline, which has now fallen to $36. An early bounce tomorrow morning would generate a gift of an entry point, as the stock would likely roll over below that trendline yet again. But with the economic reports likely to be dismal, NTRS is likely to trade lower at the open, completing the breakdown under the $34.75-35.00 support level. Momentum traders will want to see a break below $35.50, with the BKX continuing to show weakness before adding new positions. Lower stops to $37. --- SPW $42.01 +0.66 (-1.91) After a 6-day, $14 slide, shares of SPW were due for a bit of a dead cat bounce. That's about all they got, as the stock weakly recovered from Tuesday's $41 level, crawling up to the $42 level by the close of trading today. So now that the funds have finished dressing up their windows, the question is whether SPW is ready to head south again. While that may be the case, we need to let the price action prove our case for us before plunging headlong into new positions. While a rollover from current levels can be used for new entries, a failed rally up near $43 or even $44 would be even better. If looking for continued weakness before playing, momentum traders will be best served by waiting for SPW to fall under $40.50 on strong volume before playing. For now, we're leaving our stop set at $45. ************* NEW PUT PLAYS ************* LEH – Lehman Brothers Holdings $53.27 -1.89 (-3.21 this week) Company Summary: Through its subsidiaries, LEH constitutes one of the leading global investment banks, serving institutional, corporate, government and high-net-worth individuals clients. The company is engaged primarily in providing financial services, including securities writing and direct placements, corporate finance and strategic advisory services, private equity investments and securities sales and trading. Completing its array of banking, research and trading capabilities, LEH also engages in the trading of foreign exchange, derivative products and certain commodities. Why We Like It: Amongst all the earnings and economic reports and the speculation over whether or not we'll be treated with another interest rate cut next week, you would think that the woes of the Brokerage sector had gone away. Nothing could be further from the truth, even in the wake of news that Citigroup will break off its Brokerage and Research arms in an attempt to appease government regulators. To recap, trading volumes are still anemic, there isn't any appreciable Investment Banking business to be had, layoffs are still percolating through the industry, and the major firms still have quite a gauntlet to run with respect to inquiries about their past business ethics. End of quarter window dressing may have propped up the Brokerage sector (XBD.X) through Thursday's session, but the charts are pointing to the $400 support level giving way in the near future. Not content to wait for its sector, LEH is already making strong strides towards its own breakdown, bidding farewell today to the $54.50 support level that has held the sellers in check for the past 2 weeks. There is some mild support just below, first at the 50-dma ($52.74), then the bottom of the mid-October gap at $52.50 and finally the 20-dma ($51.79). But if the XBD index gives way to the bears' advances, these levels will likely be just speedbumps along the way to filling that big gap down to the $50 level. More important perhaps is the PnF chart, which is on the verge of generating a new Sell signal. When LEH prints $53, we'll have a fresh bearish price target of $48 to work with, which just happens to coincide with the bullish support line. Aggressive traders can enter on any failed rally near the $54.50 level, which should now act as resistance. More conservative traders are going to want to wait for that print at $53, and possibly a drop under the 50-dma before playing. One final note in favor of the bears is that LEH just recently reversed from its 6-month descending trendline, currently $57.75. In order to give LEH some room to move, we're starting out with a fairly wide stop at $58, just above that descending trendline. Needless to say, if the stock breaks down tomorrow, we'll be tightening that stop significantly this weekend. BUY PUT NOV-55*LEH-WK OI=2399 at $3.10 SL=1.50 BUY PUT NOV-50 LEH-WJ OI=1814 at $1.10 SL=0.50 BUY PUT DEC-50 LEH-XJ OI=1365 at $2.55 SL=1.25 Average Daily Volume = 2.80 mln --- RTH - Retail Holding Company Depository Receipts - $74.60 -1.36 (-3.90 for the week) Company Summary: Retail HOLDRS are Depositary Receipts issued by the Retail HOLDRS Trust which represent your undivided beneficial ownership in the common stock of a group of specified companies that are involved in the retailing industry. The Bank of New York is the trustee. Retail HOLDRS may be acquired, held or transferred in a round-lot amount of 100 Retail HOLDRS or round-lot multiples. Retail HOLDRS are separate from the underlying deposited common stocks that are represented by the Retail HOLDRS. The Retail HOLDRS Trust is not a registered investment company under the Investment Company Act of 1940. (source: AMEX) Why We Like It: The retailing group rallied with the broader markets the last three weeks, but the cracks in the sector are starting to show. The first sign was this week's Consumer Confidence report that missed estimates by 10 points, which was a huge deficit. When consumers are worried about jobs and the stock market, they generally do not spend. GDP came in this morning below expectations, as well. While the market held up on the possibility that it solidified the possibility of a rate cut, it showed that the recovery is coming along more slowly than analysts thought it was. The trend of same store sales disappointments has continued for the last several months, and Wal-mart's comments that Halloween sales were below plans are an indication that holidays will not be enough to overcome concerns about the economy, when it comes to spending. That does not bode well heading into the holiday season. Same store sales growth expectations have been dialed down, as evidenced by Wal-Mart cutting their usual predictions of 4-6% to 2-4%. The industry was able to bounce from the Consumer Confidence report, but not from the WMT downgrade the next morning. Analyst comments accompanying the downgrade cited a continued slowdown in consumer spending into 2003. The Retail Index (RLX.X) managed to hold above its 50-dma until the Wal-Mart news hit, which kept us on the sidelines in regard to playing the RTH short. Albertson's, another RTH component, followed the Wal-Mart downgrade with a warning of its own, lowering 3rd quarter and full year estimates today. The RLX has now broken down through that 50-dma, confirming the same move in the RTH, and both have now seen resistance at those levels since the breakdowns. We are seeing rollovers in a number of retail stocks included in the RTH and feel a short play on the HOLDRS is the best way to take advantage of the group. The 50-dma in the RTH is $77.03 and cautious traders can wait for another test of that level before entering. We see the current level as an entry point. Place stops above recent resistance, at $80.00. More conservative traders can place stops just above the 50-dma, at $78.50. Our initial target is $70, however, the ultimate target on the play is $65, which is both daily support, and the PnF bullish support line. BUY PUT NOV-75 RTH-WO OI= 269 at $2.40 SL=1.20 BUY PUT DEC-75*RTH-XO OI= 133 at $4.00 SL=2.00 Average Daily Volume = N/A --- LOW - Lowe's Companies - $41.73 -1.22 (-2.12 for the week) Company Summary: With 2001 sales of $22.1 billion, Lowe's Companies Inc. is a Fortune 100 company that serves more than seven million customers a week at more than 800 home improvement stores in 43 states. The 14th largest retailer in the nation, Wilkesboro, N.C.-based Lowe's is the second-largest home improvement retailer in the world. (source: company release) Why We Like It: Lowe's experienced a bull run with the rest of the broader market over the last few weeks. However, that run stalled at $45, and the stock has slowly rolled over since that time. Poor Consumer Confidence numbers this week, which are an indication of consumers' willingness to spend, were followed by a downgrade of retail giant Wal-Mart, affecting the entire sector. Lowe's is concentrated in the home improvement field, which got bit of bad news yesterday, as well. Mortgage and refinancing applications fell 19% last week, which is not good for a company whose customers have been financing home improvements through refinancing. This also cuts into the business derived from customers purchasing fix-up homes. As we head into the holiday shopping season, more of consumers disposable income will undoubtedly be steered toward gift purchases, rather than new kitchens and baths. While those projects are often completed in time for the holidays, they are usually ordered more than two months ahead of time, and thus the season is past. The stock was unable to break the $45 level, however did manage to break through the $43 bearish support line on the PnF chart. However, $44 and $45 are strong resistance on the PnF, as well. A trade of $41 will amount to a three-box reversal and conservative traders can wait for that break to enter the play. a look at the daily chart shows that each breakdown of the 200-dma this year has been good for at least $3.00 and as much as $10.29, and an average gain of $6.03 on the four breakdowns. The stock broke its 200-dma of $42.95 on Wednesday is currently trading $41.73. Our target on the play is $37, which coincides closely with the average aforementioned gain, and was the recent low in early October. We see the current price level as an entry point, however alternative entries are a failed rebound at the 200-dma and the three-box reversal level of $41.00. Place stops at $45. BUY PUT NOV-42.50*LOW-WV OI= 1036 at $2.20 SL=1.10 BUY PUT DEC-42.50 LOW-XV OI= 39 at $3.40 SL=1.70 Average Daily Volume = 5.59 MIL ************************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 Thursday 10-31-2002 Copyright 2002, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: Put - RTH Traders Corner: Dow Theory and Technical Analysis: Part 1 Traders Corner: ADX: Truth or Hoax? Futures Corner: New information on the November 8th launch date of Single Stock Futures (SSFs). Options 101: Bear Call Spread Revisited ********************* PLAY OF THE DAY - PUT ********************* RTH - Retail Holding Company Depository Receipts - $74.60 -1.36 (-3.90 for the week) Company Summary: Retail HOLDRS are Depositary Receipts issued by the Retail HOLDRS Trust which represent your undivided beneficial ownership in the common stock of a group of specified companies that are involved in the retailing industry. The Bank of New York is the trustee. Retail HOLDRS may be acquired, held or transferred in a round-lot amount of 100 Retail HOLDRS or round-lot multiples. Retail HOLDRS are separate from the underlying deposited common stocks that are represented by the Retail HOLDRS. The Retail HOLDRS Trust is not a registered investment company under the Investment Company Act of 1940. (source: AMEX) Why We Like It: The retailing group rallied with the broader markets the last three weeks, but the cracks in the sector are starting to show. The first sign was this week's Consumer Confidence report that missed estimates by 10 points, which was a huge deficit. When consumers are worried about jobs and the stock market, they generally do not spend. GDP came in this morning below expectations, as well. While the market held up on the possibility that it solidified the possibility of a rate cut, it showed that the recovery is coming along more slowly than analysts thought it was. The trend of same store sales disappointments has continued for the last several months, and Wal-mart's comments that Halloween sales were below plans are an indication that holidays will not be enough to overcome concerns about the economy, when it comes to spending. That does not bode well heading into the holiday season. Same store sales growth expectations have been dialed down, as evidenced by Wal-Mart cutting their usual predictions of 4-6% to 2-4%. The industry was able to bounce from the Consumer Confidence report, but not from the WMT downgrade the next morning. Analyst comments accompanying the downgrade cited a continued slowdown in consumer spending into 2003. The Retail Index (RLX.X) managed to hold above its 50-dma until the Wal-Mart news hit, which kept us on the sidelines in regard to playing the RTH short. Albertson's, another RTH component, followed the Wal-Mart downgrade with a warning of its own, lowering 3rd quarter and full year estimates today. The RLX has now broken down through that 50-dma, confirming the same move in the RTH, and both have now seen resistance at those levels since the breakdowns. We are seeing rollovers in a number of retail stocks included in the RTH and feel a short play on the HOLDRS is the best way to take advantage of the group. The 50-dma in the RTH is $77.03 and cautious traders can wait for another test of that level before entering. We see the current level as an entry point. Place stops above recent resistance, at $80.00. More conservative traders can place stops just above the 50-dma, at $78.50. Our initial target is $70, however, the ultimate target on the play is $65, which is both daily support, and the PnF bullish support line. BUY PUT NOV-75 RTH-WO OI= 269 at $2.40 SL=1.20 BUY PUT DEC-75*RTH-XO OI= 133 at $4.00 SL=2.00 Average Daily Volume = N/A ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** TRADERS CORNER ************** Dow Theory and Technical Analysis: Part 1 By Leigh Stevens lstevens@OptionInvestor.com A funny thing happened on the way to writing this, my next Trader’s Corner article – I noticed that, in terms of Dow Theory, there has been NO “confirmed” sell “signal” given since the 2000 top at least on a monthly closing basis. This was a revelation and I decided to take up the topic of what Dow’s work might tell us about the market today and its great importance as a foundation for the technical (analysis) approach to understanding market trends. It’s important to understand that Charles Dow considered his ideas on the market (he didn’t call it “Dow Theory”) to be the broad strokes and provide the big picture for INVESTMENT purposes only. He used closing prices only. Moreover, he would use a monthly close quite often, rather than on a daily or weekly basis. I’ll get to Charles Dow and how he expected the averages to behave relative to each other (and to his overall theory of how the markets work in a subsequent article). As we are closing out the month, I first present a monthly chart of the Dow Industrials or Dow 30 stock average compared to the Dow 20 Transportation average – So, what’s this all about you may say? And, after losing 34% from the highest to lowest close in the Dow 30, what “good” is a market theory that suggested that there is still a green light on staying invested? By the way, I am making an assumption that not all Dow Theorists would make, which is that the prior SIGNIFICANT low was the major closing low at 7539 in ’98 as noted on the chart above and not the more minor downswing low 3 months before the final 2000 peak. Dow Theory is not a system of market timing exactly, only a forecaster of the major or “primary” trend (over years, not months or weeks) and a good forecaster of the deeper recessions – more then we’ve experienced in the last two years which was actually fairly mild. The real “recession” (depression?) was in tech stocks, not in the mainstream economy which the Dow 30 represents. Now that I’ve suggested where we stand currently in terms of a Dow Theory signal – still on a “buy” or “stay invested” track – let me back up and talk about Charles Dow, who is the father or “grandfather” of technical analysis. Back in the 1880’s and 1890’s, Charles Dow (who, along with Edward Jones formed Dow Jones & Co.) came up with the first stock market averages, which became, over time, the Dow Jones 30 Industrial, 20 Transportation and 15 Utility stock averages as known today. I tend to call the Dow Industrials the “Dow 30” as these stocks have become more technological, manufacturing and service oriented and less industrial, unlike the case of the heavy industry stocks like U.S. Steel that were part of the early Dow. Today common parlance is “the Dow”, or the “Dow Jones” for this average. This average of 30 stocks is not capitalization weighted, as is the case of the Standard and Poor 500 or Nasdaq Composite index. Dow stocks of companies that have become price laggards, even if they’re much smaller companies than say General Electric, can have more of a dragging effect in the PRICE weighted Dow 30 average than indexes that give more weight to these larger companies with far more shares outstanding; e.g., the S&P 500(SPX). Only the Dow Industrials and Dow Transportation (then a group of railroad stocks) averages are used in what became known as “Dow theory”. Charles Dow never called the market principles he wrote about a theory, only observations on how the economy and the market functioned. Dow’s principles were later discussed in a book by the Wall Street Journal Editor that succeeded Charles Dow, William Hamilton, and was called The Wall Street Barometer. Robert Rhea is credited with distilling the ideas of Dow further and wrote a book in the early-30’s called Dow Theory. In Part 2 (on Sunday, 11/3) – there may have to be a Part 3 to prevent any one article from being too long - I’ll get into the main tenets of Dow’s observations on market behavior, which is a lot more than just how these two averages behave. Nevertheless, one of Charles Dow most important contributions was the idea that “confirmation” of the primary trend must exist by the actions of BOTH the Industrial and Transportation averages. A related aspect to this, really the flip side of it so to speak, is the concept of “divergence”. Dow spoke mostly about confirmation – divergences between averages and between prices and volume or between price action and indicators is mostly what came in this century by various technical analysts. What Dow said was that if the Industrials moved to a new closing high or low, without the Transportation average following suit – “confirming” it – or vice versa, with the Transports going to a new peak or bottom, without the same action in the Industrials, no change in the primary trend was “signaled”. We are talking about the situation where there is a potential reversal in the primary trend. To suggest such a change, the averages must be synch. Now, the reasons for this are simple, but accounted for a very astute observation on Dow’s part. For example, industrial or manufacturing activity could continue to be very strong for a period of time while orders for those goods were slowing. This would result in the build up of inventories. Where such a slowdown would show up however, is in transportation orders and activity. Slowing orders in the transportation sector, as fewer goods were shipped, would result in a fall off of company revenues. Astute followers of these stocks would notice this and selling would start to show up in these stocks, either keeping a “lid” on stock prices or actually driving them lower. Conversely, manufacturing could start picking up but might not be at first reflected in a pick up in those stocks – however, an increase in shipping might be noticed more readily and cause those stocks to begin rising. The Dow Industrials might fall to a new low, but not be followed by the Dow Transports. Therefore, a new high or low in the Industrial average, not confirmed by the Transportation average is suspect. In the case of a new high not confirmed by the Transportation stocks it may indicate that the same slowing of earnings and hence stock prices, will show up later on in the Dow Industrials. This was NOT the case for the 2000 highs, as both the Dow 30 AND the Transports went to new closing monthly highs as you can see on my first chart above. Perhaps manufacturing activity in the past two years, as reflected in the Dow Industrials, has not declined so much that it put the Dow 30 to a new closing monthly low – its interesting that this most recent rebound was from an area of the major low in the Dow (month ending 8/31/98) prior to its 2000 price peak. Back in 1994 there was another important case of a new low in the Dow Transports not being followed by a new low in the Industrials– as has been true (so far) in 2002. Here I use a weekly chart, but the result would have been the same on a monthly chart basis - We can assume that manufacturing was holding relatively steady – perhaps there was not a big build up of inventories - but transportation stocks were suffering more relative to the heavy volume and good earnings that they were experiencing in the prior year(s). A different sort of “non-confirmation” is when a new low in the Industrial average is not confirmed by a similar new low in the Transportation stocks. It may be that shipments of goods has started to rebound and has shown up in a slowing of the decline of the transportation stocks or in an actual upturn in their prices, whereas industrial companies are just shipping already produced and built up inventories – a rebound in their earnings lies ahead still, after they start up their manufacturing lines again in earnest. In the chart below (also a weekly chart), depicting the 1998 to 2000 period, it is striking how failure to confirm new relative highs in the Dow Industrials in both 1998 and again in 1999, by a similar move in the Dow Transportation average, preceded major downside reversals in the Industrials within a few weeks to months. The 1999 example is the most striking - In the period shown in the above chart – you can observe that as the Industrial average was going to greater and greater highs, the transportation average was moving to ever-greater lows. Eventually, there was a sharp decline in the Industrials into late-1999 into early-2000, followed by a lengthily sideway trend with no further new highs. The flip side of a lack of confirmation is the warning signs posted by such pronounced divergences. It will be interesting to see, in terms of Dow Theory, if the primary uptrend continues now over the coming months or years. AND, whether there will be an eventual new high in the Dow 30 in coming years; i.e., above 11,500 on a monthly closing basis. Failure to make an eventual new high would mean that we were in a bear market in terms of Dow Theory, but at some point an old high should be exceeded to suggest that the primary up trend was alive and well. A major or primary bear market would be signaled however, if the Dow closed below 7539 on a monthly basis (per my first chart at the top). ************** TRADERS CORNER ************** ADX: Truth or Hoax? By John Seckinger jseckinger@OptionInvestor.com The Average Directional Index, or ADX, has recently got my attention because the Dow has been in a relatively trend less pattern since October 22nd. The question is, Has the ADX oscillator been reliable in the past, or is this just another trading tool that needs to be put out to pasture? The ADX is technically measured from 0 and 100; however, readings above 60 are relatively rare. Low readings, below 20, should indicate a weak trend and high readings, above 40, indicate a strong trend. The indicator does not grade the trend as bullish or bearish, but merely assesses the strength of the current trend. Note: A reading above 40 can indicate a strong downtrend as well as a strong uptrend. In theory, when the ADX rises from below 20 and/or moves above 20, it is a sign that the trading range is ending and a trend could be developing. When ADX begins to weaken from above 40 (example 60 to 50) and/or moves below 40, it is a sign that the current trend is losing strength and a trading range could develop. For example: If the ADX falls from 30 to 10 and then rises to 15, I will consider that a sign that a near bullish trend could be developing. The ADX gets a little more complex because there are two other Indicators to consider; Positive Directional Indicator (+DI) and the Negative Directional Indicator (-DI). The default setting is a length of 14 for DI readings, and a smoothing number of 14 for the ADX. I like to use the default because there is a good chance traders will keep this setting and look at the same numbers as myself. Feel free to chance the length and smoothing numbers, but be careful not to create an oscillator that dramatically legs the security it is following. Buy and sell signals are generated when these +DI/-DI indicators cross. A buy signal occurs when +DI moves above -DI and a sell signal when -DI moves above the +DI. Also with the ADX, there is something called the 'turning point concept. First, the ADX must be above both DI lines. When the ADX turns lower, the market often reverses the current trend. The ADX serves as a warning for a market about to change direction. The main exception to this rule is a strong bull market during a blow-off stage. The ADX turns lower only to turn higher a few days later. Ok, time to test the oscillator. Beginning with a weekly chart of the Dow, I interpreted a sell signal given as the +DI crossed under the –DI during April of 2001. It was also at the same time that the ADX (pink line) turned higher and did indicate the beginning of a trend. Another sell signal was given above Dow 10,000 as the +DI indicator fell underneath the –DI once again. The ADX continued its downward trend and was indicative of a market not ready to trend in one direction. However, the ADX wasn’t exactly going lower, either. Roughly one month later, the ADX was correct and the Dow really didn’t do more than trade in a range. Would that have stopped out traders that went long from the initial signal? Well, actually it should not have. The +DI never rose back above the –DI, so shorts should still have been maintained. Here is a possible problem: What if the Dow moves a thousand points and the +DI doesn’t rise above the –DI? Well, to increase probabilities, maybe it makes sense to put on a trade when the ADX has confirmed a trend change. It might reduce profits, but should certainly increase probability of a winning trade. Food for thought: Is there a ‘turning point’ formation taking place at the moment? The ADX is above both the +DI and –DI indicators, and we do not seem to be in a strong bull market (possible exception previously noted). Dow Jones, Weekly Looking at a daily chart of the Dow, the ADX fell underneath 40 and signaled a weakening of trend. The difference between the +DI and –DI also decreased; thus preparing traders for the beginning of a trend to take place in the near future. Then, during late August, the ADX line did begin to trend higher from below 20 and the +DI crossed above the –DI. This appears to be a great trade; however, it depends on the execution getting out of the trade. When the ADX began to turn down and the +DI met the –DI once again, the Dow rallied hundreds on points and closed above the 50 DMA. So, is there a solution? I would use moving averages as a complement towards entry and exiting equity positions. Dow Jones, Daily As can be seen in the above chart, the Dow is currently showing a 21.34 rating and represents a trend less market. With that said, I pulled up a 30 minute chart from mid- to late September when there was a better trend taking place. Looking at the 30-minute chart and oscillator readings, there was a solid sell signal given above 8200 as the +DI fell underneath the –DI indicator and the ADX line turned higher and indicated the possibility of a trend. It was 400 points lower when the ADX line broke its upward trend and gave an indicating that shorts would cover. Looking at the right hand side of the chart, the ADX is currently trending higher, and the –DI index spiked higher to 50 and then fell under 40 (sounds like short covering to me). Moreover, the spread between –DI and +DI looks to be narrowing. The ADX has not reached 40 (sign of strong trend), but I feel that forces traders to miss a good part of the move. Dow, 30 minute In conclusion, I felt that the ADX oscillator actually works fine. Should it be the only indicator used? Definitely not; however, long-term traders should have good results if they wait for the +DI to cross the –DI and the ADX line is solidly trending higher. With that said: I give this oscillator a “Truth” rating. Good luck. ************** FUTURES CORNER ************** New information on the November 8th launch date of Single Stock Futures (SSFs). by Alan Hewko futures@OptionInvestor.com SINGLE STOCK FUTURES News was released today about next Friday's (November 8th) start information regarding Single Stock Futures (SSFs). In a prior column, I had written an article on Oct. 13th covering their basic information, and it can be read at http://www.OptionInvestor.com/futurescorner/101302_3.asp SSFs are set to start trading next Friday on Nov. 8th. Most futures brokers as I understand the situation are ready to begin trading them on their Nov. 8th start date. It is also my understanding that very few Stock and Option Brokers will allow you to trade SSFs at this time. Preferred Trade as an example is giving an approximate time period of "hopefully by year-end" to begin trading them. SSF's Trading hours are from 9:15 AM to 4:02 PM EST. OneChicago is the newly created Exchange for SSFs and their website is www.OneChicago.com The "front month" for SSFs shall be Dec 2002. The full press release, along with the actual stocks that shall start trading SSFs on Nov. 8 is below. __________________________________________________________________ PRESS RELEASE - OneChicago OneChicago Announces Products for Nov. 8 Launch. CHICAGO, IL – Oct. 30, 2002 – OneChicago, LLC today announced the first single stock futures to be traded at its launch on Friday, Nov. 8, 2002, pending regulatory approval. The Exchange also listed the single stock futures that had not already been revealed to be offered during the first weeks of trading. OneChicago Chairman and Chief Executive Officer William J. Rainer said, "OneChicago is offering futures on some of the most actively traded stocks from a variety of industries. Our intention is to continually add new products every two weeks until we have a complete menu of 100 security futures offerings." The initial product launch, which will trade with December 2002 contracts as the front month, include: Bank of America Corp. (BAC) Best Buy Co. Inc. (BBY) Brocade Communications Systems Inc. (BRCD), Citigroup (C) Dell Computer (DELL) Exxon Mobil Corp. (XOM) General Electric (GE) Goldman Sachs Group Inc. (GS) Hewlett Packard (HPQ), Home Depot Inc. (HD), Johnson & Johnson (JNJ) JP Morgan Chase & Co. (JPM) Merck & Co. Inc. (MRK), Microsoft Corp. (MSFT) Nokia Corp. ADR (NOK) Oracle Corp. (ORCL) Philip Morris (MO) Qualcomm Inc. (QCOM) SBC Communications Inc. (SBC) Schlumberger Ltd. (SLB) Veritas Software Corp. (VRTS) OneChicago also unveiled additional single stock futures not previously announced that will be available for trading in the weeks following the launch. They include: 3M (MMM), Alcoa Inc. (AA), Altera Corp. (ALTR), Boeing Co. (BA), Caterpillar (CAT), Disney Co. (DIS), Dupont (DD), Eastman Kodak (EK), Honeywell Int’l Inc. (HON), International Paper Co. (IP), Maxim Integrated Products Inc. (MXIM), McDonald’s Corp. (MCD), San Disk Corp. (SNDK) and United Technologies Corp. (UTX). The Exchange is listing futures on narrow-based indices as well, which are already listed on the OneChicago Web site at www.OneChicago.com. OneChicago is a joint venture of the Chicago Board Options Exchange® (CBOE®), Chicago Mercantile Exchange Inc. (CME) and the Chicago Board of Trade (CBOT®). All of OneChicago’s products will be electronically traded on the CBOEdirect® match engine and can be accessed through both CBOEdirect® and GLOBEX® platforms. Both single stock futures and futures on narrow-based indices can be carried in either securities accounts or futures accounts. ************************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 ************************************************************** *********** OPTIONS 101 *********** Bear Call Spread Revisited Buzz Lynn buzz@OptionInvestor.com OOPS! The law of probability says that some trades are bound to get off to a rocky start. We talked last week about bear call spreads using IBM as an example, which clearly fits that bill. We want the price moving down in order to profit from our spread, but the price is moving up! Panic - we're stuck! OK, let's take a deep breath and clear our minds for minute from that unavoidable sinking feeling when a trade moves against us. It isn't as bad as we think as long as we keep a clear, cool head. In essence, we're going to examine the trade again to determine that age-old traders' question (with apologies to The Clash from 1982), "Should I stay or should I go?" Here's a recap of where we left off. We had opened a bear call credit spread: IBM-KM NOV 65 = $8.10 bid - short IBM-KO NOV 75 = $1.80 ask - long Net credit = $6.30 in our pocket. $6.30 was our maximum potential reward for IBM closing under $65 by November expiration. Our maximum risk of loss would be $3.70 if IBM closed $75 or over at November expiration. We entered this with IBM trading at about $72. IBM trades at nearly $79 today. Thus, the trade has run against us. And that panic, fretting and fear of loss starts running wild in our brains. Maybe we're even losing sleep over it. OK, put the brakes on those thoughts. It's time to collect ourselves. I remember reading probably 11 years ago a passage in the book, "The 7 Habits of Highly Effective People" by Steven Covey. It was a helpful book, by the way, in that it really encourages us to focus most on the "Important, Not Urgent" aspects of our lives. It all boiled down to a simple concept, "Begin with the end in mind". Something like writing our epitaphs and then doing the things with our lives that would enable those words to be placed on our tombstones and to have nice things said about us in eulogy. Beginning with end in mind is exactly how we should enter every trade. "Great Buzz, you big smart aleck. The end I had in mind was to make a profit, and it aint here yet!" I know, but that's not what I mean. One of the basic rules of trading is that we always know our entry and exit BEFORE we ever enter the trade. And before we know that, we have to have REASONS WHY we're entering the trade in the first place. Let's recap - we entered this trade having evaluated risk and reward and determined that the risk of $3.70 was worth the reward of $6.30. We looked at the charts and decided that IBM was nearing resistance and that a price move to $75 might make the ideal entry. Most importantly, we interested in the likelihood of collapsing volatility premium and time decay that would both work in our favor on this play even as we slept. Our most important factor - volatility and time decay - are still very much intact. Our risk and reward are still quantifiable, as exactly as they were last week. Also, we still have time to be right and let the oscillators do their job. While the price has moved against us, the principles guiding the trade are coming true. So just how far under water have we gone? Well, at $79, we're subject to the extent of maximum risk penalty of $3.70. This is where a personal decision has to be made. Perhaps we can exit the trade early and avoid losing the whole $3.70. As I write this, IBM trades at $79.09. In order to close the position, we would have to buy back the short NOV65 call and sell back the NOV75 call. The NOV65 costs $14.40. We can get $5.10 for our NOV75 call. That would cost us $9.30 net. But remember, we have a $6.30 credit from opening the position to offset that. $9.30 cost minus a $6.30 credit equals a net $3.00 loss. We can book that $3 loss, or "roll the dice" and maybe or maybe not lose the whole $3.70. That's a personal choice we each have to make. My personal thinking goes back to the recap of two paragraphs above. I remember why I entered this trade. I remember the risk I committed to taking - $3.70 worth. I was willing to live with that possible outcome, and I still am because other than price, the trade still stands on the principles in which it was entered. This may sound harsh, and not very touchy-feely. But those who have switched their "feelings" about the trade and have now decided that risking $3.70 is no longer acceptable should evaluated their risk tolerance BEFORE entering the trade. That emotional change of heart based on fear of loss will prove deadly to an attempted long-term career as a trader. The point is to remember that we took a calculated risk to enter the trade, and if those principles still apply, we stick with it. Please don't misunderstand. Our job in the trade is not to "take the pain" and hope to be right. Our job is to enter initially or stay out based on our own determination of risk and reward. We make the decision to stay or go before we ever enter the trade. Better to have stayed out on unwillingness to lose $3.70 than change the strategy and lock in the $3 loss. In other words, we stick to the plan on principle than change it on emotion. All that said, what could we do from here? Any change we might salvage the play? The answer depends a lot on risk profile and our willingness to guarantee a $3 loss, limit loss to $3.70 by staying the course, or assuming more risk and potentially reaping reward. We must decide where we stand and "know thyself". Each branch of that decision tree must be evaluated. The first two, we've already evaluated. Assuming more risk is really a separate trade and should be evaluated completely independently of the position we already hold, If we are thinking, "Great, an opportunity to make up for our loss", we are dead meat. That's a dangerous emotion belonging to a gambler. It must be evaluate as a fresh trade. So let's evaluate starting with the chart. IBM chart - IBM (weekly/daily/60): Well, $75 resistance was broken and $80 is looking like a formidable next stop of resistance. We can see that on the weekly chart, as well as the weekly stochastic entering overbought. Take a look at the daily too. Notice the overbought stochastic on both the 10 and 5 period lookbacks. Just to keep it interesting, I threw on a volume chart, as well. Notice that volume increased during the selling that started in late September and volume began declining on the recent advance from early October. We note the 60 chart is also peaking just under $80 and candle action is beginning to weaken as the stochastics have lost their "oomph" in the thin air around the current price. This still looks like a great short candidate to me, only this time with a better entry. Were I going to enter another bear call spread, shorting the $75 call ($5.00) and going long the $85 call ($0.50) yields would yield a $4.50 credit. But that leaves $5.50 of risk. Too much risk and not enough reward for my taste this time around. But there is another factor missing here too. Volatility isn't as great as it was a week ago, which reminds me that I don't have quite as much to gain from a volatility collapse. Personally, I think a volatility collapse back under 30 is unlikely for the current option cycle. For this reason, I'd personally rule out entering a new 75/85 bear call spread. What to do? Let's see, volatility is down slightly; DEC contracts would have even less volatility in the put option prices, which leaves more time to be right. You know, I might just consider buying straight puts this time around. Of course, there are no guarantees, but this looks to me like an even better entry if we are to bet on future declines in IBM. Not only that, but we may yet be right on the first bear call spread for all the right reasons. Make a great weekend for yourselves! Happy Halloween! Buzz ********** 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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