The Option Investor Newsletter Thursday 11-14-2002 Copyright 2002, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Dell Rocks Futures Markets: The Third Friday Index Trader Wrap: Not as bad, gets better than expected response Market Sentiment: In a Pinch Weekly Manager Microscope: William Fouse & Thomas Loeb: Vanguard Asset Allocation Fund (VAAPX) Updated on the site tonight: Swing Trader Game Plan: Did The Trend Just Change? Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 11-14-2002 High Low Volume Advance/Decline DJIA 8542.13 +143.60 8545.11 8403.69 1.81 bln 2334/ 881 NASDAQ 1411.52 + 50.20 1411.63 1378.94 1.72 bln 2337/1078 S&P 100 461.14 + 10.43 461.32 450.61 Totals 4671/1959 S&P 500 904.27 + 21.74 904.27 882.53 RUS 2000 386.24 + 10.13 386.24 376.11 DJ TRANS 2339.12 + 48.20 2339.24 2291.42 VIX 32.60 - 3.68 34.64 32.06 VXN 52.40 - 2.06 50.61 49.86 Total Vol 3,706M Total UpVol 526M Total DnVol 3,144M 52wk Highs 112 52wk Lows 147 TRIN 0.44 PUT/CALL 0.58 ************************************************************ Dell Rocks The AMAT earnings after the bell yesterday were grim with guidance for another -20% drop in orders in the fourth quarter and a forecast for another 6-9 months of declining chip demand. Dell hit estimates which were raised twice in the quarter and said the fourth quarter was shaping up for another rise in revenue. Both companies are heavily dependent on the current economy but they appear to be living on different planets. Dow Chart – Daily Nasdaq Chart – Daily The AMAT news was grim but the chip sector soared to a huge gain on the bad news. The SOX was up +23.48 with many chip makers breaking out to a new recent high. Obviously if you want logic don't look in the stock market. The consensus appeared to be that the bad news was already priced in after the recent AMAT restructuring news and everybody expected worse. That leads us to the following assumption. Dell posted what could only be called a remarkable quarter. When everyone else was growing +2% Dell grew +22%. They said they were continuing to steal market share from HWP and GTW and their server and notebook business was soaring. The server side of the business gained +27% for the quarter. Michael Dell said the fourth quarter was shaping for another +10% gain over the third quarter. Dell said business spending had stabilized and was no longer dropping. This brought back memories of the Dell of yesteryear. Constant growth at the expense of others and continued branching out into other tech areas where its business model would give it the edge over competition. Dell said it was turning over inventory 99 times per quarter and that gave them a price and feature edge over the other box makers. The bottom line to this story is that Dell is firing on all cylinders and kicking box maker butt. This is a strong win for Dell but only Dell. The only positive thing Dell said about the market was that IT spending had quit falling. Dell is gaining share from rivals not from business expansion and increased capital spending. However, the news "should" be positive for Dell stock but it was trading down in after hours. Surprised? You shouldn't be. The strong gains Dell stock posted in the last month were based on Dell raising/affirming guidance twice during the quarter. The good news was already priced into the stock, which was trading at six month highs. In later news the COO said on the conference call that "we are not sure the industry is going to see a particularly strong Q4 and that is the big question mark in our outlook. "IF" we see better industry numbers then we could do better." He must have been listening to the IBM call yesterday. Now for the assumption. If AMAT trades up after posting a grim quarter AS EXPECTED then should DELL trade down after posting a strong quarter AS EXPECTED? Dell dropped -$1 in after hours and Nasdaq futures were down -4.50 in early trading. This is of course temporary and tomorrow is another story. With the extreme bullishness exhibited today I would be surprised if the "business spending has stabilized" comment did not fuel some more gains. Bad news equaled good news again. The bad news was that retail sales were flat for October. This was also good news because the bottom did not fall out as many analysts had expected. Autos were the major cause of the flat line as the biggest decrease in sales. Without the auto anchor consumer sales actually grew +0.7% with winter clothing leading the charge. Adding to this "bullish" news was a minor drop in initial jobless claims of -8,000. The markets roared off at the open and you would have thought the total jobless claims were 8,000. The key number was the +89,000 increase in continuing claims, which indicates the number of people out of work is still growing. Also, the weekly number, which got so much positive press, was not even a complete number. The Veteran's Day holiday caused some data to be left out and this number will be revised next week. There was also no allowance for the increase in temporary holiday jobs causing seasonal dips in the jobless claims. The bottom line again was that traders wanted an excuse to buy stocks and this was the best one available. Remember it was just yesterday that Greenspan said there were "no signs of appreciable vigor" in the economy and warned we were in a "soft spot". That soft spot hit Sprint, which announced another -1,600 job cuts and Lehman Brothers, which announced -500 cuts after the close. They said their chief investment strategist Jeffery Applegate was also fired. Economics for tomorrow include Business Inventories, PPI, Industrial Production, Capacity Utilization and Michigan Sentiment. The Industrial Production and Sentiment are going to be the most important. The markets ran up to stop just under resistance once again and the internal market indicators are showing very overbought conditions. The Dow has strong resistance at 8550 and closed at 8541. Nasdaq at 1425 and closed at 1410. The SPX/OEX are both within a couple points of critical resistance levels. With option expiration tomorrow there is a good chance we will see some pinning at critical levels like OEX 460, SPX 900, Nasdaq 1400, DOW 8500. The exception to this forecast would be a breakout based on the Dell earnings, which would make no sense other than some positive sentiment since it is a Dell only story. A breakout over those levels mentioned above could generate significant short covering. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** The Third Friday By John Seckinger jseckinger@OptionInvestor.com Equity options technically expire Saturday immediately following the third Friday of the expiration month; therefore, all eyes should be focused on the S&P tomorrow and how closely it gravitates around the 900 level. Note: Options on cash indices expired on Thursday. Thursday, November 14th at 4:15 P.M. Contract Net Change High Low Volume ES02Z 902.75 +17.00 905.75 881.25 621,610 YM02Z 8518.00 +93.00 8546.00 8390.00 21,538 NQ02Z 1051.50 +35.00 1066.50 1002.00 265,473 ES02Z = E-mini SP500 futures YM02Z = E-mini Dow $5 futures NQ02Z = E-mini NDX 100 futures Note: The 02Z suffix stands for 2002, December, and will change as the exchanges shift the contract month. The contract months are March, June, September, and December. The volume stats are from Q-charts. Making Headlines: Initial claims fell 8k to 388 (analysts expecting 396k), while October Retail Sales (ex-autos) increased 0.7% versus expectations for a 0.3% increase. Also, HSBC announced plans to acquire Household Intl. for $14 billion dollars, or $30 a share. Shares of HI closed at 27.50. In other news, Argentina announced that it is going to default on payments to the World Bank. Additionally, shares of Honeywell (HON) came under pressure following a downgrade amid asbestos concerns. Wednesday’s Potential Catalyst(s): Reaction to DELL’s earnings (came in-line at 0.21), as well as October PPI (8:30 a.m.), Industrial Production (9:15 a.m.), and November Michigan Sentiment figures (expectations at 82 versus 80.6 in October). Notes: The bond market collapsed on Thursday, falling over 2 full points (64/32) and giving equities an underpinning bid for the entire session. It did seem as though some good profit taking would enter stocks; however, it never truly materialized. A stronger dollar also played a role in the enthusiasm within the general equity market. Most futures markets began the session gapping above solid resistance levels, with some (ES) testing levels just underneath these ‘now support’ levels before trending higher throughout the session. In other news, there certainly was a lot of talk about the potential H&S formation within all major indices. ================================================================= Longer Term View, S&P 500 Let us begin with a weekly chart of the S&P 500 and establish a long- range projection. If the index decides to ‘pin’ the 900 area on Friday as options expire, sentiment will have changed from bearish (earlier in the week, when the index was below 886.86 – blue line) to more neutral levels. With that said, a weekly close below 886.86 should be viewed as an opportunity for intermediate traders to short the ES02Z contract with the expectation that the SPX will trade down to 842. That is the bearish scenario. The bullish scenario still requires a few things to fall into place. One is for the index to remain above 900 and settle above it 22 Weekly Moving Average, not shown, currently at 914.46. A close above the 22 WMA should be the catalyst for a test of the 38.2% retracement area at 923. If the index closes above 923, intermediate traders should then expect a move above the upper bearish red trend line (currently at 950). This ‘laddered’ bullish scenario will require a trailing stop just below the aforementioned areas. A bit tighter than necessary for long-range traders; however, the current geopolitical risk makes the trading environment a bit riskier. Therefore, it makes sense to err on the side of caution. Chart of SPX, Weekly Getting to a swing trader’s mentality, a 60-minute chart of the SPX shows a “zone of resistance” from 907-910, and traders keying off the SPX to close near 900 on Friday could use this level to place a potential short position. Stops should be placed at 915, since there is not much resistance from roughly 914 to 925.66. If the SPX index falls under the 899.37 pivot, look for a move to 894 before buyers step in. This support area will most likely line up with the bearish trend line from June. It appears the most optimistic bearish opportunity on Friday is a move to 886.68, and that could be played once 892 is penetrated on good volume. Chart of SPX, 60-minute A 5-minute chart of the ES02Z contract shows a short-term regression channel containing prices relatively well during trading on Thursday. Furthermore, the mid-regression line (from a daily chart) bisected prices near the highs of the session. Because of option expiration, I would key off the cash market pretty heavily on Friday when initiating positions. Then turn to the ES02Z market for the exit. With that said, the SPX contract at 907 should line up nicely with the mid- regression channel. Therefore, a potential trade would be to Go SHORT ES02Z contract at 905 (or 899 if market opens lower) with at stop at 910 (or 904). The target would be 895 and 890, respectively. Chart of ES02Z, 5-minute Turning to the NQ02Z contract, a 120-minute chart seems to capture sentiment pretty well for the Nasdaq-100 Index. With the market under resistance at 1058, look for a potential move to 1023.50 and then the upward trending blue line (currently at 995). The blue line would be the best-case scenario. I would be more inclined to play this market responsively (sell resistance, buy support) than the ES contract; therefore, a potential trade would be to Go LONG at 1023 with an objective of 1050 and stop at 1014. If the market rallies, look to Go SHORT at 1080 with a target of 1060 and stop at 1090. Chart of NQ02Z, 120-minute Most likely, technicians are going to be focusing on a possible H&S formation in the Dow and the likely drawing of the left shoulder near 8560. If prices continue to rise above 8550-60 area, the major regression channel comes in at 8670 and should temporarily halt the enthusiasm. On the downside, a move below the lower channel of the shorter regression channel (upward trending) at 8485 will most likely get new shorts involved and buyers stepping to the sidelines until either 8400 or 8331 (horizontal blue line). . Chart of Dow Jones, Daily Taking things to a more micro level, the YM02Z contract shows support at 8505 and below at 8492. If prices move below 8492, a potential trade would be to Go SHORT YM02Z contract at 8485 with a target of 8437 and stop of 8525. An optimistic objective for bears on Friday would be for a test of 8405, which would become our eventual target if the market doesn’t bounce from 8437. If the YM contract finds a bid, a possible play would be to Go LONG at 8565 with a target of 8670 and stop at 8520. Note: Resistance will definitely be felt at 8600, so re-evaluate market conditions once reached. Chart of YM02Z, 3-minute Good Luck. Questions are welcomed, John Seckinger jseckinger@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** Not as bad, gets better than expected response A bear has got to be raking the bark from trees as October retail sales came in at unchanged, but was better than the economists had expected. That news, combined with weekly jobless claims of 388K, which was also better than the forecasted 396K and a four- week average falling below 400K to 397K got a better than expected response from the market as investors pushed stocks back near their recent recovery highs. The move higher in equities was helped along not only from angry bears covering on the "not as bad as expected" news, but also by a fresh round of cash coming out of Treasuries as the 2, 5, 10 and 30-year Treasury bonds all found selling, with the longer- dated 30-year December futures (us02z) 111'07 -1.63% falling sharply as YIELD ($TYX.X) 4.926% jumped sharply back above its 50-day SMA, which bearish technicians had probably looked to begin serving as resistance. The benchmark 10-year also found a strong round of selling as its YIELD ($TNX.X) 4.021% jumped in similar manner and above its 50- day SMA, to close just under a starting to round flat 21-day SMA. Near-term, this may be the bond YIELD that gets some technical attention from stock and bond traders should further selling take place in Treasuries and have this benchmark bond breaking higher above the 21-day SMA at 40.35, or 4.035%. As crazy as it may sound or seem to you and I, the floor traders in equities will make buy/sell decisions as the bond market dictates, while the same is true for the bond traders themselves. One thing I did tonight at the close is quickly "click through" the major indexes and multiple sector charts, looking for an index or sector that had been able to break above its recent October highs. Looking for some type of breakout to hint that the MARKET was willing to push at least on group to upside ground. While I was unable to discover these technical, its worth noting that the Wireless Telecom Sector (YLS.X) 52.34 +4.8% did close at a new relative high, just above its longer-term 200-day SMA, but just shy of its November 4th relative high of 52.86. Wireless Telecom Sector Chart - Daily Interval Wireless Telecom stocks made a new relative closing high today, which came just above the trending lower 200-day SMA. Past moves above the 200-day have been short-lived and sharply turned lower, but with some renewed selling in Treasuries, this rather volatile group of stocks, where 7-10% swings in a day are not uncommon looks to be a group that wants to push higher. A sustained move above the 200-day SMA would be DIVERGENCE from the past and hints that bulls are very aggressive and willing to take on risk. A move higher may also hint that bears are washed out and ready to call it quits. The rising 21-day SMA would be the bullish trader's trend, with a stop just under this trend of $45.76. It a group of momentum, and right now the momentum looks to be building on the upside. Sector components (AETH, AWE, CCI, CHL, DT, ERICY, LU, MOT, NOK, NT, NXTL, PALMD, PCS, QCOM, RFMD, TLAB, USM, VOD, VZ, WWCA). In today's 01:00 EST Update, I showed a "cleaned up" chart of the Dow Industrials and pointed out a POTENTIAL head/shoulder top with left shoulder at 8,560. In past commentary here, I've shown the Dow chart with horizontal resistance at 8,550, which a trade at that 8,550 level would have the Dow's 50-point box point and figure chart giving a "buy signal" and negating the current bearish count of 7,850. Contrary to some subscriber e-mail, I'm NOT an eternal bear. It's my job to point out POTENTIAL technicals regardless of bullish/bearish nature, to help all traders understand and better assess trade risk. It's hasn't been all that long ago, we noted similar technicals in the Dow. Dow Industrials Chart - Daily Interval It was back in August-September that many of the indexes showed head and shoulders tops and breaks of neckline. All we're doing currently is noting similarity and exercising some caution and not getting to skewed on the bullish side. However, it is notable that on September 3rd, the NDX bullish % reversed lower, the next day, the OEX bullish % reversed lower, the next day the SPX and Dow bullish % charts reversed lower. Currently, the market internals are showing strength, not weakness and should help the Dow break above 8,560 and make a rally attempt at 8,765 and perhaps 9,000. Today's action saw the Dow Industrials Bullish % ($BPINDU) see a net gain of 1 stock to a point and figure buy signal and the bullish % grows to 66.67%. In May of 2001, the Dow bullish % reached 80% before falling to 18% by September of that year (terrorist attacks helped the decline). Then in March of this year, the Dow bullish % reached a high of 76% before reversing lower to 3.33% this past July. The bullish % can always go as high as 100%, but I'd think anything close to 9,000 is formidable resistance, not just from a technical standpoint, but RISK standpoint. S&P 500 Index Chart - Daily Interval Today's boost from the S&P Retail Index (RLX.X) 290.29 +2.95% and Retail HOLDRS (AMEX:RTH) $75.25 +3.36% slightly outpaced the SPX gains. SPX and even OEX bulls would like to see some follow through from both these groups tomorrow and over the next coupe of weeks to show some conviction by bulls. The Retail HOLDRS closed right on their 21-day SMA, but just under their 50-day SMA of $75.65. MACD on the Retail HOLDRS chart (-0.629) is ever so close to crossing above its Signal (-0.476), but most likely takes above its 50-day SMA to get that more bullish signal. Today's action saw the S&P 500 Bullish % ($BPSPX) gaining 1.4% or seeing a net gain of 7 stocks to new buy signals. This had the SPX bullish % recovering some recent weakness to the 54.6% level, but still a little shy of last Wednesday's best reading of 57.6%. While bulls got a bullish response to the consumer-related economic data, there's no time to rest. For the consumer to show strength, the consumer needs jobs. To create jobs, that's where a bull wants to see a DECLINE in business inventories (then they need to be replenished) and a RISE in industrial production. I don't think the capacity utilization reading will be that closely watched, but bulls wouldn't mind a RISE in that number, which would most likely come from a RISE in industrial production. S&P 100 Index Chart - Daily Interval There may still be some bears that held into the close that are holding out for tomorrow's economic data and the potential reverse head and shoulders pattern with left shoulder at 460.84. However, a bullish response to economic data above 465 should see a nice move higher and challenge of the recent highs. It's been tough for indexes like the SPX and OEX to make big gains above their Bollinger Bands, but if we were to see another strong round of selling from Treasuries, then relative high of 472 by tomorrow's close isn't out of the question. Negative response would still have a trader looking for support above 440. Today's action saw the S&P 100 bullish % ($BPOEX) find a net gain of 3 stocks to point and figure buy signals as the bullish % grows to 64% bullish. Still some room to the 70% and more "overbought" levels. Internals confirming the OEX chart. March's high reading was 78%. NASDAQ-100 Index Chart - Daily Interval Fiber Optic (FOP.X) +8.7%, Semiconductor (SOX.X) +7.9%, Networking (NWX.X) 131 +6.9%, Internet (INX.X) +6% and Software (GSO.X) +4.21% all bolstered the NASDAQ-100 higher today. Right now, I'm not looking short/put with Treasuries seeing selling. I had a "tough enough" time putting the QQQ at NDX 1,045 last Wednesday and getting a move to 1,001 when Treasuries found buying, so I'm not about to try and launch a short here with Treasuries seeing selling. Could get a four session run up along a rising upper Bollinger Band like that found in late August with 1,100 a target on break above horizontal resistance of 1,075 (thick red line). Hmmmm... today's action saw a net loss of 1 stock to a sell signal in the NASDAQ-100 bullish % ($BPNDX). That's right. I remember that Intuit (NASDAQ:INTU) $49.24 -6.8% generated that sell signal. However, I noted in the market monitor that the tock might find support at bullish support trend and rising 50- day SMA of 48. The stock held that level today. It's a fairly meaningful stock considering price and perhaps one to monitor if an NDX trader. It's been one of the longer-term strong stocks in the NDX and a NDX/QQQ bull would want to see some firming and hold of upward trending 50-day SMA. 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 **************** In a Pinch by Steve Price Let's see, Applied Materials (AMAT) predicts a 20% revenue decline in the first quarter, and the semiconductor stocks jump 7%. Retail sales were flat in October and the sector rises 3%. Confused? Bulls looking to get into the market can certainly interpret data any way they want. And if they are going to keep buying, in spite of data that does not look promising, then the bears should step back and get out of the way. The Dow close over 8500 should throw up a big red flag, although 8550 is also strong resistance. I talked about the possibility of another head and shoulders formation taking place in the Dow and S&P 500 several days ago, and in order to get that formation we needed a bounce to form the right shoulder. The top of the left shoulder is 8550, so we are not in all-out bullish territory just yet. In fact, we could rally all the way to below 8800 in the Dow (925 SPX), and still see significant downside risk. If we do roll over below 8550, then look for a neckline break around 8300 to land us back below 8000 (downside measuring objective of 7750). The current bearish vertical count on the Dow's point and figure chart is 7850. Of course, that's the bear's view of the current market situation. Bulls will point to the higher low on the recent pullback and rebound back above 8500. While a 50-point range seems a little tight to draw conclusions from, this 50-point range contains two significant levels. A breakout above 8550 should give the buyers fuel and we could see a run back to 8800. A drop back below 8500 will help form the aforementioned right shoulder. There was some good news this morning. Initial jobless claims for the week ended November 9 dropped 8,000 to 388,000. More importantly, the 4-week moving average fell below the 400,000 barometer most analysts use as an indication for a weakening or improving economy. The median home price in the U.S. also rose 7.2% to $161,800, indicating that buyers are still outstripping supply. After the bell, Dell released earnings that met expectations and said that next quarter should see an increase in revenue of 20% year over year. It pegged revenue at $9.7 billion, which was actually slightly below some expectations of $9.9 billion. When asked if the company had seen an increase in IT budgets, CEO Michael Dell said there had been more of a re-allocation than an increase. The stock traded down 0.90 after hours to $30.06. Gap Stores also reported after the bell and beat expectations by a penny. The retailer, which also owns Banana Republic and Old Navy, said that it would remain cautious going forward, though, until its business shows consistent results. It also said capex for the full year 2002 would be down in the low $300 million range, from previous estimates of $360 million. Tomorrow's economic plate includes PPI, business inventories and the preliminary University of Michigan Consumer Sentiment report. We should definitely get a feel for which direction the rally is headed. We haven't seen less than a 100-point intraday range in the Dow since the middle of September, so the chances of trading between 8500 and 8550 are fairly remote. Dow 8537.13 is where we ended last week, so for all the triple digit movement, we are up only 5 Dow points for the week. We are up 10 in the SPX. The Nasdaq is the big winner so far, up 52.24, after a gain of 50.18 today. With the COMP at 1411.52, a rally could once again test the August high of 1426. If we break that level, then it doesn't make sense to lean short, regardless of the action in the rest of the market. However, if we fail there, and at Dow 8500 (and SPX 900), then it appears that we can ride the range back down to 8300 for the short term and possibly much lower with a move under 8300. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7286 Current : 8542 Moving Averages: (Simple) 10-dma: 8534 50-dma: 8173 200-dma: 9237 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 775 Current : 904 Moving Averages: (Simple) 10-dma: 899 50-dma: 867 200-dma: 992 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 1057 Moving Averages: (Simple) 10-dma: 1026 50-dma: 928 200-dma: 1140 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): AMAT predicts a 20% revenue decline and says it sees no turnaround anytime soon in the chip sector - and the SOX jumps 8% to 319.13. If you listened only to the comments coming out of the sector, and viewed only the IT spending trends, you would short every chip stock on the board. If you looked only at the charts and completely ignored forecasts and comments about the industry, you'd be buying. Therefore, I am still struggling with jumping on board long to a sector that has no visible turnaround. However, shorting the sector, given the current buying and blast through resistance at 300 and 310, also seems foolish. I'm going to close short positions here until I see an appreciable downtrend, however I haven't quite convinced myself to hang on for a ride up yet, either. 52-week High: 657 52-week Low : 214 Current : 319 Moving Averages: (Simple) 10-dma: 308 50-dma: 270 200-dma: 417 ------------------------------------------------------------------ Market Volatility All of a sudden, everything is alright. A Dow rally over 8500 and the VIX drops into the low 30s. I wonder what will happen if we end up testing 8400 again. Actually, the big firms don't seem too worried about that possibility, since you don't get a 3.68 drop in the VIX without some institutional selling. If we continue upward tomorrow, we could see the VIX testing 30 on expiration Friday, as firms who sold November premium buy it back in for pennies and roll out to short December positions. November is no longer included in the VIX calculation, so a big drop in the December at the money premium levels could possibly even lead the VIX below 30. CBOE Market Volatility Index (VIX) = 32.60 –3.68 Nasdaq-100 Volatility Index (VXN) = 52.46 –2.00 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.58 884,857 514,447 Equity Only 0.50 567,203 284,752 OEX 1.07 54,009 57,729 QQQ 0.68 73,417 50,174 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 40 - 1 Bull Confirmed NASDAQ-100 66 - 1 Bull Confirmed Dow Indust. 67 + 4 Bull Confirmed S&P 500 55 + 0 Bull Alert S&P 100 64 + 2 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.34 10-Day Arms Index 1.20 21-Day Arms Index 1.10 55-Day Arms Index 1.25 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when they do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals Advancers Decliners NYSE 2120 634 NASDAQ 2219 1019 New Highs New Lows NYSE 22 43 NASDAQ 55 52 Volume (in millions) NYSE 1,796 NASDAQ 1,746 ----------------------------------------------------------------- Commitments Of Traders Report: 11/05/02 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 4,000 contracts to the short side, while increasing longs by 1,000. Small trader added 1,000 to the long side, while increasing short positions by only 500 contracts. Commercials Long Short Net % Of OI 10/15/02 429,448 449,138 (19,690) (2.2%) 10/22/02 432,775 463,827 (31,052) (3.5%) 10/29/02 437,565 468,557 (30,992) (3.4%) 11/05/02 438,546 472,384 (33,838) (3.7%) 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 10/15/02 134,507 83,714 50,793 23.3% 10/22/02 134,641 72,681 61,960 29.8% 10/29/02 137,740 75,587 62,153 29.1% 11/05/02 138,604 76,032 65,572 30.5% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 Commercials added 2,000 long contracts while adding 1,000 to the short side. Small traders added 30%, or 3,000 contracts to the long side, while increasing shorts by a similar amount. Commercials Long Short Net % of OI 10/15/02 45,578 51,969 (6,391) ( 6.6%) 10/22/02 48,954 54,088 (5,134) ( 4.9%) 10/29/02 47,837 55,261 (7,324) ( 7.1%) 11/05/02 49,128 56,121 (6,993) ( 6.6%) Most bearish reading of the year: (15,521) - 3/13/02 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 10/15/02 10,185 12,478 2,293 10.1% 10/22/02 10,202 8,892 1,310 6.6% 10/29/02 10,584 9,419 1,165 5.8% 11/05/02 13,355 12,903 452 1.7% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 8,460 - 3/13/02 DOW JONES INDUSTRIAL Commercials added to both sides, increasing longs by 700 and shorts by 2,300. Small traders reduced long positions slightly, but dropped 2,300 from their short side, for a significant reduction in the overall short position. Commercials Long Short Net % of OI 10/15/02 20,914 9,630 11,284 36.9% 10/22/02 22,189 13,448 8,741 24.5% 10/29/02 21,800 13,337 8,463 24.1% 11/05/02 22,533 15,687 6,846 17.9% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 10/15/02 6,040 10,329 (4,289) (26.2%) 10/22/02 4,445 9,270 (4,825) (35.1%) 10/29/02 5,602 11,090 (5,488) (32.9%) 11/05/02 5,089 8,735 (3,646) (26.4%) 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 ************************* William Fouse & Thomas Loeb: Vanguard Asset Allocation Fund (VAAPX) William Fouse and Thomas Loeb are co-chairmen of Mellon Capital Management, the firm they co-founded in 1983 that has served as investment adviser for Vanguard Asset Allocation Fund since its inception in November 1988. The two principals responsible for managing the fund's investments bring over 80 years of combined investment experience. Fouse, a CFA, started in investment management in 1953, and has managed the fund since 1988. He is the former chief investment officer of Wells Fargo Investment Advisers. Fouse designed the asset-allocation model used by Mellon Capital Management today. Loeb has been in investment management since 1970, and has been fund adviser since 1988. He has more than 30 years of industry experience, working with both Mellon Capital and Wells Fargo. The $6.6 billion Vanguard Asset Allocation Fund is offered on a no-load basis through the leading brokerage fund networks; some of which offer the fund on a no-load NTF basis. The fund has a minimum initial investment of $3000 for regular accounts ($1000 for IRAs). For more information or a fund prospectus, call the Vanguard Funds at 800-662-7447 or logon to the www.vanguard.com website. Fund Overview Fouse and Loeb seek to provide long-term total return that is commensurate with an investment in an all-stock fund but with less risk. The two managers use a computer model to evaluate expected return and risk of stocks, bonds and cash securities, and to make changes to the fund's allocation, as expectations shift. Fouse's asset-allocation model is designed to vary the fund's allocation based on the relative attractiveness of each asset class, with no limitation as to the amount of assets in each class. Common stocks are evaluated using a dividend-discount model that evaluates the projected worth of their "dividends." The bond portion normally consists of long-term Treasuries and government agency securities. Portfolio data for Vanguard Asset Allocation Fund is a little old, but still provides a snapshot of what the fund typically does in terms of asset allocation. According to Morningstar, Fouse and Loeb had 52.9% of net assets invested in stocks at March 31, 2002, with only 1.1% of stocks invested in foreign issues. The bond portion represented 28.6% of assets, while money market securities accounted for another 18.4% of assets. Fouse and Loeb had the fund's stock portion invested mainly in the giant- and large-cap sectors, for an average market cap of $46.4 billion at March 31, 2002, significantly higher than the category average of $29.3 billion per Morningstar. The fund's investment valuations were similar to category averages, for a large-cap blend style overall. At 0.44%, the fund's total expense ratio is roughly one third that of the average domestic hybrid fund, giving it a sizeable expense advantage over other hybrid products now on the market. That helps the fund's performance relative to its competition. Fund Performance Morningstar's return ratings vary depending on which trailing time period you're looking at. The Vanguard Asset Allocation Fund's YTD loss of 16.1% was 6.1% better than the U.S. equity market, as measured by the S&P 500 index, ranking in the 86th percentile of the domestic hybrid fund group. For the trailing 3-year period through November 13, 2002, the fund declined at an annual-equivalent rate of 5.9%, some 7.1% better than the S&P 500 index, ranking in the 71st percentile within the Morningstar domestic hybrid category. Because the fund's co-managers produce above average risk relative to the category, according to Morningstar, Vanguard Asset Allocation Fund is rated only 2 stars (below average) for the trailing 3- year period. However, Fouse and Loeb have earned better returns on a risk- adjusted basis for longer time periods. For the last 5 years, Vanguard Asset Allocation Fund had an average total return of 2.9%, beating the market (S&P 500 index) by an average of 2.3%, ranking in the 38th percentile of the domestic hybrid category per Morningstar. Morningstar's 3-star overall rating for the trailing 5-year period through November 13, 2002 reflects the fund's above-average volatility compared to other U.S. hybrids. While shorter-term relative performance has been below average, the fund's 10-year track record still reflects what Fouse/Loeb are capable of over time compared to other U.S. hybrid managers. For the trailing 10-year period through October 31, 2002, Fouse and Loeb produced an annualized total return of 9.7%, just 0.1% off the market as measured by the S&P 500 index and good enough for a top quintile (14th percentile) ranking in the U.S. hybrid category. The fund's 10-year rating per Morningstar is 4 stars, reflecting above-average return and risk within the U.S. hybrid fund group. Below is a summary of the fund's 9.7% average total return over the past decade compared to different Morningstar fund averages. 10-Year Annualized Return (as of October 31, 2002): Vanguard Asset Allocation (VAAPX) +9.7% S&P 500 Index: +9.9%% Domestic Hybrid Average: +7.3% U.S. Stock Fund Average: +8.4% The fact that the average U.S. equity fund lagged the S&P 500 index by an average of 1.5% per year for the past 10 years is another issue in and of itself. However, Fouse and Loeb have gotten the job done for shareholders, generating returns that have been commensurate with the broad stock market ("S&P 500") and significantly better than both the average full-stock and partial-equity (hybrid) portfolio. So while Fouse and Loeb have incurred above-average volatility for shareholders, the returns that they have produced over the long run are superior relative to their category peers, not to mention the average U.S. stock fund. The product has achieved its goal of producing returns commensurate with the U.S. stock fund average, but with less risk. Volatility is above average versus category peers, but still below that of the average U.S. stock fund tracked by Morningstar. Conclusion While Fouse and Loeb whiff from time to time, they have banged enough doubles and triples through the years to produce "above average" returns over time for shareholders. Hybrid investors looking for an asset allocation fund that's capable of earning full-equity fund returns with less risk than a 100% stock fund, and can accept the associated above-average volatility, have a compelling hybrid option here. Morningstar may have soured a little bit on Fouse, Loeb and the Vanguard Asset Allocation Fund in recent times, but I'm still a believer in these investment industry vets and their allocation model, especially if you have a long-term horizon (of 5+ years). Note that the Vanguard LifeStrategy portfolios, which invest in various Vanguard index funds to achieve the desired risk/reward tradeoff, allocate a portion of their assets to Vanguard Asset Allocation Fund, using Fouse's mathematical model to provide a "swing" factor. Mutual investors can use the fund for the same purpose, as a swing factor in your stock/bond portfolio. A 10% allocation to Vanguard Asset Allocation Fund would achieve that purpose. 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 *********************** Did The Trend Just Change? The markets roared off at the open and then failed to sell off at the close. This was a definite change in the trend and could signal new trading ranges ahead. Before you start backing up the truck take a look at the overhead resistance levels and calculate your risk reward. To read the rest of the Swing Trader Game Plan Click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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The Option Investor Newsletter Thursday 11-14-2002 Copyright 2002, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: None Dropped Puts: Low, RTH, IBM, LEH Daily Results Call Play Updates: CEPH, FRX New Calls Plays: HOV Put Play Updates: MBI, ABK, GE, PG New Put Plays: ABC **************** 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: ***** None PUTS: ***** LOW $41.89 +1.59 (+2.42 for the week) Lowe's slid from our entry point of $41.73, down to a low of $38.40 on Monday. The stock followed other retailers downward, as concerns seeped out of the sector that the shortened holiday season and low consumer confidence numbers could endanger sales numbers heading into the busiest time of the year for the industry. A shift from home improvement spending to gift spending also looked to cut into Lowe's profits as we headed deeper into winter. Better than expected retail sales numbers lifted all boats today, along with Target's earnings surprise. With three straight days of upward movement, the downtrend in LOW appears to be on hold, and we will close the play approximately where we entered. Traders wishing to hold on can look to action at the 50-dma of $41.95 as an additional gauge of a break in resistance. --- RTH $75.25 +2.45 (+2.75 for the week) The retail holders reversed their slide the last two days, after dropping as low as $70.95 on Monday. Although better than expected earnings from Wal-Mart were accompanied by guidance at the low end of estimates for next quarter, investors apparently had faith restored with the current quarter's surprise. Today's retail sales data, which showed flat sales, also came in better than expected and gave the sector another boost. We had lowered our stop on the play, entered at $74.60, to $75 and were stopped out on the close of $75.25. Traders wishing to give the play more time can use the 50-dma of $75.65 as the next level of resistance by which to measure the current bounce. If tomorrow's consumer sentiment number disappoints, we could still see a failure here. --- IBM $80.72 +1.37 (+3.13) With the broad markets once again ignoring bad news, Thursday's session had IBM trading up all day. Yesterday's analyst meeting didn't reveal any hidden skeletons and the buyers were back in force today, lifting the stock back above the $80 level. While we like the fact that the stock couldn't get back over the 200-dma, there's no ignoring the fact that our stop was violated. We're dropping the play tonight, as there is no sense arguing with the market. Look for IBM to fall back near the $80 level tomorrow as market makers strive to pin the stock to an even strike on expiration Friday. --- LEH $56.74 +2.30 (+2.24) Wrong! While it looked like LEH was finally going to break down earlier this week, the action of the past 2 days was enough to challenge the conviction of even the staunchest bear. The Brokerage sector reversed from major support on Wednesday and staged an impressive 5% rebound on Thursday. That was enough to propel LEH right back to its descending trendline (now at $57), and based on the increased volume, a breakout looks like the likely outcome. Rather than get run over by stampeding bulls, we're pulling the plug on LEH tonight. If holding open positions, look for an pullback from resistance on Friday to provide for a more attractive exit point. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu CEPH 58.41 1.65 -0.70 -1.71 1.31 Climbing quickly FRX 105.30 0.05 0.92 –0.50 4.05 All-time high HOV 33.86 -0.66 -0.85 0.48 2.06 New, 200-dma rebound PUTS ABC 63.80 -1.38 0.03 –0.16 –2.63 New, gaining speed ABK 55.98 0.09 -0.11 –1.03 –0.64 No strength IBM 80.72 -0.28 1.86 –0.15 1.37 Drop, stopped LEH 56.74 -0.20 0.16 –0.03 2.30 Drop, big bounce LOW 41.89 -0.75 0.83 0.75 1.59 Drop, sector rebound RTH 75.25 -1.35 0.85 0.85 2.45 Drop, stopped MBI 39.71 -0.33 -0.88 –2.75 1.21 failure at $40 ************************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 ******************** CEPH $58.41 +1.31 (+3.86 for the week) Cephalon has continued its run, with very little pullback. It has continued to set a series of higher highs and higher lows, even during broader market intraday pullbacks. The recent comments from the CEO that, " The results and the strong underlying demand we are experiencing for all of our products have allowed us to increase guidance for 2002," have kept investors bullish, following a 65% product sales increase in year-over-year third quarter sales. Adams, Harkness, which upgraded the stock to "Strong Buy," said the third quarter was," an excellent quarter. The second in row they were very, very strong on total product sales." The stock continues to add boxes on the point and figure chart, following a triple -top breakout at $44. CEPH is approaching resistance between $59 and $60 from back in May of this year and could see a pullback from that level. So far, however, momentum traders have been able to enter on breakouts, and new entries can take one of two different strategies. The first would be a pullback from resistance and support above a three-box PNF reversal, which would come at $55. The second would be a breakout above resistance at either $59, or $60 for more conservative traders. We will raise our stop loss on the play to $54, which would signal a break from the rising trend and possibly a more pronounced pullback. --- FRX $105.30 +4.05 (+5.15) After storing up energy for the past 2 weeks, FRX exploded higher on Thursday following news that the company's Lexapro replacement for its popular Celexa anti-depressant drug is seeing better acceptance from physicians than initially expected. While Lexapro is just a refinement of the Celexa drug, it is anticipated that it will extend the company's protection from generic competition, which improves the stock's long-term prospects. After trading in the $100-103 area from the past 2 weeks, FRX blasted through resistance to close above $105 for the first time. Accompanying the price breakout was strong volume throughout the day. This combined with bullish Stochastics divergence suggests that FRX has more room to run. But given the strong move on Thursday, we don't want to chase it higher at this point. If looking for a new entry point, look for a pullback near the $103 area and a rebound, which would confirm that old resistance is new support. Raise stops to $102, just below today's intraday low. ************** NEW CALL PLAYS ************** HOV - Hovanian Enterprises - $33.86 +2.06 (+1.16 for the week) Company Summary: Hovnanian Enterprises, Inc. founded in 1959, is headquartered in Red Bank, New Jersey. The Company is one of the nation's largest homebuilders with operations in California, Maryland, New Jersey, New York, North Carolina, Pennsylvania, Texas and Virginia. The Company's homes are marketed and sold under the trade names K. Hovnanian, Washington Homes, Goodman Homes, Matzel & Mumford, Diamond Homes, Westminster Homes, Fortis Homes and Forecast Homes. As the developer of K. Hovnanian's Four Seasons communities, the Company is also one of the nation's largest builders of active adult homes. (source: company release) Why We Like It: The homebuilding sector has been extremely volatile lately. While mortgage applications have shown big declines, followed by big bounces, it appears the recent sell-off in the sector, after a downgrade by CSFB, has reached another bounce point. Hovanian is one of the stronger homebuilders, with astounding increases in orders the last couple of months. A 94% increase in September new home orders was followed by a 60% increase in October. The company released earnings in September, at which time it stated that, "Hovnanian achieved all-time record highs for any third quarter in the Company's history in home deliveries, net contracts, sales backlog, revenues and net earnings." HOV saw earnings rise 78% in the third quarter from Q3 2001 and topped analyst expectations. The company raised guidance for both 2002 and 2003, due to strong sales predictions. Given the recent drop in interest rates, a new round of mortgage financing could be on the horizon, further increasing the current large backlog of homes waiting to be built in 2003. A 7.2% increase in median home prices in the third quarter should help the bottom line, as well. The stock has experienced pullbacks to its 200-dma, which has served as a rising trend line since the middle of July, giving it a bounce on each test. The smallest bounce was $5 and the largest was $15. The stock has just bounced from this level again, so far tacking on $1.60 from the bounce point of the $31.26 at Tuesday's close. The stock closed on its high of the day, just 0.14 short of a point and figure reversal into a bullish column of "X." While the 50-dma of $35.72 looms just above the entry point of $34, it has failed to provide much resistance or support in the past in HOV, indicating it should not be much of a hurdle. Our initial target on the play will be $40, where the stock has failed on the last three rallies, but a $6 gain will be fine with us. New entries should look to enter on a trade of $34, or a pullback and bounce above the 200-dma of $30.45. Place stops at $30, which would be the first breakdown below the 200-dma this year. BUY CALL DEC-30 HOV-LF OI= 90 at $5.30 SL=2.70 BUY CALL DEC-35 HOV-LG OI= 328 at $2.15 SL=1.10 BUY CALL FEB-30 HOV-BF OI= 148 at $6.80 SL=3.40 BUY CALL FEB-35 HOV-BG OI= 919 at $3.80 SL=1.90 Average Daily Volume = 754 K ************************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 ******************* MBI $39.71 +1.21 (-2.99 for the week) MBIA dove after its truck school loan default exposure hit the airwaves en masse on Wednesday. Salomon Smith Barney defended the drop, saying that the loan defaults were old news. While the news actually broke last week, and just got added exposure, justifying the "old news" statement, it still could cost this bond insurer significant dollars. The stock dropped $2.99 on Wednesday, finishing the day at $38.50. Today's bounce took the stock up to $41 temporarily, but the stock pulled back below $40 by the end of the day, closing at $39.71. The intraday chart shows the initial surge was met with heavy selling, which pushed the stock down for the rest of the afternoon, in spite of a broad market rally involving both the Dow and Nasdaq. There was a mild rebound attempt at the end of the day, but it saw little volume and the trend here remains down. The rebound fell well short of a PnF reversal back up, which comes at $42, leaving the stock in its current column of "O." That PnF reversal level will serve as our stop loss after the big drop. New entries can look for continued resistance under $40 to initiate shorts. Momentum traders can jump on if the stock continues back down under yesterday's low of $38.10, using a trigger below $38. --- ABK $55.98 -0.64 (-1.55) Traders looking for weakness have been well-served by our ABK play over the past couple days. After failing to hold above its 50-dma on Tuesday, the stock slid below the $57 level on Wednesday and then posted another fractional loss on Thursday. Today's slide is particularly noteworthy because of the contrast to the broad market, which saw strong gains across the board. ABK is now sitting right on the $56 support level, which is also the top of the October 11th gap. That could translate into an oversold rebound on Friday, and if it does, we can look to enter new positions on a rollover below the $58 level, which now appears to be solid resistance. The selling over the past two days has been interesting due to the fact that it has come on very heavy volume (more than double the ADV), with the only notable news event being a CSFB downgrade on Wednesday. While the vertical count extended on Thursday to $46, bears need to be cautious here. The bullish support line is currently resting at $53, so signs of a rebound in the $53-54 area would be a good signal to harvest gains and wait to re-enter at a higher level. Lower stops to $59. --- GE $24.50 +0.41 (-0.60) Following its sharp drop of the past week, GE was poised for an oversold rebound and the strength in the broad market provided the perfect catalyst for that bounce to take place. Showing just how weak the stock is, price failed to capitalize on the initial bounce, spending the remainder of the day drifting lower. GE failed to even reach the $25 resistance level before rolling over, and it is interesting that the stock actually closed below its opening price, despite the strong broad market gains. Although it fell into its opening gap this afternoon, we're not wild about new entries on further weakness on Friday due to the proximity of support in the $23.50-24.00 area. With the artificial price action of expiration Friday, an attempt to pin price near the $25 level would not be unexpected. Look to fade any failed rally into the $25-26 area with new entries in anticipation of a retest of the recent lows next week. Keep stops set at $27. --- PG $86.48 +0.68 (-1.21) Left out in the cold again, Consumer Staples stocks like PG failed to participate in the broad market rally on Thursday. While the stock did manage to end the day in the green, the +0.80% gain was a pale reflection of the 2-3% gain seen in the broad market. Even MO, which got slammed earlier in the week for cautioning that sales were slowing, managed a better percentage gain than PG on both of the past 2 days. Traders looking for an entry point yesterday got a decent one as PG rallied to and then failed right at the $87 resistance level. The stock's failure to challenge yesterday's intraday highs today speaks to the lack of bullish interest for shares of PG. Additional failed rallies in the $87-88 area look good for new entries. If you want to trade a breakdown you'll need to wait for a volume-backed decline below the $85 before initiating the trade. Until we get that breakdown, we're leaving our stop at $89. ************* NEW PUT PLAYS ************* ABC – AmerisourceBergen Corporation $63.80 –2.63 (-3.20 this week) Company Summary: AmerisourceBergen is a pharmaceutical services company dedicated solely to the pharmaceutical supply chain. The company markets its products and services to hospital systems (hospitals and acute care facilities), alternate care customers (mail order facilities, physicians' offices, long-term care institutions and clinics), independent community pharmacies, and regional drugstore and food merchandising chains. ABC also provides outsourced pharmacies to long-term care and workers' compensation programs. ABC perates in two segments: Pharmaceutical Distribution and PharMerica. The Pharmaceutical Distribution division is primarily the company's wholesale and specialty drug distribution business, and PharMerica is the company's institutional pharmacy business. Why We Like It: Weak stocks really stand out when the broad market rallies, as the rising tide should lift all the boats. Stocks that can't post gains on such a broad-based rally as we saw on Thursday are clear pockets of weakness that can be exploited when the bears flex their muscles again. Shares of ABC haven't had a very good week. After plunging below the 200-dma (currently $70.58) last Thursday, the stock has lost another 10% and judging by the heavy selling volume today (2.5 times the ADV), the bearish party is just getting started. The story is actually somewhat humorous in light of recent analyst comments. Following the heavy selling last Tuesday, Bear Stearns defended the stock after it slid sharply lower in the wake of some of the statements released with the company's earnings report. Those comments were good for a one-day pop before the stock started back down the slippery slope. Good old Bear Stearns was out defending the stock again today, citing their belief that it was down because of its removal from BofA's Fresh Money list. If history repeats, we ought to get an oversold rebound tomorrow, which we can use to initiate new positions into this beleaguered Pharmaceutical stock. Certainly, the PnF chart doesn't hold any hope for the bulls, as it has generated a series of Sell signals over the past few weeks, but we do need to be careful, as it achieved its bearish price target of $63 on Thursday. Look for a rally failure at $66, or possibly as high as $67-68 to provide the next solid entry point. Initial stops are in place at $68, as a close above that level would likely indicate a change of trend. BUY PUT DEC-65*ABC-XM OI=320 at $4.50 SL=2.75 BUY PUT DEC-60 ABC-XL OI=132 at $2.50 SL=1.00 Average Daily Volume = 1.20 mln ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Thursday 11-14-2002 Copyright 2002, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: CALL - HOV Traders Corner: Reversal patterns: Rounding Tops & Bottoms Futures Corner: Regression Analysis for Futures Options 101: Divergence ********************** PLAY OF THE DAY - CALL ********************** HOV - Hovanian Enterprises - $33.86 +2.06 (+1.16 for the week) Company Summary: Hovnanian Enterprises, Inc. founded in 1959, is headquartered in Red Bank, New Jersey. The Company is one of the nation's largest homebuilders with operations in California, Maryland, New Jersey, New York, North Carolina, Pennsylvania, Texas and Virginia. The Company's homes are marketed and sold under the trade names K. Hovnanian, Washington Homes, Goodman Homes, Matzel & Mumford, Diamond Homes, Westminster Homes, Fortis Homes and Forecast Homes. As the developer of K. Hovnanian's Four Seasons communities, the Company is also one of the nation's largest builders of active adult homes. (source: company release) Why We Like It: The homebuilding sector has been extremely volatile lately. While mortgage applications have shown big declines, followed by big bounces, it appears the recent sell-off in the sector, after a downgrade by CSFB, has reached another bounce point. Hovanian is one of the stronger homebuilders, with astounding increases in orders the last couple of months. A 94% increase in September new home orders was followed by a 60% increase in October. The company released earnings in September, at which time it stated that, "Hovnanian achieved all-time record highs for any third quarter in the Company's history in home deliveries, net contracts, sales backlog, revenues and net earnings." HOV saw earnings rise 78% in the third quarter from Q3 2001 and topped analyst expectations. The company raised guidance for both 2002 and 2003, due to strong sales predictions. Given the recent drop in interest rates, a new round of mortgage financing could be on the horizon, further increasing the current large backlog of homes waiting to be built in 2003. A 7.2% increase in median home prices in the third quarter should help the bottom line, as well. The stock has experienced pullbacks to its 200-dma, which has served as a rising trend line since the middle of July, giving it a bounce on each test. The smallest bounce was $5 and the largest was $15. The stock has just bounced from this level again, so far tacking on $1.60 from the bounce point of the $31.26 at Tuesday's close. The stock closed on its high of the day, just 0.14 short of a point and figure reversal into a bullish column of "X." While the 50-dma of $35.72 looms just above the entry point of $34, it has failed to provide much resistance or support in the past in HOV, indicating it should not be much of a hurdle. Our initial target on the play will be $40, where the stock has failed on the last three rallies, but a $6 gain will be fine with us. New entries should look to enter on a trade of $34, or a pullback and bounce above the 200-dma of $30.45. Place stops at $30, which would be the first breakdown below the 200-dma this year. BUY CALL DEC-30 HOV-LF OI= 90 at $5.30 SL=2.70 BUY CALL DEC-35 HOV-LG OI= 328 at $2.15 SL=1.10 BUY CALL FEB-30 HOV-BF OI= 148 at $6.80 SL=3.40 BUY CALL FEB-35 HOV-BG OI= 919 at $3.80 SL=1.90 Average Daily Volume = 754 K ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** TRADERS CORNER ************** Reversal patterns: Rounding Tops & Bottoms By Leigh Stevens lstevens@OptionInvestor.com ROUNDING TOPS AND BOTTOMS - I’ve been writing some recent Trader’s Corner’s articles on the various technical patterns that prices will trace out in forming a top or bottom. Examples include double (and triple) bottoms and tops, sharp reversals in the form of a “V” including and “upside” down “V’s” when prices spike up to new high and then reverse down sharply. Also included are rectangle tops and bottoms. You can peruse some of these recent columns at – http://www.OptionInvestor.com/indexes/traderscorner.asp Rounded or “rounding” tops and rounding bottoms are a pattern that I have found to offer one of the better buying or selling opportunities when it is seen – it is not the most common pattern but a gem when it does occur, in terms of its tendency to precede a substantial trend. A recent example of a rounding formations, in this case a rounding bottom is the chart of Corning (GLW) below – The first rule of thumb with a rounding pattern is that the price trend often accelerates once there are 2,3 or 4 “touches” that form a circular arc and the stock or index begins to move AWAY from the arc – this is “thrust” and the rounding pattern seems to have plenty of it, once the trend reversal gets going. Another trading rule of thumb is to buy dips that carry prices down toward a circle that represents the line of a rounding bottom – conversely, sell rallies that carry prices up toward a circle that represents a rounding top: Here is another example and demonstrates yet another tendency with this pattern – if prices fall to below the line of this circular arc in the case of a rounding bottom, especially on a closing basis and by a factor more that has already occurred, this is an EXIT point and usually where you can REVERSE to a put trade - This curved line or arc is like a (straight) trendline in this respect, only the subsequent move is more likely to be BIG. Circular arc type patterns often form over a long-time, although you will see this on hourly charts as well. But in terms of the big picture, the dynamics of how and why these big rounding tops or bottoms form has to do with gradual “accumulation” (buying) or gradual “distribution” (selling). I’ll start with another example, then more explanation – When accumulation or distribution (selling to others) occurs gradually in a market by deep pocket investors, particularly institutional ones, it can create these types of rounding formations. This situation is especially driven by the professional types of market participants that Charles Dow found to be the early buyers and sellers of equities (and the market) as these folks correctly perceive stocks to under or overvalued, respectively – Hey, I bet YOU wish you could have bought IBM at $10-15 at the time – note that when the curve of the circle got nearly vertical and prices went into a “waterfall” type decline, this was getting near to being the “blow off” bottom. The “smart money” institutional money managers, to use that term, will be very moderate in their buying or selling activity so as to not drive the price up or down overly much. Nevertheless given this added volume – volume precedes price – the stock gradually moves either up from the bottom or down from the high: Because this movement is so gradual and takes place over a lengthily period whether that is over many many hours, days, weeks of months - the outline traced out on a chart is that of an arc or part of circle. A hand held compass, which is one of the most simple hand-held drawing instruments – remember from geometry perhaps? - and that can so easily can construct a circle, allows the drawing an arc that has multiple touches of the lows of a bottom or highs of a top pattern on a printed out chart. Otherwise, you need a sophisticated graphics or technical analysis program that allows drawing of arcs. However, you can also visual this type pattern quite well and a little drawing on a cocktail napkin will do quite well also – an art practiced by Art Cashin and his NYSE floor buddies. If the subsequent price action continues so that about a quarter of the circle is completed, the stock or other item then gets further along in terms of an accelerating trend and there is increasing price momentum. Such momentum is created by the buying and selling activity of the widening circle of investors and traders who get involved in the stock because it is moving – also usually at this stage, the increasingly positive, or negative, fundamentals become more widely known written about or discussed in such forums as within professional research departments, the business media, investments clubs and internet chat rooms. This underlying dynamic relates very much to what I described in past articles in our Trader’s Corner on Dow Theory and how Dow would perceive a gradual shift from a bull to bear market and vice versa - from the bear to a bull. The business media talking heads are abuzz as to whether the U.S. is getting a shift like this currently – a resounding MAYBE! The current state of profits (not great) and the slow potential growth of earnings is certainly the type of conditions that could lead to a big, but slow-forming rounding bottom over the coming year - perhaps to be followed by a stronger upswing in 2004. Well, options traders mostly need some good-sized price swings from day to day, week to week. However, when I put on my “investor” hat, this will be a long-term pattern to be alert for. ************** FUTURES CORNER ************** Regression Analysis for Futures By John Seckinger jseckinger@OptionInvestor.com While trading futures, one of my favorite tools for macro and microanalysis is Regression Analysis. Using regression analysis properly can help identify either potential trend reversal areas, or simply allow traders to trade with a range. A definition of Linear regression is as follows; a statistical tool used for forecasting future price via finding the best estimate of the trend given a noisy sample of data points. It is calculated by using the "Least Squares" method over a given period, which is drawn as a trend line extending through the defined period that attempts to filter out market noise. Ok, that is the end of the ‘science’ part. Penetration outside of a regression channel is an indication that a reversal of the price trend is in a higher risk of occurring. Unfortunately, I have found that there is some art needed when using these channels in a practical manner. Getting to an example, I try to focus on three important steps while setting up a trade using regression analysis. The three steps are as follows: Establish a trend line, recognize a relative high and low, look for an execution. From November 11th to the 12th, the ES contract gapped higher and started to trade in an aggressive bullish fashion. With that said, I drew a bullish trend line (blue) from the low on the 11th and waited until this trend line was penetrated. Once penetrated, I use the relative high before the penetration as “the relative high.” Then, using regression analysis, I start the channel at the relative low and end just above 892. A nice channel is mapped out, and the key now becomes looking for the proper execution. . So, how do we go about finding an execution level? That is the “catch,” since it involves even more art. If the market tests the relative high (above 892) one more time, that should be the ideal area where traders can go short. I would then recommend using a 5-point stop loss (just above 896) to minimize risk and possible unforeseen shock to the market. If this area is not retested, I look for the last relative low to be taken out. This is done because it will put in a lower low and really break the bullish trend. In this particular example, that low is at 886.50 (set near noon on Tuesday). Chart of ES02Z, 5-minute As the market continued to trade, ideally a trader should be short just above 892 as the relative high was in-fact retested; however, it is ok if that was missed and a short was taken just below 886.50. Just remember to use a 5-point stop either way. As the chart below shows, it is now time to start an entirely new regression channel and trend line. The first obvious relative low AFTER THE TREND LINE IS BROKEN is found at 879, and that is when we draw a new downward regression channel. Note: Forgot to mention, I use 2 standard deviations with all regression channels (default setting on Q-charts). Ok, now what? We are still short, and now we have a regression line drawn. We can do one of two things. One is to buy the ES (read: cover short) as the bottom of the regression channel is tested, or simply wait for the market to either rise or close above the drawn channel. Note: After the regression channel is drawn, it is ok to disregard the trend line. Chart of ES02Z, 5-minute As most of us probably remember pretty clearly, the market rose extremely fast on Wednesday due to the Iraqi news regarding the UN weapons inspectors. Or was it really because the upper regression channel was broken? Kidding aside, there definitely would have been some slippage while exiting the short position. Nevertheless, this trading tool makes it clear to exit and look for a new trend line and new regression channel. The trick of course would have been to both exit the short AND gone long as the last relative high (set on 10 a.m. on Wednesday) was taken out and gave an execution trigger (opposite of last example when last relative low was taken out). Chart of ES02Z, 5-minute As noted at the beginning of this article, regression analysis can be used both on a micro and macro level. I like to go from a weekly to a five-minute chart, constantly reinforcing my viewpoint on the market. Remember, no matter how well these channels work, proper execution is key. Prices can rise above the top channel and last relative high during the first minute of trading. Be prepared. Without proper execution, trading becomes extremely difficult. Good Luck. Questions are welcomed, John Seckinger jseckinger@OptionInvestor.com *********** OPTIONS 101 *********** Divergence Buzz Lynn buzz@OptionInvestor.com Webster's Dictionary says, "To go or move in different directions; to differ, as in opinion". Sounds like CNBC Analyst de Jour's market opinion vs. my own - definitely different. However, divergence isn't always about being bullish when everyone is bearish or vice-versa. It's not necessarily fundamentals-laden opinion either. For despite it's fundamental bent toward, well, fundamental opinions, it's a concept we use frequently in technical analysis too to help us decipher potential market direction. We use the term when looking at charts. So just how does divergence work and how can we apply it to our charts for better interpretations of the market? Glad you asked! Today, we are going to stick to the meaning and definition of the word so that fellow readers can add this to their trading arsenal. Application is like anything else with a thousand different nuances, but today, it's important to understand what it is. Only then is it useful. And it's so simple, we almost don't even need an instruction manual! OK, so back to, "What is it?". Divergence is based on a chart relationship of oscillators - stochastics - to candle or price action. It's based on the assumption that when oscillators are moving up, so are stochastics. And when prices are moving down, stochastics do too. But it's the magnitude of the price move and its relationship to the stochastic move that determines "divergence" It's important to understand too that there are two different types of divergence - bullish and bearish. Bearish divergence occurs only from a stochastically overbought chart situation. The meaning here is that the divergence carries a bearish implication for future price action. Conversely, bullish divergence occurs only from a stochastically oversold chart situation. Keep in mind that "overbought" or "oversold" isn't necessarily indicative of divergence. So come on, Buzz. Spill the beans! What's it look like? To tell the truth, I don’t' have a good example of bullish divergence tonight. But maybe I'll think of one before the article is over . Isn't it just like Fundamentals guy to hint that he's still building and finds value in a financial ark? That said, let's take a look at today's Dow Jones Industrial Average (INDEX:INDU) chart. Like I noted above, if there's no bullish divergence example coming immediately to mind, then it follows that this chart is an example of bearish divergence. Dow Industrial chart - INDU (weekly/daily): Oh, so that's what it looks like! Wait, one side is different from the other. How can they both be bearish divergence? Ahh, good eye! Starting on the left side of the chart (weekly), first note that there are two high points in "overbought" in the stochastic part of the chart. Without that, there could be no divergence. Actually, even if only the most recent point were stochastically overbought, it would still count as "overbought" and thus be a divergence candidate. That we have two, one higher than the other, is an added bonus. Anyway, the most recent "overbought" crossover (fast stochastic over slow stochastic) is higher than the last one. Second, note that for the same period of time, the tops of the candles (not the wicks) show lower price action than the last time. Connecting the stochastic tops and the price candle tops gives us two black lines, which "diverge", hence divergence! Big deal. It's just lines on a chart. Why is that important? Now for the interpretation part: Think of stochastics as the power behind a price move. The first data point on the candle and the first data point on the stochastic have a relationship. The second data points on each determine the presence or absence of divergence. If both lines were sloped up or both sloped down, there would be no divergence. NEXT! But in this case, we have price sloped down and stochastic sloped up. It's those second data points that bring this all together in opposing sloped lines. Here's the "big whoop": while the power (stochastic) behind the move up the charts was greater than last time, price did not match it. Price stayed lower despite the power behind it. While the conviction was great, as indicated by the stochastic, the market was not willing to support a higher value. That's bearish. Were the price to have moved higher above it's last top, that would be consistent with a continued upward move. It looks like that upward trend is going to change, give or take a few daily gyrations. (Don't look for Dow 10,000 any time soon.) Hence, we use the divergence to signal the POSSIBILITY OF A CHANGE IN MARKET DIRECTION. That's one half the explanation. But what about the exact opposite lines on the daily chart? Why is that bearish too? Refresh your eyesight for just a moment and take another look at the daily side of the chart. In this case, we see a HIGHER price point from the last time and a LOWER stochastic high from the last time. Connecting those points with previous data points, we again see a divergence. While the lines are opposite, it's still a divergence, and still bearish at that. Here's why. On the daily chart, price has taken off like a shot from a gun. But the power behind it, as shown by a lower stochastic hasn't kept pace with the price before rolling over from overbought. The psychology behind this is that while prices were rising at a frenzied pace, there was little conviction to make it happen. It's like Jim Belushi in the movie, Animal House, running out the door by himself with nobody following after half- heartedly asking the first time, "Who's with me?" His advance was OK, but his stochastic was a little low! He needed to return to rally the troops for a second attempt, with the power of a crazed lunatic yelling, "Who's with me!?" Related to the market, that second attempt may happen, but it will have to overcome the greater weekly trend. But the point is that a higher price move with lack of conviction on the stochastic is equally bearish. This also signals a possible change in market direction. Were the lines in either side of the chart moving up or down together, there would be no divergence. Thus the status quo would be intact, and no possible change of market directions could be foretold. How about an example of that? Your wish is my command (at least for now). Take a look at Dow stalwart, GE. General Electric chart - GE (weekly/daily): Note that the slope of the weekly stochastic line and price line are the same - also true for the daily side. There is no divergence here; just an indication of the downward status quo. Thus, we would not expect a reversal in the trend of GE. The weekly trend chart appears to indicate that this uber-company's stock price is headed lower over the next few weeks/months, and not about to change. Wish we could show a chart undergoing some bullish divergence, but I can't find one! That's OK. We're a patient lot. We'll bring up the subject again when we see it in the charts. Until then, make a great weekend for yourselves! Buzz ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. 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