The Option Investor Newsletter Tuesday 12-03-2002 Copyright 2002, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Let The Warnings Begin Futures Markets: Clear and Present Danger Index Trader Wrap: Loaded for bear Market Sentiment: Time to Reconsider Weekly Fund Screen: Multi-Asset Global Funds Updated on the site tonight: Swing Trader Game Plan: Trend Reversal Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 12-03-2002 High Low Volume Adv/Dcl DJIA 8742.93 -119.60 8861.13 8721.88 1.79 bln 1234/1978 NASDAQ 1448.96 - 35.80 1474.69 1445.23 1.61 bln 1094/2300 S&P 100 469.62 - 7.57 477.19 468.57 Totals 2328/4278 S&P 500 920.75 - 13.78 934.53 918.73 RUS 2000 400.83 - 7.71 408.54 400.83 DJ TRANS 2337.04 - 44.40 2381.82 2334.27 VIX 31.76 + 1.70 32.32 30.88 VXN 51.99 + 1.82 52.69 51.62 Total Vol 3,612M Total UpVol 677M Total DnVol 2,905M 52wk Highs 126 52wk Lows 73 TRIN 1.96 PUT/CALL 0.89 ************************************************************ Let The Warnings Begin It is that time of the month, again. The first three weeks of last month of each quarter is chock full of earnings warnings, analyst meetings, mid-quarter updates and news events worded to cause investor guidance to drop. The is commonly know as the smoke and mirrors period. There is the official announcement, the official spin about the announcement and the analyst interpretation of the announcement. An example would be an analyst comment that HPQ was doing well because their printer business was healthy and they saved $2.4 billion from the merger. Dow Chart – Daily Nasdaq Chart – Daily On the surface that HPQ comment sound great. The company is a year ahead of schedule to trim $3 billion in costs by merging CPQ/HWP into one company. HPQ has already cut -$2.4 billion in expenses or the translated version, "they merged two companies together and then cut half the employees." To say HPQ is doing great because the printer business is up +15% is also an error. The other five divisions lost ground. The leading losers were storage -13%, hardware -20%, Personal Computers -18%. Carly was positive in her spin but the company said technology spending was still tepid and they could not raise guidance due to the current uncertain economy. Translation, "the earnings gains have come from slashing employees and writing off merger assets and are not repeatable." Just before the bell UAL announced that they were cutting more pilots in two more waves of cuts in Jan/Feb. There is just no pickup in airline traffic and the warning to American airports that Al Queda may have smuggled shoulder fired antiaircraft missiles into the U.S. will make even more travelers reconsider their trips. Based on auto sales for the month they are not buying new cars for those trips either. Sales were up slightly from the terrible October levels but were significantly below levels from last November. This should not surprise anyone since November-2001 was a banner month with new incentives prompting many to go into debt for a new car since they were going to be spending more time closer to home. The greatly increased incentives this year barely increased November sales over the October drought period. This was likely a dead cat bounce as dealers reacting to the serious October drop pulled out all the stops to lure buyers back into the showrooms. The buy one get one free program by Ford did little to help with sales falling -20% in November. Ford said it would cut production by 25,000 units. The technical drop in November sales was the topic of many news stories today but the main point should have been "actual sales" did not drop from the October levels. If they can hold the current 16 million pace it will prevent a further decline in the sector. Retail Sales rose for the second consecutive week but only enough to erase the -1.2% dip from the week of Nov-16th. While the sales were up they were only up +0.3% and this was supposed to be a huge shopping week. Reports generally indicated a strong Friday but weaker Saturday. This is not an exciting prospect for the seasonal trend. If shoppers have only four weeks instead of the normal five to complete the task then sales should have escalated more than +0.3%. In the local parking lot indicator update, I visited a new one million square foot shopping mall here in Denver on Monday. At 6:PM there were less than 30 people in a food court that holds over 500. Most stores had less than 10 customers, many zero customers. I counted customers as we walked through Neiman Marcus. There were 12 in the entire store. The only stores with traffic were the toy stores and Target. I went into a video game store to look for a title on my list and I was the only customer in the store for the entire 10 min I was there. They claim there are 3500 employees in the mall and I would have bet that was twice the number of shoppers. I dropped by Best Buy to get a DVD player and had five employees ask if they could help me before I made it 150 ft into the store and one was the manager. When I went to check out there were three registers open and no customers at two of them. However, as I drove by Wal-Mart two blocks away the parking lot was packed. It appears to me that sales are only good at the super discount general merchandise stores like WMT and TGT and bearish for everyone else. This may only mean that Denver is a depressed economic center and not a national trend. It does make me more wary about reading between the lines on future retail news. I have had several emails tell me to stick to stock reporting and spare them the personal retail stories. If you feel that way I am sorry. I think as investors we should keep our eyes open to everything we can observe in the world around us. We should not depend on CNBC to deliver our economic outlook in a tidy package. I personally would rather have an opinion about what the next retail sales report might say BEFORE it is released. I want to know as far in advance as possible if we are going to fall back into another recession. I do not want to be led down the path with the rest of the sheep only to find out the yellow brick road led into a slaughter house. If my economic expectations are low then an upward revision is a pleasant surprise. The Challenger Layoff report showed that mass layoffs had dropped slightly from the October high of 176,000 to 157,000. This was still the second highest month in the last ten and well above the average of 93,580. More than one third of the cuts were in the high tech industries with the computer sector leading the report with -25,000 layoffs. These job cuts are helping companies cut costs and post higher profits but are doing nothing to help consumers weather the storm. With higher productivity allowing companies to do more with fewer workers it means the eventual rebound may not produce more jobs. Technology improvements are increasing output but fewer consumers will have paychecks to spend. Since Congress failed to extend unemployment benefits for a second time there are more people dropping off the continuing jobless claims each month even though more people are unemployed. This makes the headline numbers even more deceiving. Friday we will get the nonfarm payroll report for November and there is a good chance that we will see a negative jobs number. This is not a sign of a recovery. Nokia dampened hopes for a rebound in the cell phone market saying global phone sales could rise only +10% in 2003 and equipment for cellular communications would drop by -10% on fears of an uncertain market, war and the global economy. Nokia makes 40% of all cell phones and their forecast carries weight in the sector. This outlook was opposite the bullish forecast by Merrill on Monday, which estimated 474 million units compared to only 440 million by Nokia. TXN also said business in the mobile digital signal processors was on track to exceed expectations for the quarter while the analog competitors were seeing slowing of their business. This shows that only high end phones are in demand while the cheaper mass market models are slowing. AOL shocked the markets this morning with estimates of revenue for 2003 well below their prior forecast. They put forth a get tough strategy going forward and began promoting their "AOL for life" campaign. Hopefully that does not refer to the time it takes to get connected and download email. They said they were going to concentrate on making a profit on their dialup customers, which translates to higher prices in my view. They are going to try and convert 10% of their 30 million customers to broadband at $15 a month for service plus the cost of the broadband. They are not expecting any sales growth in 2003 and sees earnings in the low end of the prior range. AOL dropped nearly -15% on the news to $14. Cisco began it's analyst meeting by saying it had no plans to discuss guidance. Chambers said it was not company policy to discuss guidance unless it had changed materially. The analysts in attendance griped visibly that the speech by Chambers was the same speech he gave at the USB conference last month. The general opinion was that nothing positive had changed or Cisco would have tried to spin it to their benefit. Without any new information they theorized that the outlook was negative and the low end of estimates currently apply. CSCO fell to $14.40 on the news and traders were expecting further profit taking on the two month rally from the $8 October low. We have had comments from HPQ, AOL and CSCO, all of which left us with a sour taste in our mouth and red candles on the charts. The next challenge is Intel, which holds it's update on Thursday. INTC fell to support just above $20.00 on worries that the Thursday meeting could show a lack of pickup in the PC sector. With HPQ showing strong drops in sales of computers and retailers for big ticket items not reporting any gains the outlook is grim. There is a very large replacement cycle looming in our future with software on 180 million computers going off maintenance by June 2003. That is when Windows-98, the Y2K upgrade product, will no longer be supported. This is not a big problem because 98 is very stable (all things considered) and companies with thousands of Win98 computers should have tripped over any problems long ago. The bigger problem is the upgrade path. A new computer will be much faster but the software will be more expensive due to the new MSFT license program. Companies will hold off changing until the last minute due to cost and complexity and some analysts think they may try to generation skip the Windows-XP release and jump to the successor. If so then the brunt of the next upgrade cycle could be 2004 instead of 2003. The squeeze point is processor speed. Faster servers are being held back by slower workstations and companies may be forced to upgrade due to data constraints. There are as many opinions as there are analysts and all eyes will be on Intel on Thursday. The markets cratered on the AOL warning this morning and never recovered. The futures after the HPQ announcement and Disney earnings warning after the close are hovering at -4.00 for the S&P and -7.50 for the Nasdaq. This is not painting a bullish picture for Wednesday. There is another flurry of economic reports on Wednesday. Factory Orders, ISM non-mfg, Mortgage Applications and Productivity. Not much in that list to hope for. Support for the Dow is now 8670 and 1440 for the Nasdaq. Both of these levels do not leave us much room to breathe before dropping into critical territory. The challenge is also strong overhead resistance which begins around 8800 on the Dow and 1460 on the Nasdaq. As you can see this is not a very big range and it will require much more effort to go up than drift down. Volume is the weapon of the bulls and it was absent today and will likely be absent until we hear from Intel. Enter Very Passively, Exit Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** Clear and Present Danger By John Seckinger jseckinger@OptionInvestor.com There is a weekly bearish divergence within the Dow and S&P 500 that looks like it might hold. This type of pattern was seen back in March and May, but there does appear to be just one more level that needs to be taken out. Monday, December 2nd at 4:15 P.M. Contract Net Change High Low Volume ES02Z 923.75 -11.25 939.50 917.75 625,581 YM02Z 8736.00 -111.00 8894.00 8718.00 20,631 NQ02Z 1095.00 -32.50 1110.00 1084.00 266,434 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. Fundamental News: Shares of AOL Time Warner (AOL) fell over 14% on Tuesday after providing a disappointing guidance for 2003. The company reported seeing a 15-25% EBITDA decline for its online unit. In other company-specific news, shares of Nokia (NOK) lost almost 5% of its value in heavy trade (35.7 million) after its handset guidance was low relative to a forecast from Merrill of 474 million units. Moreover, the company reported seeing its infrastructure market down 10% from 2002. Looking elsewhere, Merck (MRK) reaffirmed its 2003 profit guidance and rebounded from a low of 55.16 to close at 58.82 and near its high of 59.17. Shares still finished lower by 1.88% on the day. In economic news, November truck sales came below expectations (7.1 versus estimates for 7.5 million). Auto sales for November met estimates at 5.7 million. Technical News: The Semiconductor Sector (Sox) opened on its highs (375) and closed on its lows of 355.63 and well below a 38.2% retracement area calculated from the highs in early March to the lows in October. This level comes in at 376. The downward objective appears to be for a move to 336, which correlates to the 22 Weekly Moving Average. The 200 DMA is higher at 380. It looks like the range is set. It was interesting how both the UTY and XOI index found bids on Tuesday, rising 1.18 and 2.25%, respectively. Both indices are not at either a relative low or high, but there has been price compression and the recent move will have to be watched. Note: A rise in the UTY and XOI could control downward pressure on stocks, and could possibly be a leading indicator based on an unknown variable (news not widely known to market participants). ================================================================= The December Mini-sized Dow Contract (YM02Z) A few bearish developments took place on Tuesday. First, the highly watched bullish trend line finally gave way and the Dow proceeded to close below this trend line for the first time. Secondly, the RSI weekly bearish divergence has a better possibility of reaching fruition. Another nice thing for bears is risk to the upside is also well defined. The 200 DMA at 8943 correlates to the 50% retracement from March to October (8935). The trend line in the Dow comes in currently at 8850 (same as YM contract), and a close back above this level should give the first sign of concern if short. Going forward with the bearish sentiment, remember the much talked about H&S formation? The right shoulder was at the 8625- 8645 area, and the significant rise above this level made it clear that shorts were covering and some longs entered. With that said, this level obviously becomes pivotal on a horizontal basis going forward. If the Dow falls under this area, there is a chance longs will liquidate and shorts will regain their confidence and try once again. This level also correlates with the 22 DMA, currently at 8639. Below 8625, I am sure the 8035 level will be brought up once again. If the Dow reverses and takes out this week’s high, longs will most likely hold all the cards once again. Chart of Dow Jones, Daily Looking at a daily chart of the YM02Z contract, the 8785 level that held in the past failed to do so during trading on Tuesday. With the YM, the 8658 area correlates with the Dow at 8640 and should hold the same significance. As far as looking at the YM from a bullish point of view, a move above 8785 could be the catalyst for one more test of 8800 (pivotal on Tuesday). Once above 8800, short-term sentiment might turn neutral (depending on if this is a gap higher opening or move after an economic release, with the latter being more bullish). Only a close above the trend line (will be near 9000 by Tuesday’s close) should turn sentiment back to bullish readings. Chart of YM02Z, Daily YM02Z Support Resistance Pivot 8658 8800 8800 8645-25 8875 8625 8500 8900 8425 9077 Bold signifies levels within the Dow Jones. The December E-mini Nasdaq 100 Contract (NQ02Z) If there is one contract that makes a bear wait, it is the NQ02Z. As noted yesterday, the 1080 level should have solid intermediate implications. With Tuesday’s low at 1084, there are certainly some large traders waiting for a move under the 1070-1080 level before beginning or adding to a significant short position. I don’t blame them. For shorter-term traders, it was bearish how the NDX had a high of 1110 (previous solid support) and then only rallied back to 1101 late in the session before failing once more. A close above 1110 could have short-term traders covering shorts and would turn sentiment to more bullish readings (currently neutral). Note: A point and figure chart shows a sell signal at 1080 with an objective of 1050 (10-point scale). Chart of NDX, 120-minute A 3-minute chart of the NQ02Z does show relative strength within the MACD, and the late-day selling pressure failed to make a new low. Nevertheless, support has turned into resistance (1100 and 1110), and both shorts and longs understand how these levels could tip the scale either back into the long’s camp or signaling the start of a new wave lower. The intermediate objective is for a test of 1000, but there will be support at 1058 and 1023 along the way. Chart of NQ02Z, 3-minute NQ02Z Support Resistance Pivot 1079 1100 1110 1069 1110 1100 1058 1120 1070 1023 1134 Bold signifies levels within the NDX. The December E-mini S&P 500 Contract (ES02Z) The S&P 500 Index has a similar pattern to the Dow on a daily chart, and, like all three contracts, there is some support below that might need to be broken first. The level in the SPX appears to be at 910, and a collapse underneath should send the contract quickly to the 902-900 area. If the market does find a bid, look for 927 to act pivotal. Once above 927, we can revisit a test of solid resistance between 937 and 942. I can see this contract trying to make a new high and then rolling over; however, we have to go with current price action, which seems to portend a test of 910. Chart of S&P 500 Index, Daily A 30-minute chart of the ES02Z contract shows a similar picture. I was surprised that the market didn’t sell off more once below 918.75; nevertheless, remaining under 927 gives shorts some ammunition. When looking for a confirmation of sentiment, I do recommend pulling up a 200 Period Moving Average (PMA) on a one-, five-, 30-, 60-, and daily chart (depending on if a trader is a day trader, swing trader, or investor, respectively). Note: A point and figure chart does give a sell signal at 910 and has an objective of 900 (five-point scale). Chart of ES02Z, 30-minute ES02Z Support Resistance Pivot 918.75 927 927 910 935 918 9000-902 942 910 894 950 900 Bold signifies levels within the S&P 500. Good Luck. Questions are welcomed, John Seckinger jseckinger@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** Loaded for bear Reeling a bit from yesterday's weaker than expected ISM Index which saw the equity market give back handsome gains and today's less than robust news from Internet/Media conglomerate AOL Time Warner (NYSE:AOL) $14.21 -14.2% and wireless handset maker Nokia (NYSE:NOK) $19.22 -4.61%, bulls had a tough time fending off the bears and markets sunk for a second straight session. With little economic news to grab hold of, North American auto sales for November had General Motors (NYSE:GM) $37.90 -5.13%, Ford Motor (NYSE:F) $9.96 -13% and Daimler/Chrysler (NYSE:DCX) $33.75 in reverse as today's trading depicted year-over-year declines in sales. On a relative basis, number three automaker Daimler/Chrysler (DCX) reported lesser declines, saying that November's unit volumes fell 12% on a year-over-year comparison, which was better than the -17.4% decline analysts had forecast. The world's largest maker of autos and Dow component General Motors (GM) said that November's 18%, compared to analyst's estimates for a 13% decline wouldn't sway the company from booting its Q4 outlook and plans to boost production by 5,000. Analysts warn investors to not worry too much about November's data as the November 2002 to November 2001 comparisons make for a tough comparison as 0% financing was introduced late last year to spur sales and many consumers did take advantage of those deals, making for some very strong comparables this month. While GM and Ford were optimistic about the market outlook and continuing demand for autos and trucks, Ford plans to produce one million vehicles in North America in the first quarter of 2003, which is 60,000 units more than it will produce in the fourth quarter of 2002, but lower than the 1,052 million vehicles produced in the first quarter of 2002 when the company was trying to rebuild its inventories. On a marginally positive note, research firm Challenger, Gray & Christmas said layoffs were still high, but fell 11% in November to 157,508 from October's 176,010 announced layoffs. Still, November's announced layoffs are nearly double the 80,966 recorded in August. Suffice it to say, today's news events held little positive and sector action was negative. Technology leadership groups from recent weeks found the CBOE Internet Index (INX.X) 106.71 -7.4% lower on AOL's "no growth" news, while Nokia's comments about 10% handset growth, which was far below Merrill Lynch's forecast from yesterday had the Wireless Telecom (YLS.X) 60.77 -4.7% and Fiber Optic (FOP.X) 56.38 -7.37% giving back recent week's gains. Treasuries saw morning gains evaporate despite Merrill Lynch's morning comments that it was cutting stock holdings in favor of bonds, citing corporate earnings uncertainty and potential war risks. The 10-year Note December futures (ty02z) 112'100 -0.08% fell fractionally, with the benchmark bond's YIELD ($TNX.X) edging up at 4.233%. Treasury traders cited this afternoon's selling in Treasuries due to traders looking ahead to Friday's jobs report for further confirmation that some of the improved news on the economy has perhaps carried through to the monthly employment statistics. Dow Industrials ($INDU) - $50 box While the pullback from yesterday morning's trade at 9,000 is suspicious when measured against the more overbought levels of bullish % at 73.33%, the 250-point pullback is considered normal, but gives trader/investors a good perception of risk at the higher levels of bullish %. I'm not an economist, but I'm thinking tomorrow's ISM Services number will either be "in line" or slightly above expectations (consensus is 54.0). I think the Dow has one "last" little run in it on a good ISM Services number for a rally back to the 9,000-9,050 level. Many comments I've read from economists note that yesterday's ISM Index is somewhat of a "lagging" economic indicator, while the ISM Services tends to be more of a "leading" indicator. Recent "sell signals" on the Dow's point and figure chart have been reversed higher as the bullish % was building. However, at the recently "overbought" levels above 70%, risk runs high for bulls and makes bullish trades on pullbacks the better risk/reward trade. I currently like the Dow bullish on a pullback near 8,500, stop 8,400 and target of 9,000. Not looking bearish at this point until I see some type of internal weakening/reversals in the bullish % charts. Today's action saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU). Current reading is "bull confirmed" at 70%, meaning 21 of the 30 components still have a point and figure "buy signal" associated with their charts. S&P 500 Index Chart - $5 box scale Subscribers have asked in the past, "why the point and figure charts only use 45-degree angled trends?" I can't say for certain, but the 45-degree trend is somewhat of a constant trend whereby the trader/investor can make note deviation from or toward trends. In the above chart, we are seeing more of a drift toward the support trend than we are the upper bullish resistance trend. This makes perfect sense as it relates to the higher levels of bullish % in the broader S&P 500. It's kind of like a progressive weight-training machine isn't it? When the bullish % was low, there was very little "weight" to push higher as both bulls and bears were buying stocks at the lower risk levels as depicted by the bullish %. That made it relatively "easy" for the SPX to test its "bullish resistance" trend. But as risk "increases" for the bulls as the bullish % moves higher, that's an obvious sign of strength, but its also a higher level of "risk" that bulls need to deal with and they become more conservative or at least less aggressive with their buying. Right now, I think a bull has to think of himself or herself as a power lifter. Lay down on that bench press machine, lift that heavy set of weights off the rack, take a deep breath and be willing to let that weight drop to your chest, then look for strength to have the weight rebounding. With the higher bullish % serving as weight, I'm not strong enough to rip off 10 repetitions of heavy weight. If I'm a bull that's used to trying to buy index break-outs to the upside at SPX 950 with a more overbought level of bullish %, then I would think a pullback to 900 was accounted for. Conversely, bears that are shorting/putting "tops" with a short-term trade in mind understand that the still strong bullish % will most likely find rebounds once the weightlifter's bar hits his chest and presses higher. With the SPX chart and trends as examples, I still have to say the bull has some strength left, but the muscles do appear to be tiring a bit. Today's action saw no net change in the S&P 500 Bullish % ($BPSPX) and status remains "bull confirmed" at 68.4% bullish, meaning that 342 of the 500 stocks currently show a buy signal associated with their point and figure charts. S&P 100 Index Chart - Nontraditional $2.5 box As we've seen in the Dow, SPX and even the OEX on $2.5 box scale, the first "sell signal" generated after a new relative high has been reversed back up and a new high established. As such, I'm labeling 465 as "tentative support" and would consider this a support level ahead of tomorrow's ISM Services number's, scheduled for release at 10:00 AM, along with Factory Orders. Today's action saw a net loss of 1 stock to a point and figure sell signals. This has the S&P 100 Bullish % ($BPOEX) slipping 1 notch to 75%, but still reads, "bull confirmed." It would take a reversal to 70% to have this index turning back to "bear alert" status. One thing I couldn't "reason" was today's bullishness in the Gold/Silver Index (XAU.X) 67.12 +5.7% as my quick scans of the news wires turned up nothing. The only thing I see on the horizon that might have had buyers in the group is tomorrow mornings final Productivity numbers for Q3, with economists looking for a 4.5% gain. The only reason I can thing gold stocks bid is that there was/is some "knowledge" of a weaker productivity number. Hmmmmm..... this may want to be watched. This could also partially explain why Treasuries found selling in the latter half of their trading session. Often times, when the broader equity market is under selling pressure, we will see gold stocks find some buyers, but Treasuries usually see buying. Today action, while marginal DIVERGENCE had gold stocks finding buyers and Treasuries finding some selling while equities declined has a trader's attention. It could be that the equity markets were just a little too overbought and sellers were determined to sell. A stronger than expected ISM Services or Factory orders number could be construed as bullish and actually hint of inflation. This may make sense to today's gold/Treasury action right? Under an inflationary scenario, gold could be perceived as a hedge, Treasuries would sell off as the market perceives a tightening Fed policy, and stocks could benefit under the premise of a growing economy. A bearish point of view for equities might have a selling in Treasuries coupled with buying in gold stocks, and selling in broader equities being sign of "stagflation," where slowing economic growth is accompanied by a general rise in prices. I will make note here that I've only seen/heard of three companies in recent weeks make public the raising of prices. UPS (NYSE:UPS) $63.80 -0.26% raised rates for 2003 on November 8th, then FedEx (NYSE:FDX) $52.53 -0.66% followed on 11/21/02 with rate increases, while Airborne Freight (NYSE:ABF) $14.27 -4.54% said yesterday that it will begin phasing in rate increases, effective January 6, 2003. This news and trend is very sector/business specific and not necessarily a sign of "stagflation." NASDAQ-100 Index Tracking Stock (QQQ) - Daily Intervals The QQQ suffered a bit of a setback when some of the recently high flying Internet (INX.X) 106.71 -7%, Wireless (YLS.X) 60.77 -4.7% and telecom related Fiber Optic (FOP.X) 56.38 -7% saw some profits removed after AOL and Nokia didn't necessarily confirm some of the bullish calls from analysts in recent days. Despite some of that sector weakness, the QQQ still held above trend and the horizontal $26.75 level which served as a resistance levels for months. With plenty of shorts below $25 still looking for some weakness to cover into, I'm not expecting the Q's to drop right down to $25 or the trending HIGHER 50-day SMA of $24.21, but if it did, that would be a trading target for bears on a break below $26.75. Until the bullish % shows some type of reversal lower, I want to limit bearish exposure to 1/4 or 1/2 positions. Action points as it would relate to the NASDAQ-100 (NDX.X) 1,088.80 -2.82% itself, would be put a break below 1,075, stop 1,160 with 50-day SMA target of 985 (50-day SMA currently at 973). Again, this would be "early" as it relates to the still trending higher 21-day SMA of 1,064. Plan #2 would be to trade bullish a positive market response to the ISM Services and Factory Orders numbers, stop snug below QQQ $26.75. Currently, I don't like a bullish trade in the NDX calls. 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 **************** Time to Reconsider by Steven Price We finally got a pattern that could give the bears some fuel heading into tomorrow's trading session. Since November12, the Dow took off in an ascending channel that has given it a boost on each pullback. However, today's close under 8750 appears to be a breakdown underneath that channel, although just barely, with a close of 8742. What was possibly just as important was the resistance below the 8000 we saw this afternoon, with a high of 8799. If we are seeing resistance at that level, following rejection just over 9000, then we may have our first lower high and a possible trend reversal. The next step for the bears is a trade under 8670, which would also be a lower low and possibly the start of a new descending channel. It was news from several sources that sent the market tumbling this morning. AOL said that 2003 revenues will be essentially flat, as growth in worldwide subscription revenue will be offset by declines in advertising and commerce revenues of 40% to 50%. Merrill Lynch added that they were shifting assets back out of stocks and into bonds and cash, citing concerns about corporate earnings and war. The Wall Street Journal reported that home prices rose at a significantly slower pace in the third quarter and that the market may be cooling. Considering how steep the recent rally has been, and the looming resistance of the August high and 200-dma for the Dow, it only took one domino to set the wheels in motion and we got a few of them. I don't want to get ahead of myself here, and it is true that my inner bear has been wondering all along just how the current rally can be sustained without some evidence of an across the board increase in business spending. We have gotten some evidence of increases here and there and I have mentioned in previous articles that a turnaround will come gradually, with good mews mixed in with the bad. Any trader can find a trend to support the view they want to see, if they look hard enough. However, the proof is in the bottom line and if we begin to see lower highs and lower lows, then the bottom line should favor the shorts. The Semiconductor Sector Index (SOX.X) has been leading the tech indices around recently and if today's action is an indication of things to come, then we should be seeing more red in the near future. The SOX gave up 5% today, which took the index back below the August highs, and also below the last pullback, establishing a lower low after a blow-off top that failed resistance at 400. The SOX finished the day down -19.62 at 355.62. That actually came in spite of some good news from the tech sector overnight, with increased guidance from Citrix (CTXS) and comments from Siebel Systems (SEBL) that the IT market is firming and demand looked better in the fourth quarter than the third. After the bell, it was reported that the CEO of Hewlett Packard said in an analyst meeting that IT spending remains tepid, contradicting those statements by SEBL and CTXS, but the sell-off came before the HP statement, so apparently investors have already decided that the chip stocks are overbought. That's not a stretch, considering they saw almost an 80% gain in seven weeks. Disney didn't do the market any favors after the bell when it announced it had overstated its 2002 profits by $74 million, due to overestimating the box office revenue from "Treasure Planet." The movie took in about half of what Disney movies usually gross in the first weekend and resulted in the company lowering its first quarter earnings estimate by a penny per share. Some "Treasure." I'll be looking for those lower lows tomorrow as a signal to go short the broader markets. If we get a bounce instead, then traders need to realize there is a short ceiling above at Dow 9077, as well as the 200-dmas in the Dow, COMPX and NDX. We'll be getting a look at the ISM index, Factory Orders and Productivity tomorrow, so we could see a bounce in the morning. However, if the Dow fails again at 8800, I'll be looking to enter short on the failure. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 8742 Moving Averages: (Simple) 10-dma: 8770 50-dma: 8280 200-dma: 9172 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 920 Moving Averages: (Simple) 10-dma: 925 50-dma: 877 200-dma: 981 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 1088 Moving Averages: (Simple) 10-dma: 1099 50-dma: 973 200-dma: 1118 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): It is beginning to appear as though the run for the chip stocks has come to a halt. After finding rejection at 400, where the index failed in June and July, it has retreated below the August highs, as well. After losing 5% today, the SOX set its first lower low, since the incredible run from a low of 209 on October 8. It saw an 80% gain in seven weeks, but has now given up 38 points since Monday's high of 393.80. After such an amazing run, some pullback can be expected, but the lower low may signal a trend reversal. If you are still long stocks in the sector, you may want to start collecting some protective puts. 52-week High: 657 52-week Low : 275 Current : 355 Moving Averages: (Simple) 10-dma: 359 50-dma: 290 200-dma: 406 ----------------------------------------------------------------- Market Volatility Index (VIX): You mean there's still a downside? Interesting that the VIX actually headed higher last week on a market increase, just before this week's drop. It usually takes some institutional trading to move the VIX against the grain. Do you suppose Merrill Lynch may have been buying a few puts ahead of this morning's announcement that they were shifting assets from stocks back into bonds and cash? Do you suppose other firms are planning the same strategy after the recent rally? I don't mean to sound like a conspiracy theorist (well maybe just a little), but I find it interesting that the VIX just wouldn't go down last week as the market rallied. CBOE Market Volatility Index (VIX) = 31.85 +1.80 Nasdaq-100 Volatility Index (VXN) = 51.99 +1.83 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.89 482,329 428,133 Equity Only 0.83 388,073 320,816 OEX 0.89 17,973 15,980 QQQ 2.80 35,052 98,256 ----------------------------------------------------------------- $bpnya Bullish Percent Data Current Change Status NYSE 51 + 2 Bull Confirmed NASDAQ-100 82 + 1 Bull Confirmed Dow Indust. 70 - 3 Bull Confirmed S&P 500 68 + 1 Bull Confirmed S&P 100 75 + 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 1.40 10-Day Arms Index 1.15 21-Day Arms Index 1.16 55-Day Arms Index 1.20 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 1007 1788 NASDAQ 1013 2194 New Highs New Lows NYSE 35 62 NASDAQ 27 26 Volume (in millions) NYSE 1784 NASDAQ 1616 ----------------------------------------------------------------- Commitments Of Traders Report: 11/26/02 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 8,000 contracts to the short side, while adding fewer than 1,000 to the long side. Small traders added almost 9,000 long contracts, while increasing short positions by only 4,000. Commercials Long Short Net % Of OI 11/05/02 438,546 472,384 (33,838) (3.7%) 11/12/02 437,683 476,540 (38,857) (4.3%) 11/19/02 446,668 480,270 (33,602) (3.6%) 11/26/02 447,024 488,250 (41,226) (4.4%) 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 11/05/02 138,604 76,032 65,572 30.5% 11/12/02 141,389 70,624 70,765 33.4% 11/19/02 143,070 77,332 65,738 29.8% 11/26/02 155,975 81,962 74,013 31.1% 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 1,000 long contracts and left shorts relatively unchanged. Small traders added 1,300 long contracts and 1,800 shorts. Commercials Long Short Net % of OI 11/05/02 49,128 56,121 (6,993) ( 6.6%) 11/12/02 45,647 55,892 (10,245) (10.1%) 11/19/02 42,074 52,302 (10,228) (10.7%) 11/26/02 43,231 52,425 ( 9,194) ( 9.6%) 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 11/05/02 13,355 12,903 452 1.7% 11/12/02 12,698 8,801 3,897 18.1% 11/19/02 16,292 10,540 5,752 21.4% 11/26/02 17,574 12,329 5,245 17.5% 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 reduced long positions by 3,000 contracts, while reducing shorts by only 700. Small traders increased both positions by approximately 2,000 contracts. Commercials Long Short Net % of OI 11/05/02 22,533 15,687 6,846 17.9% 11/12/02 22,283 14,953 7,330 19.6% 11/19/02 23,535 15,741 7,794 19.8% 11/26/02 20,499 15,015 5,484 15.4% 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 11/05/02 5,089 8,735 (3,646) (26.4%) 11/12/02 5,736 8,513 (2,777) (19.5%) 11/19/02 4,428 8,203 (3,775) (29.9%) 11/26/02 6,544 10,350 (3,806) (22.5%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************** WEEKLY FUND SCREE ***************** Multi-Asset Global Funds We like these international hybrid funds because they showcase a firm's global investment management capabilities and may provide some international diversification benefit. These funds achieve long-term growth of capital by investing in a wide range of asset classes from both U.S. and international markets. Because they invest in a wide range of asset classes from around the world, multi-asset global funds offer comprehensive exposure to the global markets. Such funds use top-down and/or bottom-up methodologies to analyze asset classes, countries and individual securities, in order to allocate assets to countries, currencies and securities worldwide. Some funds invest in smaller capitalization stocks that may have greater total return potential but are generally associated with greater price volatility and downside risk. Foreign investments may contain additional risks such as changing political climates, foreign market instability and currency fluctuations. The risks of international investing are magnified in developing (emerging) markets. Our goal this week is to screen for two or three best-fit matches based on our specific selection criteria. In the section, we go through our screening and evaluation process. Screen Process We began our screen process this week by using the advanced fund screener provided by Fidelity Investments (www.fidelity.com) and requesting all "multi-asset global" objective funds with overall star ratings of 3 stars or better from Morningstar that are open to new investors. Our initial screen produced 13 results, which are presented below for your convenience. Initial Screen Results: Calamos Global Growth & Income A (CVLOX) Comstock Partners Capital Value C (CPCCX) Comstock Partners Strategy C (CPFCX) Fidelity Global Balanced (FGBLX) First Eagle SoGen Global I (SGIIX) Lindner Market Neutral Inv (LDNBX) Loomis Sayles Worldwide I (QDACQ) MFS Global Total Return C (MFWCX) Oppenheimer Multiple Strategies C (OASCX) Payden & Rygel Global Balanced R (PYGBX) Phoenix-Oakhurst Managed Assets C (PZMCX) RS Contrarian Fund (RSCOX) UBS Global Balanced Y (BPGLX) We next refined the search to include only funds with Morningstar ratings of 4 stars or better. Three multi-asset global funds are rated 4 stars or better by Morningstar for relative risk-adjusted performance including Calamos Global Growth & Income, First Eagle SoGen Global, and Payden & Rygel Global Balanced. Only one has a Morningstar highest rating of 5 stars, First Eagle SoGen Global I class. Since the screen results reflect the institutional share class of the First Eagle SoGen Global Fund, we will use the fund's class A shares (SGENX) open to retail investors for comparison/evaluation purposes. It carries the same Morningstar 5-star rating as its I class sibling. The results also included the institutional class shares of Loomis-Sayles Worldwide Fund, but it is ruled out since the fund is not presently open to the retail marketplace. We next loaded the 12 remaining fund results, including the class A shares of the First Eagle SoGen Global Fund, into Lipper's fund database and into Morningstar's to see how the two major trackers grade the funds for return, risk, cost and other factors relative to similar funds. Payden & Rygel Global Balanced Fund was not in Lipper's system, but does show up in Morningstar's database under the "F000DY" ticker symbol, allowing for fund comparisons. PYGBX is the symbol listed in Fidelity's fund screen results. We observe in Lipper's system that Calamos Growth & Income Fund A (CVLOX), now known as Calamos Global Convertibles Fund, is one of three funds on our results list receiving Lipper's highest grades (1's) for both Total Return and Consistent Return relative to its peer group. The other Lipper Leaders for Total Return as well as Consistent Return were First Eagle SoGen Global A (SGENX) and UBS Global Allocation Y (BPGLX). The First Eagle SoGen and UBS funds are also Lipper Leaders (1's) for Preservation, two of five funds on our short list to receive that distinction. Morningstar's Fund Compare results show that the First Eagle fund and the UBS fund are good at controlling fund volatility as well. According to Morningstar, the First Eagle SoGen fund has a 3-year average standard deviation of 11.2% and the UBS Global Allocation fund has an average standard deviation of 10.3%, below average in relation to the 14.9% category average. Also exhibiting low risk compared to peers is the Payden & Rygel Global Balanced Fund with an average standard deviation of 10.1% for the last 36 months per Morningstar. On a risk-adjusted performance basis, Morningstar gives the First Eagle SoGen Global Fund A (SGENX) its highest "5-star" rating for relative returns, as adjusted for risks, costs, etc. The Calamos Global Convertibles Fund A (CVLOX) and Payden & Rygel Global Fund R (PYGBX) have overall ratings of 4 stars (above average). For more risk-averse investors, the Lipper and Morningstar return grades and ratings can be used with preservation and "volatility" statistics to make appropriate selections that balance risk and return. In the following section, we take a closer look at the three multi-asset global funds we favor based on their relative return as adjusted for risk and expense. While we like Calamos Global Convertibles Fund, it is perhaps better classified along with other convertible funds, where Morningstar categorizes the fund. The three funds we'll be profiling are all international hybrid funds in Morningstar's system, with "multi-asset global" objectives in Fidelity's system. First Eagle SoGen Global A (SGENX) Payden & Rygel Global Balanced R (PYGBX) UBS Global Allocation Y (BPGLX) First Eagle SoGen Global Fund seeks long-term capital growth by investing primarily in foreign and domestic common stocks, plus securities convertible into common stock. It may also purchase fixed-income instruments of any credit quality if they have the potential for capital appreciation. Veteran co-managers, Jean- Marie Eveillard and Charles de Vaulx have more than 38 years of combined investment experience in the SoGen Global Fund product. Their value-oriented style has helped to minimize risk over the years relative to other international hybrid funds. Compared to the $2.1 billion First Eagle SoGen Global Fund, the $8 million Payden & Rygel Global Balanced Fund is tiny, but the fund has quietly gone about its business, delivering returns in the last five years that rank in the top 30% of the Morningstar international hybrid category. The fund allocates assets among stocks, bonds, and money-market instruments in proportions that reflect the firm's economic and market outlook. While it tends to invest at least 65% of the equity portion in issuers located in three or more foreign countries, domestic securities may too be included. UBS Global Allocation Fund Y (BPGLX) has $175 million in assets per Morningstar and at one time was known as the Brinson Global Balanced Fund. It seeks capital appreciation as well as income by investing primarily in equity and fixed income securities of issuers located within and outside the United States. At least 25% of total assets must be invested in fixed income securities for income and stability. Investments in equity securities may include common stock and preferred stock. UBS' deep-value bias has produced a below-average risk level over time when compared to other international hybrid funds, but recently this fund has landed in Morningstar's large-cap growth style box. As of September 30, 2002, the First Eagle SoGen Global Fund had 67.6% of assets invested in stocks. UBS Global Allocation Fund was close behind with 66.6% of assets in stocks. Payden & Rygel Global Balanced had just 14.7% of assets invested in U.S. stocks and 21.8% of assets invested in foreign stocks, per Morningstar. The First Eagle SoGen portfolio has a mid-cap blend style, while the Payden & Rygel portfolio has large-cap blend characteristics. UBS' fund recently landed in Morningstar's large-cap growth style box, a departure from its deep-value discipline past. www.mutualinvestor.com/charts/dec02/index.asp?image=miwfs120302_01 In terms of longer-term investment results, it is hard to dispute what First Eagle SoGen Global Fund has accomplished, returning an average of 11.3% a year over the last 10 years (using the class A shares) and ranking in the top 1% within the international hybrid fund category. The fund's 11.3% average annual return topped the benchmark MSCI EAFE index by 6.9% a year and Dow Jones 60% Global index by 3.5% a year. Its Morningstar 5-star rating reflects the fund's superior return-to-risk tradeoff over time. www.mutualinvestor.com/charts/dec02/index.asp?image=miwfs120302_02 UBS Global Allocation Fund's 10-year average total return of 7.5% topped the MSCI EAFE index, but slightly lagged the Dow Jones 60% Global index, ranking in the 71st percentile within the category. Relative performance over the past three years has improved, with the fund's trailing 3-year average return of 3.1% positive enough to rank in the top 8% of the international hybrid category, using Morningstar's numbers through December 2, 2002. While the fund's relative risk has risen from below average to average in the last three years, its returns have improved enough to receive a 4-star overall rating for the trailing 3-year period. The tiny Payden & Rygel Global Balanced Fund sports a trailing 5- year average total return of 3.5% through December 2, 2002, 5.8% better than the benchmark MSCI EAFE ND index and consistent with the Dow Jones 60% Global index per Morningstar. Its 5-year fund performance was strong enough to rank in the category's best 30%. In contrast to the UBS fund, the Payden & Rygel fund has reduced its relative risk from average to below average in the last three years, a reflection of its higher global fixed income allocation. Conclusion The First Eagle SoGen Global Fund, Payden & Rygel Global Balanced Fund and UBS Global Allocation Fund are three multi-asset global options worth considering for the international portion of one's long-term investment plan. Payden & Rygel's performance has been competitive, though it's hard to argue with the stable management and superior record of the First Eagle SoGen Global Fund. If you seek a fund that favors undervalued foreign and domestic equities with smaller market capitalizations, the First Eagle fund makes a compelling case. For more fund information or to download a fund prospectus, visit the respective fund family's website. 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 *********************** Trend Reversal After getting whiplash watching the Dow, I decided to concentrate on a more significant level, rather than try to split hairs throughout the day. While traders looking for a trade may have been frustrated by the lack of an entry point, this simply is not the type of market that presents clear opportunities. To read the rest of the Swing Trader Game Plan Click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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The Option Investor Newsletter Tuesday 12-03-2002 Copyright 2002, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: MSFT Dropped Puts: SLM Daily Results Call Play Updates: ICOS, NVDA, QCOM New Calls Plays: GENZ Put Play Updates: BDK, HSIC, MEDI, APOL New Put Plays: DLX **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** MSFT $56.71 -0.98 (-0.97 for the week) Microsoft sold off on a day when the entire tech sector took a tumble. While the stock stayed above support at $55, it seems to have lost the momentum it established with the move over $57. It also traded below support at $56.78, hitting an intraday low of $56.41, and finishing at $56.71. The drop came in spite of good news from SEBL and CTXS, so there seems to be a shift in sentiment. As the biggest tech, with some recent gains, we don't want to chance the shorts picking on MSFT. While it doesn't necessarily look like it's heading into the tank, we wouldn't enter it long here anymore, so were going to close it and look for better opportunities. PUTS: ***** SLM $101.41 +1.44 (+3.68 for the week) Sallie Mae got an awfully big bounce on a day when the market went into the tank. While it may have been a bounce from the recent sell-off, or traders simply discounting the possibility of Congress actually passing a law to make the first year of college free, the stock has moved back into its gap from November 22. Rather than give it a chance to fill that gap up to the $104 area, we'll close it now and move on. Trader's who want to keep it on the radar can look for additional shorting opportunities up around $106-$107 if it makes it that high. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* ************************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 ******************** ICOS $31.96 -0.58 (+0.13) While clearly not screaming up the charts like it has in recent weeks, shares of ICOS are still exhibiting some impressive relative strength. Despite the weakness in the Biotechs today, ICOS only shed a measly 58 cents as it continues to consolidate its recent gains. Perhaps helping to prop the stock up today were comments from Bayer and GlaxoSmithKline that point to the likelihood that their anti-impotence drug is on track for European acceptance within the next few months. ICOS could be riding along on their coattails, as the firm is set to introduce its own anti-impotence drug next year. The stock's intraday highs are still moving up and the next pivotal move could be a breakout over Monday's intraday high of $32.72. Look for a trade above $33 on strong volume (ideally with the BTK index supporting such a move) to initiate new bullish positions. Recall that we don't really have any significant resistance until roughly $39, giving the play plenty of room to run. Should we get another pullback first, a successful rebound from the $31 or even $30 levels could make for a solid entry. Keep stops set at $28.50 until we get a close over the $33 level, at which point we can raise the stop to $29.50. --- NVDA $15.88 -1.12 (-1.25) So far, this week has not been kind to the Semiconductor stocks, with the SOX index shedding more than 9.5% from yesterday's opening high. Despite the rather sharp pullback, the pattern of higher lows is still very much intact and the $330-335 area should prove to be strong support if the current pullback extends that far. NVDA got hammered lower with the rest of the Chip sector today, but really hasn't suffered any significant technical damage. This looks like orderly profit taking ahead of the next push up the chart. Strong support ought to be waiting near the $15 level and a rebound from that level should make for a good long entry point. Look for confirmation of that bounce from the action in the SOX. NVDA rebounding from the $15 level should coincide with the SOX rebounding from the support level mentioned above and likely lead to a retest of the recent highs above $18. Traders looking to enter on strength will want to see a volume-backed move through the $17 level (the top of today's gap down) in concert with the SOX rallying back through the $375 level. Keep stops set at $14.50. --- QCOM $40.81 -1.88 (-0.41) The big story in the Wireless Telecom sector (YLS.X) this morning was the updated guidance from NOK. Although the firm reiterated its guidance for handset unit growth for 2003, it came in below Merrill's increased forecast and the sellers took control of the sector for the day. By the closing bell, the YLS index had shed 4.7%. Looking at the daily chart, this pullback is well within the ascending channel that has been in force since early October. QCOM held up reasonably well, given the negative reception of NOK's news. Although the stock gave up 4.4% on the day, it held solidly above the $40 support level and really didn't slip any lower after the initial drop this morning. New entries look good on a rebound from the $40 area, which should coincide with the YLS index rebounding from the bottom of its channel near $59. Wait for QCOM to take out $43 on the next rebound, with the YLS pushing back through above the midline of its channel ($62.25) before considering momentum-based entries. Keep stops set at $39. ************** NEW CALL PLAYS ************** GENZ – Genzyme General $36.20 +0.96 (+3.40 this week) Company Summary: Genzyme General, a division of Genzyme Corporation, is focused on developing innovative products and services to solve major unmet medical needs. GENZ has nearly 600 products and services on the market and a strong pipeline of therapeutic products for the treatment of rare genetic diseases. The Diagnostics business unit develops, markets and distributes in vitro diagnostic products and genetic testing services. With a solid, profitable revenue base, this research is intended to maintain the company’s high rate of earnings growth. Why We Like It: With the profit-taking occurring across the broader market, it is tough finding stocks that are breaking out to new highs. If you can find such a creature, you know you've found a pocket of relative strength. While it hasn't gotten hit by the sellers to the same degree as other sectors of the market, the Biotechnology index (BTK.X) certainly isn't a pillar of bullish strength. After breaking out a couple weeks ago, the BTK is back at the $365 level, testing prior resistance to determine if it has become support. Against that backdrop, the recent breakout move in shares of GENZ has been truly impressive. Ignoring the action of last Friday's holiday-shortened session, GENZ has put together three strongly positive days, vaulting from the $30 level (right at the 200-dma) to today's close above the $36 level for a strong 20% gain on heavy volume. The $64,000 question is whether the current move is sustainable. Judging by the long column of X's on the PnF chart, which solidly broke through the bearish resistance line this week, we're inclined to say that it is. One catalyst for the stock's outperformance this week is the CSFB upgrade to Outperform yesterday, which included a $40 price target. That level certainly looks reasonable to us, as $39-40 is the site of significant resistance (prior support before the breakdown earlier this year). Using that level as our eventual target for the play, the best risk/reward will clearly come from entering on a dip and bounce from support. Our first target would be near the $35 level, where the stock consolidated yesterday. But we don't want to rule out the possibility of a deeper dip to $34 (just above the top of yesterday's gap), which would provide an even better entry point. Due to the strong move already seen in the stock in the past several days, we don't favor chasing the stock higher from here, especially with such strong resistance near $39-40. We're looking for a favorable entry into a momentum run that is already well underway. As such, we're setting our stop at $33.50, as a close below that level would call into question the strength of the recent breakout move. BUY CALL DEC-35*GZQ-LG OI= 801 at $2.20 SL=1.00 BUY CALL DEC-37 GZQ-LO OI= 104 at $1.00 SL=0.50 BUY CALL JAN-35 GZQ-AG OI=4500 at $4.10 SL=2.50 BUY CALL JAN-37 GZQ-AO OI=1297 at $2.75 SL=1.25 BUY CALL JAN-40 GZQ-AH OI=1204 at $1.75 SL=0.75 Average Daily Volume = 3.69 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 ******************* BDK $40.72 -1.09 (-2.25) Tuesday was another clear victory for the bears in the broad market, and that applies equally well to our BDK play, which has slipped lower by more than 5% so far this week. After puncturing the $42 support level on Monday, the stock saw some pretty heavy selling volume (40% above the ADV) on Tuesday and the stock is fast approaching the $40 support level. While testing this level could result in a mild oversold rebound, the level that actually looks more interesting is $39. That is close to the closing lows from October, and an important level of support in July as well. A drop into the $38-39 area will provide a solid opportunity to lock in gains from higher levels. Traders still looking for an entry into the play need to wait for the next rebound to gauge the possibilities. A rollover near the $42 level looks good, although a pop and subsequent failure near $43.50 looks even better. Keep stops set at $44.50. --- HSIC $40.43 -0.98 (-2.13) Following the broad market yesterday, shares of HSIC made one last attempt to scale the formidable $43 resistance level, before succumbing to the weakness that enveloped the rest of the market. While the stock managed to hold above its recent lows at the close, that support level fell to the bears' assault on Tuesday, with the stock closing fractionally below the $40.50 level. Despite the stock's weakness over the past 2 days, the declining volume pattern hints that perhaps this last leg down may culminate soon. The July lows near $39 are beckoning to be tested, and it is entirely possible we'll see a decent oversold bounce from that area, possibly as early as tomorrow. For that reason, we're suggesting that this would be a good point to lock in profits on trades opened near the $43 level. We'll have to see whether that bounce has any life to it before determining whether to target new entries on a subsequent rollover or if it makes sense to exit the play. Right now, another failed rally near the $43 level looks good for new entries, but only if the stock is unable to close above our stop, which we are lowering to $43.50. --- MEDI $25.45 -0.53 (-0.93 for the week) Medimmune continued its recent sell-off with the break under $26 becoming more decisive and showing some resistance there to the upside. The next challenge for MEDI will be the 50-dma at $24.77, with support below at $23. Coverage on the stock was initiated with a sell rating today by Investec, which gave a target of $19. The firm cited decelerating growth of Synagis, the primary factor in MEDI's earnings, in 2003-2005. It also said Ethyol sales should see only modest growth in 2003 and the current pipeline is a ways off from providing replacement income. Today's drop stopped 0.30 of a point and figure reversal into a column of "O," which will come at $25. MEDI's recent rebound attempts have each been turned back by the descending bearish resistance line, now at $29. Our initial recommendation was for entry on a failed rebound underneath that level, or a breakdown under $26. With the breakdown occurring first and the market looking like it may be ready for an extended pullback, new entries can wait for the PnF reversal on a trade of $25. If we do get a rebound back over $27, then it would be prudent to let it run its course and play a rollover in the $28-29 range. --- APOL $40.50 -0.80 (-0.75 for the week) The bulls were unable to give APOL a boost for the failed rebound entry we were originally looking for. However, we did get a continued breakdown and a look at previous support just below $40. The stock bounced at $39.73 on Nov 13, and again at $39.80 this afternoon. The trade down below $40 managed to put another "O" into the bearish PnF column the stock is currently in. We'd like to see some resistance below $40 for a momentum entry, with an intraday low beneath $39.50 to make sure the buyers targeting $40 have left the building. We like the bearish vertical count of $32 for a high reward/low risk play if we can get that resistance at $40. Traders should look for another breakdown and failed rally underneath that level, before entering. If the stock falls below $39.50 and keeps going, then we will target a move underneath the 200-dma of $38.27 for new entries. It appears that the recent lower high in the stock has signaled a shift from educational stocks to other areas, however, given today's action we may be seeing a shift away from stocks altogether. Merrill Lynch announced this morning that it was reallocating from stocks into bonds and cash after the recent run, and we may see some downside momentum if other firms do the same. ************* NEW PUT PLAYS ************* DLX - Deluxe Corp. - $41.40 -1.44 (-2.00 for the week) Company Description: Deluxe Corporation's business units provide personal and business checks, business forms, labels, self-inking stamps, fraud prevention services and customer retention programs to banks, credit unions, financial services companies, consumers and small businesses. The Deluxe group of businesses reaches clients and customers through a number of distribution channels: the Internet, direct mail, the telephone and a nationwide sales force. (source: company press release) Why We Like It: While Deluxe isn't exactly a household name, the company's products (ranging from stamps to personal checks) have probably played a role in your everyday life. Their stock also boasts the largest market capitalization in the office supplies sector, ahead of both USTR, and MCL. What drew our attention to DLX was the way shares have broken down to multi-month lows. Fundamentally, we can't find a whole lot to explain this weakness. The stock has been trending lower since mid-October, despite a lack of noteworthy news developments. The latest quarterly report actually included an EPS result that was 9 cents better than consensus estimates. Not bad, but Wall Street didn't seen to be very impressed - DLX has given back more than 10% since the earnings announcement on October 17th. Meanwhile, the Dow Jones has clawed its way to a gain of 5.6% over the same time period. That pattern of relative weakness was on display during today's session, as DLX underperformed the broader market and fell below support at $42.00. Shares also closed below the 50% retracement level from July lows to October highs. This breakdown was accompanied by the largest volume in over a month. With the PnF chart showing a spread-triple sell signal and the daily stochastics (5,3,3) heading lower, it looks like the stock could continue to retrace its rapid late-summer gains and reach the August lows near $37.00. Given enough time (and some cooperation from the broader market), a retest of the July lows ($33-$34) wouldn't be out of the question. Possible support lies in the $39.50-$40.00 region. Traders can consider two possible entries for this play. Momentum traders can look for a trade beneath today's low of $41.29 for entry. If we get a bounce, then a more attractive risk/reward scenario comes on a failed rebound under $44.00. We'll set the stop at $44.25, above recent resistance and the 200-dma of $44.08. BUY PUT DEC-45*DLX-XI OI= 84 at $3.80 SL=1.90 BUY PUT DEC-40 DLX-XH OI= 184 at $0.85 SL=0.00 Average Daily Volume = 344 k ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Tuesday 12-03-2002 Copyright 2002, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: PUT - DLX Futures Corner: If... Then ********************* PLAY OF THE DAY - PUT ********************* DLX - Deluxe Corp. - $41.40 -1.44 (-2.00 for the week) Company Description: Deluxe Corporation's business units provide personal and business checks, business forms, labels, self-inking stamps, fraud prevention services and customer retention programs to banks, credit unions, financial services companies, consumers and small businesses. The Deluxe group of businesses reaches clients and customers through a number of distribution channels: the Internet, direct mail, the telephone and a nationwide sales force. (source: company press release) Why We Like It: While Deluxe isn't exactly a household name, the company's products (ranging from stamps to personal checks) have probably played a role in your everyday life. Their stock also boasts the largest market capitalization in the office supplies sector, ahead of both USTR, and MCL. What drew our attention to DLX was the way shares have broken down to multi-month lows. Fundamentally, we can't find a whole lot to explain this weakness. The stock has been trending lower since mid-October, despite a lack of noteworthy news developments. The latest quarterly report actually included an EPS result that was 9 cents better than consensus estimates. Not bad, but Wall Street didn't seen to be very impressed - DLX has given back more than 10% since the earnings announcement on October 17th. Meanwhile, the Dow Jones has clawed its way to a gain of 5.6% over the same time period. That pattern of relative weakness was on display during today's session, as DLX underperformed the broader market and fell below support at $42.00. Shares also closed below the 50% retracement level from July lows to October highs. This breakdown was accompanied by the largest volume in over a month. With the PnF chart showing a spread-triple sell signal and the daily stochastics (5,3,3) heading lower, it looks like the stock could continue to retrace its rapid late-summer gains and reach the August lows near $37.00. Given enough time (and some cooperation from the broader market), a retest of the July lows ($33-$34) wouldn't be out of the question. Possible support lies in the $39.50-$40.00 region. Traders can consider two possible entries for this play. Momentum traders can look for a trade beneath today's low of $41.29 for entry. If we get a bounce, then a more attractive risk/reward scenario comes on a failed rebound under $44.00. We'll set the stop at $44.25, above recent resistance and the 200-dma of $44.08. BUY PUT DEC-45*DLX-XI OI= 84 at $3.80 SL=1.90 BUY PUT DEC-40 DLX-XH OI= 184 at $0.85 SL=0.00 Average Daily Volume = 344 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 ************************************************************** ************** FUTURES CORNER ************** If . . . Then By John Seckinger jseckinger@OptionInvestor.com When putting on a trade, there are usually four different scenarios that have to be considered. The trading session in question is Tuesday, December 3rd. The contract: YM. Going into the session, if you read my futures wrap it became clear that I was fixated on a bullish daily trend line in the Dow (used for YM trading) that began back in October. To me, either breaking or maintaining this upward sloping line could help define sentiment going forward. With that said, I pulled up a micro chart of the Dow and YM02Z and waited for the market to open. So here comes the If/Then statements (remember, there are questions can be used to enter most, if not all, trades): ======================================================================= With the market quickly trading underneath this trend line (see charts below), I will now look to short the YM contract with a stop nicely above the rising trend line (most likely at 8850 and just above Monday’s close). If the YM does trap longs, and by definition proceeds to rise back above this trend line and stop me out at 8850, I have to look to go long with a stop back underneath the trend line. If the Dow remains comfortably below, I will look to add to positions as probabilities increase that bearish sentiment will pick up during overnight activity. The YM opened underneath the trend line. If it did not, I would ask this question: If the trend line holds, look to go long with a stop back underneath this trend line. ======================================================================= After reading these questions, it might become clear how trading involves more than a simple buy and sell signal. One of the biggest fears of trading is being caught in a trap (read: selling the bottom or buying the top). That is a risk of trading, and nowhere does it say that “if you sell the bottom you can never trade again.” That statement only comes into play with poor account management or an opinion that goes opposite of price action. As a trader, sometimes it is hurtful to wait for too much confirmation. If the trend line comes in at 8800 and the market trades 8775, does it make sense to wait for a move to 8700 to confirm the move? I don’t think so. Moreover, as a swing trader, when trading breakdowns (breakouts) it is usually a good idea to keep the position overnight and make the market prove to you that it was a trap. Otherwise, there will be countless “if only” statements instead. Getting to today’s action, execution could have taken place either during the opening (my choice) or when the 8785 level failed (not bad either). The 8785 area was taken out early, and the market kept testing this trend line until it finally gave way. As noted earlier, a stop ideally would be placed at 8850. This is a good distance from the trend line at 9:30 a.m.; however, I think it is warranted since this bullish trend line has been so psychologically significant over the last month or more. Chart of YM02Z, Daily The caveat is that the blue trend line is upward sloping and it certainly doesn’t make sense to have a stop go to 9,200 if the market just sits here day after day. For the first day, it does make sense; especially if it lowers your risk (8850). When to lower the stop from 8850 to the blue trend line? For me, a good rule of thumb is with about 45 minutes until the end of the session (a few minutes after the bond market closes to get rid of the added volatility). If the market is above the trend line and below 8850 at that time, maybe cut the position down to a quarter position or take it off entirely. I personally would sell the entire position. Looking at today’s price action, with 45 minutes to go the trend line was close to 8845 anyhow. Chart of YM02Z, 5-minute Ok, now let us do some hypothetical situations. If the YM trades 8658, we will have to same questions. If the market goes underneath, I would add to the position and then lower a stop now to be just above Tuesday’s low. If the market bounces at 8658, I would move the stop to just above 8785 (maybe even 8805) and make sure the market is not just doing a short covering bounce. Above 8785 would make me think sentiment has turned. Where would the stop be heading into Wednesday? 8805, since that is above the 8800 pivot and the 8801 high in the Dow during the last few hours of trading. The caveat with a falling market? Getting a bullish bias and going Long, right?. The aforementioned bullish trend line will start to go out of sight, and buying a bounce off support might only be viewed as a short-term trade (day trading via “open to close” strategy or “got a minute” patterns). Before I answer this differently, here is a look at my support/resistance/pivot levels for the YM (from Futures Wrap). YM02Z Support Resistance Pivot 8658 8800 8800 8645-25 8875 8625 8500 8900 8425 9077 The way to take the caveat out of the picture is to simply trade levels. This can be done if a trader is flat and the market is near a support level, say 8500. At 8500, ask the same four questions again and then proceed to put on a trade. Yes, this really is how Market Makers think; however, they do things on such a micro level and in size. I will say this over and over, “emotional trading is the most costly of all.” How do emotions get in the way? Let us stick with the 8500 level. The market opens at 8550 and trades down to 8490 and pauses. Should we go short? Of course, we are trading levels and the level did not hold. The “emotional” side could start saying, “let the market bid back to 8500 and then we can get a better execution.” The story usually goes on with the market going to 8425, a short position is THEN taken, and then the market bids back to 8500 and a loss is realized. Which brings me to another question. What rule do we have to classify a bounce? Volume? Nah, I have found that doesn’t work as well as I would like for swing trading. I recommend using a trigger roughly 10- points underneath, period. And this is only for horizontal lines of support/resistance. Trend lines can be used at their exact level. For a stop if going short at 8490, use a daily chart for levels. With the break of the bullish trend line, I used a good stop because this line, to me, holds solid importance. With 8490, I have a feeling there is support at 8415-8425; therefore, I would look to place a stop of roughly 25 points and re-evaluate if 8425 is hit. You might be asking yourself, “Can I use this method of trading every day?” If a market maker and looking for cents out of a stock, sure; however, this style will most likely only come up a few times a month or less. Am I crazy to sell a market that is up significantly from October? Just as crazy as I was to profile a weekly bullish divergence in the RSI during October. Will this trade work extremely well? Odds are barely in the bears favor now, but I think now is a good time to start small and hopefully end and win big. If I am proven wrong miserably, don’t worry, I will have exited and will certainly look to capture a move upwards. No emotions, just trading levels and clear technical trends. Good Luck. Questions are welcomed, John Seckinger jseckinger@OptionInvestor.com ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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