The Option Investor Newsletter Wednesday 12-04-2002 Copyright 2002, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Lower Lows Futures Wrap: From 200 to 22 Index Trader : S&P 100 reverses to "Bear Alert"! MUI CONTENT OF THE DAY: Top Three Fund Families: #3 American Funds Options 101: Confirmation Is Crucial Updated on the site tonight: Swing Trader Game Plan: Volatility 101 Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 12-04-2002 High Low Volume Advance/Decl DJIA 8737.85 - 5.08 8811.62 8653.38 1858 mln 619/1193 NASDAQ 1430.35 - 18.61 1444.18 1412.92 1856 mln 272/1566 S&P 100 468.03 - 1.59 472.46 463.86 totals 891/12759 S&P 500 917.58 - 3.17 925.21 909.51 RUS 2000 397.53 - 3.30 400.83 394.22 DJ TRANS 2345.48 + 8.44 2365.91 2318.16 VIX 32.14 + 0.38 33.14 31.23 VIXN 53.55 + 1.56 55.73 52.72 Put/Call Ratio 0.89 ******************************************************************* Lower Lows by Steven Price We tested some crucial levels today and the major indices left us questioning whether we had seen a trend reversal. We have definitely been seeing lower intraday resistance points for the last several days, but the big question is when it is time to turn around and go short. One of the indications I like to focus on is whether we continue to find buyers at successively higher levels on each pullback in a rising market. A series of higher highs and higher lows is certainly bullish and short plays aren't profitable for long. However, when those higher lows turn into lower lows, red flags fly and that is exactly what we saw today. We started out in a downdraft this morning, following several announcements after yesterday's close. Hewlett Packard CEO Carly Fiorina said the company was ahead of schedule in trimming costs, but that the company could not raise guidance due to tepid technology spending and an uncertain economy. That weighed on the tech sector this morning, with the Nasdaq Composite dropping 36 points a low of 1412.92 early on, before rallying back to a close of 1430.34, down 18.62 on the day. The low of the day was below its last pullback, on November 26, and constituted the first lower low since the recent rally began during the second week of October. The most recent breakout level for the index was 1426, the August high, and led a powerful run to the recent high of 1521.44. After today's rebound took us back over that level, we are left deciphering the significance of a close back above the breakout level. Chart of the COMPX The Semiconductor Index (SOX) also fell steeply, following the Hewlett Packard news, along with a Morgan Stanley downgrade to the semiconductor capital equipment makers, based on their outlook for a muted cyclical recovery in 2003. As if that weren't enough for nervous stockholders, after the recent rally has faded, Deutsche Securities also downgraded the analog chip stocks, saying they expect fundamentals to become incrementally weaker. Software maker PeopleSoft also said it saw customer spending flat next year. While it is not a chip stock, I want to make readers aware that the spending issue is still alive and well across the tech sector. The SOX pullback was significant in that it also broke the trend of higher lows on each pullback during the recent rally. It established a lower low for the first time since the rally from 214 began in the middle of October and is now testing the bottom trend line of its ascending channel. What may also be significant is the bounce from a previous resistance point at 329, with an intraday low of 330. The chip stocks have pretty much led the tech sector and today was no different. If we get a drop under 329, 310 is most likely the next support line, with a trip back into the 200s not far behind. Chart of the SOX In keeping with the same theme, we also saw the Dow, OEX and SPX set lower lows this morning, followed by an afternoon rebound that took them briefly into positive territory, before falling into the close. The Dow fell out of its ascending channel when it traded under 8750 yesterday, and then broke the trend of higher lows when it dropped under 8670 this morning. The current trend reversal, if that's what it is, is fighting a number of factors. First, we have been trending up since the second week of October. Second, the bullish percentages are very high, with the Dow and NDX in overbought territory, and underscore both the current strong bullish sentiment in the market, as well as the risk to getting long in such overbought conditions. That bullish sentiment, however, tends to bring in dip buyers, even if the dips grow successively lower. A look at the point and figure chart shows that although the Dow set a lower low on the daily chart, it bounced just 3 points above the PnF sell signal. Traders looking to go short the broader market on a Dow signal may want to target that sell signal at 8650, which would confirm the lower low on the daily chart. Judging by the 2:1 decline to advance ratio, we may see that number soon. Chart of the Dow We got a couple of economic reports this morning. Non-farm productivity rose at an annual rate of 5.1%, revised higher from last month's estimate of 4.0%. This reflects the results of job cuts and was the highest gain since 1973. Fed Chairman Alan Greenspan warned last month that the gains we are seeing in productivity, resulting from job cuts, is not sustainable and will eventually drop off as we either stop getting rid of workers, or employees who are picking up the slack with longer hours eventually burn out and become less productive. Factory orders actually came in below expectations, although they still saw an increase of 1.5%. This was the first increase in three months, but September orders were revised downward, as were bookings at manufacturers for durable goods. The ISM non-manufacturing index also showed a gain, coming in at 57.4, considerably above expectations for 54.0. The ISM report resulted in a short-lived market rally after it was released mid-morning, but the Dow re-tested its lows after that gain. As we head further into the official holiday shopping season, we got a couple of warnings about sales coming in below expectations. I have said before that one of the big wild cards in a continuing rally is holiday sales, which reflect consumer spending patterns. If consumers won't spend at this time of year, then any economic recovery could be a ways off. Federated, which owns Bloomingdale's and Macy's, said that even better than expected Thanksgiving sales did not offset weakness from earlier in the month and that it sees November- December holiday sales at the lower end of its previous guidance, which predicted sales flat to down 2.5%. That would indicate an even weaker holiday season than last year, when we were still recovering from 9/11. The sentiment was reiterated by American Eagle Outfitters, which saw its same store sales decline 4.9% in November. Office Depot, which relies more on the business sector than holiday shoppers, nevertheless also saw 4th quarter sales running below expectations. The Retail Index still managed to eke out a gain for the day, but the more reports we get of this nature, the gloomier my outlook gets. United Airlines (UAL) plunged after the bell, falling from a closing print of $3.12, to a low of $0.80, before rebounding to trade just over $1 per share. The airline's application for a $1.8 billion loan was rejected by the Treasury Department's Air Transportation Stabilization Board and UAL will likely file for bankruptcy. The board said the company's business plan was not financially sound and based on unreasonable revenue projections. The board's statement said, "This plan does not support the conclusion that there is a reasonable assurance of repayment and would pose an unacceptably high risk to U.S. taxpayers." With non-farm payrolls and unemployment claims out in the morning, we should get a good idea whether today's failed afternoon rally to 8800 in the Dow was bullish, after testing the new low mentioned earlier, or bearish, as we have a new ceiling in place. I'd be looking for a break back below 8650 as a sign to pile on short. If we break back over 8800, then the next pivotal level will be the August high of 9077. The market has been whipsawing us dramatically in recent weeks, so be careful to commit only levels of capital you are comfortable with, and don't be afraid to close out a loser for minimal cost. At some point, we should see a definable trend, but for the moment, staying lean seems the most prudent idea. ************ FUTURES WRAP ************ From 200 to 22 By John Seckinger jseckinger@OptionInvestor.com It was only a few days ago when traders were watching the 200 DMA’s (exp) for guidance. On Wednesday, it was the 22 DMA that garnered a lot of attention from traders. Wednesday, December 4th at 4:15 P.M. Contract Net Change High Low Volume ES02Z 918.75 -5.00 925.75 908.75 749,636 YM02Z 8742.00 -23.00 8812.00 8646.00 23,913 NQ02Z 1069.50 -25.00 1094.00 1055.00 339,813 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 Intel came under pressure on Wednesday after a WSJ article noted that most of the chip industry does not deserve the high valuations given to growth stocks. The WSJ also noted that the White House is close to proposing a reduction in taxes that individuals pay on corporate dividends. In other news, Lehman issued positive comments on HPQ, while Cisco was selected by SBC to supply equipment for SBC’s high-speed network. This should result in sales of 12k routers. Shares of HPQ closed down 4.47% to 18.37, while CSCO fell fractionally to 14.42. In other news, AOL Time Warner was downgraded by Morgan Stanley as shares lost 2.6% to close at 13.84. On the economic front, Q3 productivity was revised higher to 5.1% versus 4.5% consensus, while factory services rose 1.5% against estimates for 1.7%. ISM Services rose to 57.4% versus consensus estimates of 54%. Towards the end of the session, it seemed as though Microsoft was responsible for the late session bidding, rising significantly off its lows as the company mentioned it sees modest PC shipment growth for fiscal year 2003. Shares closed at 56.54, having an intra-day high of 57.44 and low of 55.82. Notes: On Thursday, look for an announcement from the European Central Bank regarding rates, as well as Intel’s mid-quarter update, a Merck conference call, and statement from St. Louis Fed President Poole (non-voter). On Friday, National Semi (NSM) is to report earnings, and a highly anticipated non-farm report is also scheduled. Estimates for the non-farm report is for a 35k increase in jobs versus a 5k contraction the month prior. The unemployment rate is expected to rise to 5.8 percent from 5.7. Technical News: The Sox index lost 5.73% to 335 on Wednesday; however, this index closed at the top end of a trading range between 330-335 throughout most of the session. Note: There is a trend line from the relative high on August 22nd at 367.90 that bisects the high on November 4th of 337.65 and the high on November 18th at 331.63. This line currently comes in at 225, and bearish sentiment should pick up once below. Note: The 22 DMA (exp) comes in at 336. ================================================================= The December Mini-sized Dow Contract (YM02Z) The Dow had an intra-day low of 8653 and did NOT take out the 8625-8645 level profiled on Tuesday. This 8645 level did correlate to the Dow’s 22 DMA on Tuesday; however, this moving average is currently higher at 8647. I will continue to use a move under 8625 as a solid shift in sentiment. Note: There was solid volume on Wednesday, and the close was almost exactly the same as where the blue chips opened (8737 versus 8734, respectively). This is called a “doji” formation (candlestick term) and signals indecision. Also important to note, the bullish trend line currently comes in at 8896. With that said, intermediate traders can wait until either a solid move under 8625 or above 8900 before entering. Chart of Dow Jones, Daily Looking at a 10-minute chart of the YM02Z, market participants used the high on November 20th at 8647 and low on November 21st at 8673 as a “zone of support” during trading on Wednesday. Moreover, the highly watched 8800 level became an important pivot as well. For short-term traders, look for a move back under 8690 as a catalyst for a quick test of 8650 and the strength of longs. On the other hand, a move back above 8800 should be the catalyst for a rise back to 8850 and maybe even 8925, depending on the volume. Note: The most important level on Wednesday and going forward is 8625 and the bullish trend line in the Dow (should trend from 8893 to 8940 on Thursday). Chart of YM02Z, 10-minute YM02Z Support Resistance Pivot 8673 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) From relative strength to relative weakness. The NDX lost 19.31 points, or 1.77%, to 1069 as well as having an intra-day low of 1055.11. The “zone of support” from 1080 was easily broken, and the close under 1070 now has the index below both horizontal and vertical support areas. The 1058 support level was also broken on an intra-day basis. Looking at a 120-minute chart of the NDX, the 1083 area has become resistance and the downward objective comes in at 1023. Look for the 1083-85 area to become an important pivot going forward. If the NDX does manage to get back above 1085, there is a good chance 1100 will be on bulls’ minds. A close above 1120 (now 50 points higher) is needed to bring sentiment back to more bullish readings. Chart of NDX, 120-minute A five-minute chart of the NQ02Z contract shows prices gapping underneath the “zone of support” level and consolidating, before rising back through the channel just to test the strength of bears at 1083. It is interesting that the contract never tested neither the 200 PMA nor the rising bullish trend line. On the other hand, the NQ contract did close at the top of the channel established during most of trading on Wednesday. With that said, least resistance should be lower, but it is perfectly acceptable to wait until the daily lows on Wednesday (1055) is taken out. If more aggressive, look for weakness under 1064; however, if this does happen, a move back above 1073 should be a signal that bulls remain in control. Note: If watching the 200 PMA, I would pull up a 30-minute chart, which shows how this 200 average went from a solid support area to resistance all in one session. This 200 PMA currently comes in at 1081, reinforcing the pivot near 1083. Chart of NQ02Z, 5-minute NQ02Z Support Resistance Pivot 1058 1080-85 1110 1040 1100 1100 1023 1110 1083 1000 1120 Bold signifies levels within the NDX. The December E-mini S&P 500 Contract (ES02Z) The 910-912 area was tested on Wednesday, but we certainly didn’t have the “collapse underneath” needed to get the contract down to 900. I would define a ‘collapse’ as price action on heavy volume, whereas the aforementioned level becomes strong resistance. The market did find a bid at the 910 level, and almost came back to the solid pivot area of 927 (a level that should then signal a move back towards 937 and 942). Looking at a 120-minute chart of the SPX contract, notice how the mid-point of the regression channel acted as resistance while the green line managed to control the selling pressure. One of these levels will most likely give in the next two sessions (with news from Intel and the non-farm report due out on Friday). Chart of S&P 500 Index, 120-minute The ES02Z contract closed exactly on the 918.75 support level profiled on Tuesday, and this seems to define current sentiment; neutral. The outside range continues to be at 907 to 927, with a solid break really defining sentiment in the near term. The downside objective is 900, while above 927 should send the index towards 940. Note: The ES contract does seem to trade a tad below support or above resistance; therefore, feel free to ‘massage’ the level(s) by a few points. I would look to the Dow for confirmation, actually. It is ok when one looks to buy support and sell resistance, but not capturing momentum. With that said, if the market does gap lower, look for bids near 900 for a move back towards 910. As far as the 927 level is concerned, it is ok to wait until a trade above 930 for confirmation. The extra 3 points should be the appropriate ‘massage’. During the next few days, I will use 907.25 for this exact reason. Chart of ES02Z, 30-minute ES02Z Support Resistance Pivot 907.25 927-930 927 900-902 937 918 894 942 907.25 Bold signifies levels within the S&P 500. Notes on 22 DMA’s (exp): Dow low at 8653, 22 DMA at 8648 Nasdaq low at 1412.92, 22 DMA at 1415.49 Sox close at 255.62, 22 DMA at 336 MSFT low at 55.82, 22 DMA at 56.04 S&P 500 Cash low at 909.51, 22 DMA at 912.28 UTY index low at 241.94, 22 DMA at 242.80 TYX.X index low at 49.84, 22 DMA at 49.87 OEX low at 463.86, 22 DMA at 465.41 Good Luck. Questions are welcomed, John Seckinger jseckinger@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** S&P 100 reverses to "Bear Alert"! We've got a lot to cover tonight, so I'll be brief with today's intra-day market news. Today's economic news showed some marginal growth at the industrial level as orders placed with U.S. plants increased for the first time in three months to 1.5%, which was slightly below economist's estimates for 1.7% growth. The more up-to-date look at the factory/industrial level was in Monday's ISM Index, which showed contraction in manufacturing for a third month. Technology sectors declined for a second session, hinting that investors may be questioning certain price valuations with little growth at the industrials level, making it difficult for company's to ramp up IT spending or capital expenditures to increase production capacity, which still looks to have plenty of capacity that is not being utilized. Before the bell, the Labor Department reported that revised productivity (preliminary Q3 was 4.0%) reached 29 year highs in the third quarter at a 5.1% annual rate, as recent job-cuts by businesses, combined with implementation of technology purchased in 1999 and 2000 are making for a leaner yet more productive workforce. Over the past year, productivity (output per hour worked) in the non-farm sector rose at a staggering 5.6% annual rate, the highest since the first quarter of 1973. Most economists look for sustainable productivity growth of 2 to 3% in the long run. While the productivity numbers help take inflation out of the picture on a near-term basis, especially at the job's level, today's gain in the Gold/Silver Index (XAU.X) 68.03 +1.35% along with the December Gold futures (gc02z) 322.20 +0.62% may have some investors looking for current productivity rates to cool off. This may not be "foolish" thoughts after Hewlett-Packard's (NYSE:HPQ) $18.37 -4.47% said corporate spending remains in a slow growth phase in a fiercely competitive environment. The gains in productivity can be viewed positive as it allows company's to manufacture goods with less man-hours, while product pricing at the consumer level if held steady can allow for stability in earnings. However, only with further productivity or renewed demand for products will top and bottom line earnings be found. Another positive from today's economic data was the ISM Services Index showing an upside surprise reading of 57.4, compared to economist's expectations for a 54.0 reading. This is a diffusion index where levels above 50 are considered expansionary. Once again, the disparity between this services reading above 50.00, while Monday's industrials reading below 50.00, being that of a consumer still relatively strong and willing to spend. As time passes, investors will continue to focus on the weekly and monthly jobs data and we'll get a look at weekly jobless claims tomorrow, as well as November nonfarm payroll and unemployment rates on Friday. While on the surface, today's equity markets declines were fractional, but some internal damage was done. As is usually the case, the more narrow bullish % indicators are the first to reverse up or down from more oversold or overbought conditions. It may seem like I've been "crying wolf" in recent sessions as the bullish % charts of the narrower Dow Industrials, S&P 100 and NASDAQ-100 have grown above the 70% and more overbought levels. However, those observations were made in order to advise bulls that risk levels were running high. Today's action did see some more meaningful internal weakness taking place as the S&P 100 saw a net loss of 6 stocks to point and figure sell signal. This has the S&P 100 Bullish % ($BPOEX) from www.stockcharts.com reversing the needed 3-boxes to establish a "bear alert" condition. S&P 100 Bullish % ($BPOEX) - 2% box Today's net loss of 6 stocks to point and figure sell signals tells us that we're starting to see supply begin to overtake demand on a more meaningful basis in the OEX and levels of past near-term support, where demand was strong enough at a given level begins to give way in at least 6 stocks. This is normal as the OEX now begins to digest some of its recent bullish gains and profits are taken. In Tom Dorsey's book "point and figure charting" notes are made that defensive action is warranted as bullish traders begin hedging bullish positions with protective puts. This becomes VERY important at the institutional level where large inventories of stocks are held to meet market liquidity needs. Traders can easily begin making RISK level ties to that found in early April of this year in relation to current levels of risk and similar "bear alert" signals. One must NOT assume bullish % declines to 50% or below 30%, but risk to those levels must immediately be assessed. For easiest tie, I'd suggest traders refer to a point and figure chart of the OEX, by first doing so on the traditional $5 box, then unconventional $2.5 box like we did last night. Tonight, I'll show a weekly interval chart of the OEX. Here I will simply take two retracement, just as a trader could have done back in April of this year, taking retracement from the relative low, to the relative high where the "bear alert" condition was created. Then, the VERY SAME and systematic approach can now be taken given today's "bear alert" status in the OEX. S&P 100 Index Chart ($OEX.X) - Weekly Interval Stepping back and looking at a point and figure chart, or even a weekly interval bar chart allows the trader/investor a "big picture" look at the OEX and a greater time horizon of observations. It's interesting to say the least that today's OEX close (468.03) and "bear alert" reading at 80.9% retracement is quite similar to early Aprils close at 80.9% retracement of 576.97 at 80.9% retracement. If history were to repeat, then MINIMUM downside risk is immediately assessed to 448, (round number 450) in the OEX. That may tie in with the point and figure chart of the OEX we looked at last night on the $2.5 box scale where the bullish support trend was at $442.50 and where we identified "critical support" at 445. I like a 1/4 or 1/2 position bearish trade in the OEX here. A 1/4 bearish position here, say 1 contract, allows a trader to wait one week, perhaps find a rally entry near 480 for an additional 1/4 position (then holding 1/2) and sit tight. Then should bullish support (longer-term trend) on point and figure chart get broken, begin rounding to full positions as profitability is found in early 1/4 positions. I would suggest options traders that want to implement the partial positions strategy, look further out than 1 or 2 month expiration. Give yourself TIME to then leg into positions. Out the money puts are sometimes preferred by more speculative options traders. That type of trading is understood to be "higher risk/ higher reward potential" trading. As such, even smaller positions should be taken with the higher risk/reward potential. Now lets take a look at the broader S&P 500 Index (SPX.X) 917.58 -0.34% with the "bigger picture" of the OEX in our mind's eye (both look very technically similar) and the observation of potential weakness in the next couple of months. S&P 500 Index Chart - Daily Intervals The SPX found support near the rising 21-day SMA and I think today's ISM Services report had something to do with that technical support. I would not be "freaking out" if traders bought the dip with the mindset of a short-term "pop" back near 950 on the SCENARIO that tomorrow's weekly jobless claims might show continued improvement as has been the trend the last couple of weeks. HOWEVER, if long/bullish, I would look to keep a tight stop just under today's low. The SPX did violate and close BELOW a rather aggressive upward trend and hints that some momentum is being lost. While the narrower S&P 100 Bullish % ($BPOEX) did reverse into "bear alert" status, we can understand it takes a lot more selling to have the broader S&P 500 Bullish % ($BPSPX) doing the same. In up and down moves, we always look for the narrower bullish % charts to reverse course FIRST, which is often times an EARLY signal of internal weakness. Today's action did see a net loss of 1.8%, or 9 stocks to point and figure sell signals in the S&P 500 Bullish %. This has the S&P 500 bullish % inching down at 66.6% and it would take a reading of 62% to see a reversal lower into "bull correction status." Again.... the "bear alert" status given by the OEX bullish % is because it had reached a level of 70% or higher. So far, the SPX bullish % has not reached the 70% level. Dow Industrials Chart - Daily Interval The Dow Industrials traded rather strong RELATIVE to the other major market indexes and actually pushed to a 69-point gain late this afternoon. It has been my observation over the years that when the bullish % charts get more extended, especially in the more volatile and "high flying" technology sectors, equity mutual fund managers will take profits in their technology stocks and according to prospectus, HAVE to stay fully invested (90% or more) in equities and then tend to stash those profits in the larger cap, and very liquid Dow components. Even if they "think" equities are overbought, they'd rather risk 10% losses in the Dow, that potentially risk 20% in the more volatile technology stocks. Today's action saw no change in the VERY narrow Dow Industrials Bullish % ($BPINDU). Status remains "bull confirmed" at 70%. NASDAQ-100 Index Tracking Stock (QQQ) - Daily Interval While the QQQ is an AMEX listed stock, it is representative of the largest NASDAQ stocks that MARKET MAKERS trade. It may not be coincidence that the QQQ held $26.18 today as this might be considered "market maker" support, but with the OEX bullish % reversing and the NASDAQ-100 Bullish % ($BPNDX) starting to show some internal sell signals, I'm now looking for resistance to be firm near $28 as market makers begin taking on more of a sell bias as they look to manage risk in their NASDAQ inventoried stocks. Today's action saw a net loss of 5 stocks to point and figure sell signals as the NASDAQ-100 Bullish % ($BPNDX) slips from 82% bullish to 77% bullish. It would take a reading of 76% for this bullish percent to reverse into "bear alert" status. Note: The retracement used in the above QQQ chart was derived in part from our "Ask the Analyst" column of 11/24/02 http://www.OptionInvestor.com/ask/112402_1.asp and could be used in conjunction with this past weekends column. 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 ************************************************************** ************************** WEEKLY FUND FAMILY PROFILE ************************** Top Three Fund Families: #3 American Funds Over the next three weeks, we'll profile the three biggest and best-managed mutual fund families in the nation, beginning with the American Funds Group of Los Angeles, California. American Funds is a family of "load" mutual funds and variable annuities that takes a long-term view in their investment approach and is dedicated to helping people build long-term investment success. They are one of the nation's oldest mutual fund families, with roots dating back to 1931, and they're the largest mutual fund family sold/distributed exclusively by financial advisers. The American Funds Group does this because they believe strongly in the value of a financial adviser. They feel financial advisers can be instrumental in helping investors develop and stick to a long-term financial plan. The third largest U.S. mutual fund family has approximately $325 billion in investments today and 15 million shareholder accounts, per company sources. One of things that differentiates American Funds Group from other fund families is its true "global" focus, with over $70 billion in non-U.S. assets managed. The American Funds is part of The Capital Group Companies, one of the world's largest asset management organizations. If you go to the company website (www.americanfunds.com) you can learn more about the fund family and its diverse lineup of funds. There you'll find a section summarizing what makes them different from the competition, paraphrased as follows: What Makes The American Funds Different: 1. Long-term focus (long-term, value-oriented approach) 2. Global research (unparalleled global research effort) 3. Unique management (multiple portfolio counselor system) 4. Experience (experienced investment professionals) 5. Low expenses (a commitment to low operating expenses) The American Funds Group and The Capital Group Companies focus on one business - managing money. They seek to make money over time with reduced risk relative to similar funds by taking a long-term value-oriented investment approach. Securities are valued versus their true worth and the company commits substantial resources to its global research effort. The firm's unique "multiple-manager" portfolio management system, now in use for over 40 years, blends teamwork with individual accountability. Only professionals with experience and expertise are brought into the system, and once in the prestigious organization they tend to become lifers. Like the Vanguard Funds, the American Funds are committed to low operating expenses. They recognize that ongoing annual expenses can have a substantial effect on long-term total return. Having low expenses doesn't guarantee success, but it can contribute to relative performance over time, by allowing investors to capture more of the fund's gross return. Studies have shown that mutual funds with lower expenses generally outperform those with higher expenses. Fund Overview The American Funds Group's 29 mutual funds cover the full range of investment objectives: growth funds, growth and income funds, equity-income funds, balanced funds, taxable and tax-exempt bond funds, and money market funds. The American Funds have produced competitive results in each objective class. Investment Company of America A (AIVSX) traces its roots back to January 1, 1934 and at $48.5 billion in assets, ranks as the top mutual fund in the American Funds lineup based on assets managed. The "large-cap value" fund seeks long-term growth of capital and income by investing primarily in common stocks of companies that are domiciled in the U.S. and included in the S&P 500 index. It favors securities with strong appreciation potential that pay or have the potential to pay dividends. Washington Mutual Fund A (AWSHX) is the second largest fund with assets of $44.5 billion in all share classes. It was started on July 31, 1952 and seeks income and the opportunity for growth of capital by investing in common stocks (or equivalent securities) that are legal for the investment of trust funds in the District of Columbia. The "large-cap value" fund seeks to be diversified and fully invested at all times, and tries to select a portfolio that an investor with fiduciary responsibility might select under prudent investor rules. Growth Fund of America A (AGTHX) was launched on January 1, 1959 and is the American Funds' third largest mutual fund, with $36.8 billion in total assets. It pursues capital growth over time by investing primarily in common stocks that are "reasonably priced" and represent strong long-term investment opportunities. It may invest up to 10% of its assets in securities of issuers domiciled outside the United States and Canada, and not included in the S&P 500 index. It lands in Morningstar's large-cap growth style box, but its price-conscious approach results in less volatility, more consistency than the typical large-cap growth product. The American Funds Group's fourth and firth largest funds are on the international equity side, another example of their "global" research capability. The $24.2 billion EuroPacific Growth Fund A (AEPGX) was launched on April 16, 1984 and seeks long-term growth of capital by normally investing at least 80% of assets in equity securities of issuers domiciled in Europe, Australia/New Zealand, and the Pacific region. Its large-cap blend style and developed foreign markets focus make it suitable as a core "foreign stock" investment. The $23.3 billion New Perspective Fund A (ANWPX) is global focused and includes securities of issuers domiciled here and abroad. The fund's management team looks for global changes in international trade patterns, and also economic and political relationships, and then isolates companies that may benefit from the new opportunities created by such changes. Like Growth Fund of America, New Perspective Fund lands in the Morningstar large- growth style box but invests primarily in growth stocks that are reasonably priced. The $21.5 billion Income Fund of America A (AMECX) is an equity income product launched on December 31, 1970 that is classified by Morningstar as a "domestic hybrid" fund due to its generally higher allocations to fixed income and money market instruments. It seeks income first, growth second, by allocating fund assets among common and preferred stocks, convertible securities, debt securities, and cash equivalents. Income-type investments will generally represent at least 60% of fund assets, with up to 20% of assets invested in lower quality, higher yielding securities for greater potential total return. The fund's equity style is "large-cap value" according to Morningstar, with up to 15% held in equity securities domiciled outside the U.S. and not part of the S&P 500 index. Fundamental Investors Fund A (ANCFX), American Balanced Fund A (ABALX), Bond Fund of America A (ABNDX), Capital Income Builder Fund A (CAIBX) and Capital World Growth & Income Fund A (CWGIX) are five more American Funds with assets of $10 billion or more today, using Morningstar's most recent figures. So, altogether eleven mutual funds with assets of $10 billion or more invested today, exemplifying the firm's long-term investment performance. In the next section, we take a closer look at the firm's return performance relative to index benchmarks and category peers per data from Morningstar. Fund Performance Roughly half of 29 mutual funds in the American Funds Group are rated 4 stars or better by Morningstar for risk-adjusted return performance within their respective category peer groups. Four funds - Growth Fund of America (AGTHX), New Perspective (AEPGX), Capital World Growth & Income (CWGIX), and Amcap (AMCPX) - have Morningstar's highest 5-star overall rating for relative "risk- adjusted" performance. Another 11 American Funds are currently rated 4 stars for their above-average risk-adjusted performance results. Morningstar 5-Star Rated American Funds: Amcap (AMCPX), Large Growth Capital World Growth & Income (CWGIX), World Stock Growth Fund of America (AGTHX), Large-Cap Growth New Perspective (AEPGX), World Stock Morningstar 4-Star Rated American Funds: American Balanced (ABALX), Domestic Hybrid American High Income (AHITX), High Yield Bond American Mutual (AMRMX), Large-Cap Value Capital Income Builder (CAIBX), International Hybrid EuroPacific Growth (AEPGX), Foreign Stock Fundamental Investors (ANCFX), Large-Cap Value Income Fund of America (AMECX), Domestic Hybrid Investment Company of America (AIVSX), Large-Cap Value New Economy (ANEFX), Large-Cap Growth New World (NEWFX), Emerging Markets Washington Mutual (AWSHX), Large-Cap Value You can see that the American Funds are well represented in the large-cap value and large-cap growth style boxes, as well as in the various foreign stock fund objectives such as foreign stock, world stock and diversified emerging markets. One international hybrid fund and two domestic hybrid funds round out the family's top-rated funds. The above-average and high Morningstar ratings reflect the strength and consistency of the American Funds Group. Below are average annual total returns over the trailing 5-year and 10-year periods, along with their respective category ranks, per Morningstar: Annualized 5-Year Return (December 3, 2002): + 7.0% Amcap (AMCPX), 2nd percentile + 6.0% Capital World Growth & Income (CWGIX), 4th percentile + 8.6% Growth Fund of America (AGTHX), 2nd percentile + 5.6% New Perspective (ANWPX), 7th percentile + 6.6% American Balanced (ABALX), 5th percentile + 1.7% American High Income (AHITX), 15th percentile + 3.7% American Mutual (AMRMX), 9th percentile + 5.1% Capital Income Builder (CAIBX), 12th percentile + 2.6% EuroPacific Growth (AEPGX), 13th percentile + 3.0% Fundamental Investors (ANCFX), 13th percentile + 4.2% Income Fund of America (AMECX), 19th percentile + 4.5% Investment Company of America (AIVSX), 6th percentile + 1.2% New Economy (ANEFX), 17th percentile + 3.2% Washington Mutual (AWSHX), 12th percentile Annualized 10-Year Return (November 30, 2002): +11.7% Amcap (AMCPX), 5th percentile +12.9% Growth Fund of America (AGTHX), 2nd percentile +11.2% New Perspective (ANWPX), 9th percentile +10.6% American Balanced (ABALX), 9th percentile + 6.5% American High Income (AHITX), 14th percentile +10.5% American Mutual (AMRMX), 28th percentile +10.3% Capital Income Builder (CAIBX), 15th percentile + 9.1% EuroPacific Growth (AEPGX), 9th percentile +11.4% Fundamental Investors (ANCFX), 13th percentile + 9.7% Income Fund of America (AMECX), 14th percentile +11.2% Investment Company of America (AIVSX), 15th percentile + 9.3% New Economy (ANEFX), 25th percentile +11.9% Washington Mutual (AWSHX), 9th percentile You can see that the top-rated American Funds, where the bulk of fund family assets are invested, have generally produced returns that rank in the top quintile (top 20%) of their respective fund category. In many cases, performance has been in the top decile. Their investment success shows in a variety of equity styles and strategies, with stable management a key to their fine long-term record. The firm's commitment to low operating expense improves their funds' odds of outperforming index benchmarks and category peers relative to those with higher annual expenses. Conclusion The American Funds Group offers a number of top-rated equity and partial equity funds to choose from for your long-term financial goals. Their largest, most successful products have the desired characteristics (above average returns, moderate risk, and below average annual expenses) relative to similar funds. In terms of their return-risk-expense tradeoff, the American Funds are tough to beat, making a compelling case for their U.S. and global fund products. Relative performance hasn't been quite as good in the bond funds, but is still respectable. The downswing in the economy has hurt the high-yield bond market, an area that the American Funds tend to have greater-than-average exposure to relative to their peers. If you view it as a buying opportunity today, the American Funds High Income Trust (AHITX) might be worth considering. It has an above-average performance record in the high-yield bond category. For more information or to download a fund prospectus, log on to the American Funds website at www.americanfunds.com. Steve Wagner Editor, Mutual Investor firstname.lastname@example.org *********** OPTIONS 101 *********** Confirmation Is Crucial by Mark Phillips mphillips@OptionInvestor.com As options traders, we have a much more daunting task to trade profitably than do stock or futures traders. In addition to being right on direction, we also have to be right on timing. Not only that, but due to factors such as volatility, time decay, bid/ask spread and slippage, we need a solid move to overcome the natural erosion in value of the option we purchase. Traders that have been involved in this game for a while understand the truth behind the statistic that 90% of all options expire worthless. To profit from the practice of buying options with the goal of selling them later for a profit, we have to stack as many factors in our favor as possible. Another way of thinking of this is that the deck is naturally stacked against us in this game. Our defense against this situation is to only enter trades where we can see enough factors lined up in our favor that the odds our good that we can overcome the stacked deck. That is what technical analysis is all about. Many new traders think they can find one magic technical indicator that will provide one winning trade after another. Sadly, that siren's song has led to more than a handful of busted accounts. Lest you think you're alone in that pursuit, let me assure you that I spent more late nights toiling on that path than I care to admit. The effort wasn't in vain, as I managed to cobble together what I think is a fairly solid understanding of the world of technical analysis. In the process, I even managed to craft a few technical tools of my own, that have helped me in my quest for profits over the years. I wrote about a couple of these indicators earlier this year, with emphasis on a moving average channel system that I call the Ribbon System, as well as a technique for trading gaps. Long time readers will have a vague recollection of those articles, while newcomers won't have any idea what I'm talking about. So let's start off by refreshing everyone's memory. Here are the links to those articles, if you're interested. New Tools for the New Year More On The Application of Moving Averages Another Tool For The Toolbox Combining Technical Tools Improves Confidence and Results Alright, that should give us all a common reference point for our discussion today. From time to time, I'll get questions from readers, asking if this stock or that one looks like an entry (either bullish or bearish) based on one of the technique I've written about in the past. Sometimes the answer is yes, and sometimes the answer is no. But it always provides me with food for thought and the opportunity to share any illuminating thoughts with the rest of you. Earlier this week I got an email asking if AIG looked like a short, based on the signal being given by the Ribbon system. Let's take a look at the daily chart together, and see what it tells us. Daily Chart of AIG -- Moving Average Ribbon Shown Based on the definition of the Ribbon system, we have a quantifiable bearish entry signal as of the close on Tuesday. The daily Stochastics confirms this weakness, as it is rolling over without getting anywhere near overbought territory on this latest move. That seems pretty clear, doesn't it? But remember the topic of our conversation here today -- Confirmation. Let's take a closer look at that chart and see what other clues it might provide about the future direction of AIG. Daily Chart of AIG -- A Closer View Well now, hold on just a minute. Suddenly, there seem to be a lot of obstacles in the way of a profitable trade to the downside. First up is the Support near $62, with the 50-dma resting just below at $61.82. Then we have support near $61 at the bottom of that big gap up in the middle of October. And finally, the bottom of the gap should provide support near the $60 level. Not only is there substantial support just under the current level, but the weakening volume trend isn't showing any rush to get out of the stock. Certainly we might be able to squeeze out a couple $$ of profit on a successful fill of that gap, but what's the risk-reward ratio. By my estimation, it would be tough to place a meaningful technical stop much below $66 (using the hourly chart, which isn't shown). With the stock trading just below $63, that makes the risk to reward ratio just about 1:1. There doesn't seem to be anything here that is improving our odds of success. But let's take a look at one more thing before we call it quits. I NEVER place a trade without at least looking at the Point and Figure (PnF) chart to find out whether it is bullish, bearish or neutral. Point and Figure chart of AIG Once again, we can see that it is a stretch to call AIG currently bearish. While it has certainly weakened since late November, the stock would have to trade at $62 or below to generate a PnF Sell signal, and then there is the rising Bullish Support line at $61. Recall that the first test of bullish support is usually painful for the bears. That means that a trade down to just above $61 (the top of the gap) could very easily produce a reversal. That would show on the PnF chart as a one-box violation of the $63 support level and would be a classic bear trap. I don't know about you, but I don't like traps, at least not when they get sprung ON me. Don't get me wrong. AIG may turn out to be an attractive short play in the future, but it isn't one right now. Before contemplating a bearish trade, we need to see a couple things materialize. First those support levels listed above need to be taken out and the PnF chart needs to generate a new Sell signal. But that isn't the point at which we want to implement the trade. With the broad market Bullish Percent readings so high right now, bearish trades need to be implemented by selling resistance on technically weak stocks. So what we'd like to do is implement our bearish trade on a subsequent failed rally below the $66 level, AFTER the PnF Sell signal is generated. Not only does that give us confirmation of the stock's weakness, but it makes for a much better risk/reward ratio, as we can set a close stop at $67. Note that after generating a Sell signal, the PnF chart would need to print $67 before going back on a Buy signal. This column is normally reserved for options trading related educational material, and if you've been paying attention you've noticed that we really haven't talked about any options-specific material today. Or have we? As noted at the top of this piece, stacking the odds in our favor has EVERYTHING to do with successful options trading. We didn't highlight anything that looks like a high-odds trade right now, but I think we may have done something more important -- we've stayed out of a questionable trade. If we can avoid the questionable trades and only take those where we can stack the odds in our favor, we should be able to profit over the long term using whatever options trading strategy (whether long puts or calls, spreads, straddles, or naked option sales) happens to fit with our own individual business plans. Since we've gone through this process tonight and rejected the idea of a bearish trade, my goal next Monday is to go through a similar process of confirmation, presenting a trade candidate that looks good with the odds stacked in our favor. If you've got a stock that you think looks good, then send it along for consideration. I'll look at all the candidates, along with those that catch my attention and present the one that looks the best. Have a great week! Mark ************************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 *********************** Volatility 101 We certainly got a lesson today in volatility. The now regular triple digit intraday moves in the Dow dictate wider stops, as long as the trend remains solid within those limits. To read the rest of the Swing Trader Game Plan Click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp ************************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 ************************************************************** ******************* 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. 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The Option Investor Newsletter Wednesday 12-04-2002 Copyright 2002, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: None Dropped Calls: NVDA Dropped Puts: None Play of the Day: Put - DLX SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS: Slumbering Bears Stir As Market Retreats Updated on the site tonight: Market Watch Market Posture ************************Advertisement************************* Quit paying fees for limit orders or minimum equity _ No hidden fees for limit orders or balances _ $1.50 /contract (10+ contracts) or $14.95 minimum. _ Zero minimum deposit required to open an account _ Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ************************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 ************************************************************** *********************************************************** Stop-Loss Adjustments *********************************************************** None *********************************************************** DROPS *********************************************************** calls ^^^^^ NVDA $13.98 -1.89 (-3.02 for the week) NVidia pulled back with the rest of the tech sector today, following Hewlett Packard's cautious statements about the tepid IT spending environment. While the company may still have a bright future, the fact that the Nasdaq Composite (COMP) and Semiconductor Index (SOX) broke their trends of higher lows on each pullback has us weary of playing a bounce. NVidia broke through our stop and with three straight down sessions, is having trouble finding support. Rather than hope for a bounce, we'll close the play and look for a more consistent trend to play. puts ^^^^ none ************************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 OF THE DAY - Call ********************** 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) Most Recent Write-Up: 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. Why This Is Our Play of the Day: We identified a couple of entry points in DLX in last night's write-up. With today's rebound running into resistance at $42.50 we didn't get the preferred risk/reward entry on a bounce under $44.00. However, with the market likely to get a bounce in the morning on the employment data, and then roll over after setting a lower low across all indices today, we like the possible set-up for entry on a rollover under $44 in the morning. If, instead, the stock rolls over and falls below Monday's support at $41, then that would also be a sign of weakness and can be used to initiate short positions. Trader's should look for signs of resistance on the intraday chart and then short a failed bounce, with a stop of $44.25. BUY PUT DEC-45*DLX-XI OI= 84 at $2.90 SL=1.50 BUY PUT DEC-40 DLX-XH OI= 184 at $0.65 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 ************************************************************** ************** MARKET POSTURE ************** Correction To Read The Rest of The OptionInvestor.com Market Watch Click Here http://www.OptionInvestor.com/marketposture/mp_120402.asp ************ MARKET WATCH ************ Downside Looking Tasty To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/wl_120402.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. You may also fax the information to: 303-797-1333 SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS *************** Slumbering Bears Stir As Market Retreats By Ray Cummins Stocks slumped again today amid renewed concerns about the U.S. economy and a brokerage downgrade of some key technology sectors. The Dow Jones Industrial Average finished 5 points lower at 8,737 on weakness in blue-chip bellwethers Hewlett-Packard (NYSE:HPQ) and Walt Disney (NYSE:DIS). The NASDAQ Composite slid 18 points to 1,430 after Morgan Stanley downgraded its ratings on the chip and chip-equipment sectors as part of a multi-industry downgrade. Telecom and software shares were also among the big losers in the hi-tech segment. In the broader market groups, almost any issues related to technology were lower while specialty retail, hospital and healthcare, and tobacco shares enjoyed limited buying pressure. Trading volume was 1.51 billion shares on the Big Board and 1.88 billion on the NASDAQ. Losers edged past winners 16 to 15 on the NYSE but losing stocks pounded the gaining issues 19 to 13 on the technology exchange. In the bond market, Treasurys rose as stocks fell. The benchmark 10-year Treasury note added 5/32 at 98 17/32 to yield 4.18% and the 30-year bond also climbed 5/32 at 105 9/32, yielding 5.02%. *************** SUMMARY OF CURRENT POSITIONS - AS OF 12/03/02 *************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of actual traders, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The play commentary (when provided) is simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it replace your duty to diligently monitor and manage the positions in your portfolio. Naked Puts Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mo. Yield CCMP DEC 40 38.80 56.62 $1.20 7.04% CDWC DEC 40 39.15 49.88 $0.85 5.10% FRX DEC 85 83.05 107.43 $1.95 5.14% GILD DEC 32 31.85 36.88 $0.65 4.41% KLAC DEC 30 29.25 42.28 $0.75 6.06% NBIX DEC 35 34.30 45.27 $0.70 4.64% AZO DEC 75 73.05 78.67 $1.95 6.05% COCO DEC 30 29.40 36.96 $0.60 5.89% GILD DEC 30 29.40 36.88 $0.60 5.36% IGEN DEC 30 29.15 36.74 $0.85 8.01% MSFT DEC 50 49.00 56.71 $1.00 4.62% NBIX DEC 35 33.85 45.27 $1.15 9.08% SNPS DEC 35 34.50 50.70 $0.50 4.31% CYMI DEC 25 24.70 34.96 $0.30 4.33% IR DEC 35 34.50 44.50 $0.50 4.97% LLTC DEC 25 24.75 31.86 $0.25 3.84% MERQ DEC 25 24.65 31.91 $0.35 5.33% QCOM DEC 32 32.10 40.81 $0.40 4.31% QLGC DEC 30 29.60 41.79 $0.40 4.67% SYK DEC 60 59.15 62.00 $0.85 4.15% TTWO DEC 22 22.20 28.52 $0.30 4.91% Autozone (NYSE:AZO) may become an early-exit candidate and some of the technology issues are turning south as well, so keep a close watch on any positions that move near their respective sold (short) strikes. Naked Calls Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield ABK DEC 65 65.90 60.73 $0.90 4.88% ATK DEC 65 66.05 57.55 $1.05 5.24% EXPE DEC 80 81.05 74.37 $1.05 5.16% Put-Credit Spreads Stock Gain Symbol Pick Last Month L/P S/P Credit C/B (Loss) Status FCN 41.18 38.71 DEC 30 35 0.55 34.45 $0.55 Open MSFT 57.03 56.71 DEC 47 50 0.30 49.70 $0.30 Open SNPS 47.35 50.70 DEC 35 40 0.60 39.40 $0.60 Open COLM 40.85 44.71 DEC 30 35 0.60 34.40 $0.60 Open CCMP 53.80 56.62 DEC 40 45 0.50 44.50 $0.50 Open ROOM 68.94 74.23 DEC 55 60 0.50 59.50 $0.50 Open WFMI 50.55 52.15 DEC 40 45 0.30 44.70 $0.30 Open XL 80.15 82.65 DEC 70 75 0.50 74.50 $0.50 Open Call-Credit Spreads Stock Gain Symbol Pick Last Month L/C S/C Credit C/B (Loss) Status CAH 70.01 62.25 DEC 85 80 0.55 80.55 $0.55 Open FNM 68.21 64.10 DEC 80 75 0.75 75.75 $0.75 Open APA 50.00 55.49 DEC 60 55 0.60 55.60 $0.11 Open? LLL 44.49 44.25 DEC 55 50 0.50 50.50 $0.50 Open TOT 67.37 66.22 DEC 80 75 0.45 75.45 $0.45 Open BRL 58.13 66.30 DEC 70 65 0.65 65.65 ($0.65) Closed CAH 75.70 62.25 DEC 75 70 0.80 70.80 $0.80 Open NVS 38.40 36.61 DEC 45 40 0.50 40.50 $0.50 Open Barr Laboratories (NYSE:BRL) has completely reversed its recent trend and the bearish position has been closed to limit losses. Apache Oil (NYSE:APA) also changed direction recently and the issue will likely test the previous trading-range top near $59. Credit Strangles Stock Strike Strike Cost Current Gain Potential Symbol Month &Price Basis Price (Loss) Mon. Yield KBH DEC 50C 52.00 41.53 $2.00 7.68% KBH DEC 40P 38.75 41.53 $1.25 6.67% THO DEC 40C 40.50 37.46 $0.50 4.34% *** THO DEC 30P 29.50 37.46 $0.50 4.46% Conservative traders should have closed the Thor Industries (NYSE:THO) position when the issue moved up and out of the recent trading-range top (near $37) on heavy volume. As well, conservative traders may consider closing the bullish portion of the Kb Home (NYSE:KBH) strangle since the issue is moving towards the sold strike at $40. Synthetic Positions: No Open Positions Questions & comments on spreads/combos to Contact Support *************** NEW POSITIONS This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. The positions with *** will be included in the weekly summary. Those with "TS" (Target-Shoot) are below our minimum monthly return but may offer a favorable entry price with a limit order, due to the daily volatility of the underlying issue. *************** BULLISH PLAYS - Premium Selling All of these issues have robust option premiums and relatively favorable technical indications. However, current news and market sentiment will have an effect on these stocks, so review each play thoroughly and make your own decision about its future outcome. *************** BSX - Boston Scientific $43.18 *** Multi-Year High! *** Boston Scientific (NYSE:BSX) is a global developer, manufacturer and marketer of less-invasive medical devices. The firm's unique products are offered by two major business groups, Cardiovascular and Endosurgery. The Cardiovascular segment focuses on products and technologies for use in the firm's interventional cardiology, interventional radiology, peripheral vascular and neurovascular procedures. The Endosurgery organization focuses on products and technologies for use in oncology, vascular surgery, endoscopy, urology and gynecology procedures. BSX - Boston Scientific $43.18 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT DEC 40 BSX XH 498 0.45 39.55 5.9% *** SELL PUT DEC 42.5 BSX XV 209 1.20 41.30 12.8% *************** C - Citigroup $37.85 *** Entry Point? *** Citigroup (NYSE:C) is a diversified global financial services holding company whose businesses provide a range of financial services to consumer and corporate customers. The company has over 192 million customer accounts in over 100 countries and territories. The company's activities are conducted through Global Consumer, which delivers a wide array of banking, lending, insurance and investment services; Global Corporate, which provides corporations, governments, institutions and investors with a broad range of financial products and services; Global Investment Management, which offers a broad range of life insurance, annuities and asset management products and services; Private Banking, which consists of customary banking activities, and Investment Activities, which are the company's venture capital activities. C - Citigroup $37.85 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT DEC 35 C XG 21,288 0.45 34.55 6.8% *** SELL PUT DEC 37.5 C XU 13,402 1.15 36.35 13.9% *************** COF - Capital One $34.48 *** Premium Selling! *** Capital One Financial (NYSE:COF) is a holding company whose major subsidiaries market a variety of financial products and services to consumers using its proprietary information-based strategy. The company's primary business is consumer lending, with a focus on credit cards, but including other consumer lending activities such as unsecured installment lending and automobile financing. The company's principal subsidiary, Capital One Bank, a limited purpose, state-chartered credit card bank, offers credit card products. Capital One, F.S.B., a federally chartered bank, offers consumer lending and deposit products. Capital One Services, the other major subsidiary, provides various operating, administrative and business services to the company and its subsidiaries. COF - Capital One $34.48 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT DEC 27.5 COF XY 2,380 0.30 27.20 7.9% *** SELL PUT DEC 30 COF XF 10,063 0.80 29.20 15.0% SELL PUT DEC 32.5 COF XZ 1,478 1.40 31.10 20.1% *************** GM - General Motors $38.41 *** Bottom Fishing! *** General Motors (NYSE:GM) is a diversified automotive business with interests in communications services, locomotives, finance and insurance. GM's automotive business designs, manufactures, and/or markets vehicles primarily in North America under the Chevrolet, Pontiac, GMC, Oldsmobile, Buick, Cadillac, Saturn and Hummer nameplates, and outside North America under the Vauxhall, Opel, Holden, Isuzu, Saab, Buick, Chevrolet, GMC, and Cadillac nameplates. GM's communications services relate to its Hughes Electronics Corporation subsidiary, which includes its digital entertainment, information and communications services, and satellite-based private business networks. GM also is engaged in the design, manufacturing and marketing of locomotives and heavy-duty transmissions. The firm's financing and insurance operations are conducted through the General Motors Acceptance Corporation, which provides a broad range of financial services. GM - General Motors $38.41 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT DEC 32.5 GM XZ 10,461 0.30 32.20 5.8% *** SELL PUT DEC 35 GM XG 11,114 0.65 34.35 9.8% SELL PUT DEC 37.5 GM XU 5,382 1.25 36.25 15.1% *************** PPD - Pre-Paid Legal Services $28.62 *** 6-Month High! *** Pre-Paid Legal Services (NYSE:PPD) was one of the first companies in the United States organized solely to design, underwrite and market legal expense plans. The company's legal expense plans (referred to as Memberships) currently provide for a variety of legal services in a manner similar to medical reimbursement plans. Plan benefits are provided through a network of independent law firms, typically one firm per state or province. Members have direct, toll-free access to their Provider law firm rather than having to call for a referral. Legal services include unlimited attorney consultation, traffic violation defense, auto-related criminal charges defense, letter writing/document preparation, will preparation and review and a general trial defense benefit. PPD - Pre-Paid Legal Services $28.62 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT DEC 22.5 PPD XX 2,177 0.25 22.25 8.0% *** SELL PUT DEC 25 PPD XE 6,702 0.65 24.35 14.6% *************** BULLISH PLAYS - Credit Spreads These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may also be higher than other plays in the same strategy, due to small disparities in option pricing however, each play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. *************** AMGN - Amgen $46.93 *** Trading Range? *** Amgen (NASDAQ:AMGN) is a biotechnology company that discovers, develops, manufactures and markets human therapeutics based on advances in cellular and molecular biology. Amgen manufactures and sells human therapeutic products including Epogen, Neupogen, Aranesp, Neulasta and Kineret. Amgen focuses its research and development efforts on therapeutics delivered in the form of proteins, monoclonal antibodies and small molecules in the areas of nephrology, cancer, inflammation and neurology and metabolism. The company has research facilities in the United States and has clinical development staff in the United States, the European Union, Canada, Australia and Japan. Amgen has acquired Immunex, a biopharmaceutical firm dedicated to developing immune system science to protect human health. Immunex has developed two major products, Enbrel and Leukine, and has two other products, Novantrone and Thioplex, which can be used in treating multiple indications. AMGN - Amgen $46.93 PLAY (conservative - bullish/credit spread): BUY PUT DEC-40.00 AMQ-XH OI=3755 A=$0.30 SELL PUT DEC-42.50 AMQ-XV OI=3043 B=$0.50 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$42.25 *************** NKE - Nike $46.10 *** Basing Pattern? *** Nike (NYSE:NKE) principally is engaged in the design, development and worldwide marketing of footwear, apparel, equipment and other clothing accessory products. Nike sells its products to over 17,000 retail accounts in the United States and through a mix of independent distributors, licensees and subsidiaries in over 140 countries around the world. Virtually all of Nike's products are manufactured by independent contractors. Most of the company's footwear products are produced outside the United States, while apparel products are produced in the United States and abroad. NKE - Nike $46.10 *** Basing Pattern? *** PLAY (conservative - bullish/credit spread): BUY PUT DEC-40.00 NKE-XH OI=173 A=$0.25 SELL PUT DEC-42.50 NKE-XV OI=234 B=$0.45 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$42.25 *************** XAU - PHLX Gold & Silver Sector $68.03 *** Market Hedge *** The PHLX Gold & Silver Sector (XAU) is a capitalization-weighted index composed of the common stocks of 9 companies involved in the gold and silver mining industry. The XAU was set to an initial value of 100 in January 1979; options commenced trading on December 19, 1983. For more information on the XAU, go to www.phlx.com. XAU - PHLX Gold & Silver Sector $68.03 PLAY (less conservative - bullish/credit spread): BUY PUT DEC-60.00 XAU-XL OI=940 A=$0.40 SELL PUT DEC-65.00 XAU-XM OI=1731 B=$1.00 INITIAL NET-CREDIT TARGET=$0.65-$0.75 POTENTIAL PROFIT(max)=14% B/E=$74.40 *************** BEARISH PLAYS - Naked Calls Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. *************** NVLS - Novellus Systems $31.84 *** Sector Slump! *** Novellus Systems (NASDAQ:NVLS) manufactures, sells and services semiconductor processing equipment. The company's products are comprised primarily of advanced systems used to deposit thin conductive and insulating films on semiconductor devices, as well as equipment for preparing the device surface prior to these deposition processes. Novellus is a supplier of high productivity deposition and surface preparation systems used in the fabrication of integrated circuits. Chemical Vapor Deposition systems employ a chemical plasma to deposit all of the dielectric (insulating) layers and certain of the metal (conductive) layers on the surface of a semiconductor wafer. Physical Vapor Deposition systems are used to deposit conductive metal layers by sputtering metallic atoms from the surface of a target source via high DC power. Electrofill systems are used for depositing copper conductive layers in a dual damascene design architecture using an aqueous solution. NVLS - Novellus Systems $31.84 PLAY (conservative - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL DEC 37.5 NLQ LU 2,633 0.30 37.80 7.7% *** SELL CALL DEC 35 NLQ LG 5,652 0.75 35.75 13.8% SELL CALL DEC 32.5 NLQ LZ 2,141 1.80 34.30 24.7% *************** QLGC - QLogic $39.50 *** Profit-Taking In Progress! *** QLogic Corporation (NASDAQ:QLGC) designs and supplies storage network infrastructure components and software for server and storage subsystem manufacturers. The company's products are based on SCSI, iSCSI, Fibre Channel and Infiniband standards. The company is the only end-to-end supplier of Fibre Channel network infrastructure components that aid in the transfer and acquisition of data within the SAN. Their products include its SANblade HBAs, SANbox Fibre Channel Switches and SANsurfer Tool Kit management software. QLogic is the only HBA vendor that supports SCSI, Internet Protocol, Virtual Interface and FICON protocols with the same Fibre Channel HBA. In addition, the company designs and supplies controller chips used in a variety of hard drives and tape drives as well as enclosure management and baseboard management chip solutions that monitor the health of the physical environment within a server or storage enclosure. QLGC - QLogic $39.50 PLAY (conservative - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL DEC 45 QLC LI 7,533 0.50 45.50 8.8% *** SELL CALL DEC 42.5 QLC LV 3,483 1.25 43.75 16.9% SELL CALL DEC 40 QLC LH 4,905 2.10 42.10 22.9% *************** BEARISH PLAYS - Credit Spreads All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. *************** ERTS - Electronic Arts $65.54 *** Trading Range? *** Electronic Arts (NYSE:ERTS) operates in two principal business segments globally: EA's Core business segment comprises the creation, marketing and distribution of entertainment software, while the EA.com business segment is composed of the creation, marketing and distribution of entertainment software which can be played or sold online, ongoing management of subscriptions of online games and Website advertising. ERTS - Electronic Arts $65.54 PLAY (less conservative - bearish/credit spread): BUY CALL DEC-75.00 EZQ-LO OI=4366 A=$0.10 SELL CALL DEC-70.00 EZQ-LN OI=11895 B=$0.55 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$70.50 *************** LEN - Lennar $50.25 *** Trending Lower *** Lennar (NYSE:LEN) is a homebuilder and a provider of residential financial services. The company's homebuilding operations include the sale and construction of single-family attached and detached homes as well as the purchase, development and sale of residential land directly and through its unconsolidated partnerships. The company's financial services operations provide mortgage financing, title insurance and closing services for both its homebuyers and others, resell the residential mortgage loans it originates in the secondary mortgage market and also provide Internet access, cable television and alarm monitoring services to residents of its many communities. The company recently acquired Patriot Homes, a new homebuilder in the Baltimore marketplace, and expanded into the Carolinas with the acquisition of Don Galloway Homes as well as the assets and operations of Sunstar Communities. LEN - Lennar $50.25 PLAY (conservative - bearish/credit spread): BUY CALL DEC-60.00 LEN-LL OI=608 A=$0.15 SELL CALL DEC-55.00 LEN-LK OI=2261 B=$0.50 INITIAL NET-CREDIT TARGET=$0.40-$0.50 POTENTIAL PROFIT(max)=8% B/E=$55.40 *************** MMM - 3M $128.00 *** An Old Favorite! *** 3M (NYSE:MMM) is a $16 billion diversified technology company with leading positions in health care, safety, electronics, telecommunications, industrial, consumer and office, and other markets. Headquartered in St. Paul, Minn., the company has operations in more than 60 countries and serves customers in nearly 200 countries. 3M businesses share many technologies, manufacturing operations, brands, marketing channels and other important resources. 3M, which marks its 100th anniversary this year, is one of the 30 stocks that make up the Dow Industrial Average and also is a component of Standard & Poor's 500 Index. MMM - 3M $128.00 PLAY (conservative - bearish/credit spread): BUY CALL DEC-140.00 MMM-LH OI=6893 A=$0.20 SELL CALL DEC-135.00 MMM-LG OI=3661 B=$0.55 INITIAL NET-CREDIT TARGET=$0.40-$0.45 POTENTIAL PROFIT(max)=8% B/E=$135.40 *************** ********** 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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