The Option Investor Newsletter Tuesday 12-10-2002 Copyright 2002, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Finally a Rebound Futures Markets: On Thin Ice Index Trader Wrap: A lack of enthusiasm Market Sentiment: Is the Bounce for Real? Weekly Fund Screen: Best in Class: International Stock Updated on the site tonight: Swing Trader Game Plan: Playing the Bounce Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 12-10-2002 High Low Volume Adv/Dcl DJIA 8574.26 +100.90 8578.99 8469.55 1.55 bln 2167/1011 NASDAQ 1390.52 + 23.40 1397.84 1373.89 1.45 bln 2030/1347 S&P 100 460.45 + 6.45 460.92 453.99 Totals 4197/2358 S&P 500 904.41 + 12.41 904.95 892.00 RUS 2000 393.47 + 7.17 393.97 386.55 DJ TRANS 2353.38 + 30.70 2354.58 2318.55 VIX 31.67 - 2.80 34.11 31.44 VXN 51.75 - 1.23 54.28 49.48 Total Vol 3,171M Total UpVol 2,486M Total DnVol 640M 52wk Highs 105 52wk Lows 116 TRIN 0.60 PUT/CALL 0.89 ************************************************************ Finally a Rebound The markets shook off a weak open and an uneventful Fed meeting and rallied at the close to put a green candle at the end of a string of red ones. While red and green are holiday colors many traders are wishing for a little less lopsided mix. Dow Chart – Daily Nasdaq Chart – Daily The day began with bad news on the economic front. Retail Sales fell -2.3% last week according to the weekly chain store sales report. Analysts were quick to blame the ice storm in the north east but readers of the market monitor know the news has been bad pretty much all over with only a few pockets of strength. The weekly sales index fell to its low of the year at 393. The Bank of Tokyo-Mitsubishi who produces these numbers said they were lowering their estimates for the month of December to only +2.5% growth from previous expectations of +5% growth. They claim that while the current pace of sales is enough to maintain growth there is no pent up demand and low confidence. They feel that while the season is only going to be slightly weaker than last year the risks have intensified that spending is going to fall even further below current expectations. They warned that retail profits are likely to suffer as a result. Adding to the negativity from the Retail Sales report was the Richmond Fed manufacturing survey. The headline number fell to -1.0, a seven point drop with shipments and employment negative but orders improved to +4 after three months in negative territory. Prices continued to increase despite the drops in order backlog, capacity utilization and employment. The internal expectation components continue to reflect expectations for an increase in business in the next six months. The Wholesale Trade report showed a drop back to an inventory-to- sales ratio of 1.22, which ties a record low. The -0.1% drop was far below expectations of a +0.3% gain. This was the first back to back monthly sales decline since 3Q-2001. The Fed meeting did not help the investor sentiment before the announcement. Investors "knew" the box the FOMC members spent five hours wrapping today was going to be empty but they continued to hold out hope that there was a surprise of some type inside. At 2:15 the Fed presented their holiday gift and it was indeed empty. The official statement continued the party line. "The limited number of incoming economic indicators since the November meeting, taken together, are not inconsistent with the economy working its way through its current soft spot." The Fed was referring to the negative ISM numbers and the higher than expected unemployment. The markets dipped right after the announcement as if traders had expected another surprise cut. If so they needed serious psychological counseling. Volume buyers showed up to buy the dip around 3:15 and the Dow managed to close +100 for the day. Most of the buying was in the big caps and appeared to be cautious despite the gain. Something unusual happened today. The 52-wk new lows beat the 52-wk new highs for the first time Nov-20th 118 to 101. Why is this surprising? The last eight trading days the markets have been dropping but the new highs beat new lows every day. A stealth movement that suggested underlying strength. Those new highs peaked on Dec-2nd with 202 stocks hitting the mark. New lows bottomed the prior day at 37. Since then the trends have been closing and today they crossed. Is it a one day wonder and if so why on a day that the markets rebounded? We have to remember that the market started the day weak and the Dow gained +72 points in the last hour. Did the trend change at 3:PM? I would be surprised if it did. We need to continue to watch these numbers as the week progresses. With big caps getting the most attention and internals weak it appears there is no conviction in today's move. A continued increase in new lows tomorrow could be a warning signal of further underlying weakness. Much of the move was credited to a positive choice of William Donaldson to head the SEC and replace Harvey Pitt. I would not give this reason much credence even though institutions were pleased with the appointment. A more likely reason for the bounce was simply oversold conditions and strong support. The Dow dipped to around 8475 three times in the first hour of trading but sellers were not able to push it any farther below 8500 than that level. The 8500 level begins about 150 points of strong support for the Dow. The 50DMA at 8365, 100 DMA 8388 and the 38% Fib retracement level at 8344. It is going to be very difficult to break through this before the holidays. This underlying support and the failure to break even the beginning layer at 8500 on bad economic news was a sign to institutions that buying stocks could be a safe move. They used the 3:PM dip to trigger their buy programs and the rest is history. If you read between the lines above you probably picked up on the "before the holidays" comment. I am becoming more concerned about numerous declining internals and the eventual impact on the broader market. I have been reporting on declining retail sales for a couple weeks and the numbers today were no surprise. Retailer profits are going to be tough to find in this post holiday season. Tech stocks drew some attention with the Nasdaq rebounding +23 points but that is hardly a blip compared to the recent losses. Chip stocks managed only a minor rally on the Taiwan Semiconductor news and positive comments from several other techs. There is simply no normal end of year budget flush that usually provides a 4Q lift to techs. WR Hambrecht reiterated a sell rating on JNPR with a $4 price target due to smaller than expected orders from large customers. This syndrome bodes ill for the entire tech sector. Companies are holding on to the extra budget cash, if any, instead of spending it. Home builders, a staple in the current economy, took heat from an article in the Wall Street Journal about donating money to non-profit groups to be then given to home buyers as down payments. This donation scam helps to eliminate excess home inventory by selling to people who would not normally be able to afford it. According to the report 17,000 Americans per month have been buying homes with down payments from "gifting groups" funded by homebuilders. It is feared now that these buyers are an increased credit risk because they do not have any of their own money at risk and a downturn in the economy could create a massive wave of foreclosures. If home builders are suddenly cut off from those 17,000 buyers per month then the inventory backlog will ripple down through the food chain. Prices will drop, layoffs will occur, suppliers will suffer, etc. Locally in Denver 38% of sales by KB Homes were funded with down payment gifts. If this program was to cease you can see the potential problems. Even worse, the builders have admitted raising the price of the homes to compensate for the gift program. Lenders are afraid that the houses are now over priced compared to normal houses bought in the area. This makes the loans even higher risk for foreclosure in any downturn because the loans exceed the value. Need more evidence of weak economic internals? Wendy's hit a 52-week low and other food retailers are not far behind due to lagging sales and shrinking profit margins. Even Lance, the vending machine snack company, warned tonight that they were cutting 4Q earnings estimates by about -10% due to lower than expected 4Q sales. Think about this. They do not rely on corporate budgets, IT spending and they are not impacted by the IRAQ war or terrorists. This is spending at the lowest level. Pocket change from consumers mostly in office buildings or convenience stores. We are not talking about slowing sales of $1,000 workstations but slowing sales of 75 cent cheese and crackers. At least there will be plenty of excess inventory available to send to the troops in Iraq. Traders are also starting to be more concerned about the IRAQ problem as well as new problems coming to light today. The new high tech IRAQ war nerve center in Qatar, which is staffed by hundreds of U.S. Central Command officers went live today with a full test of command and control planned. U.S. troops have taken over one quarter of Kuwait and are conducting live fire exercises with tanks and planes this week. Warships intercepted a North Korean freighter today loaded with Scud missiles for Yemen. On Wednesday President Bush is expected to unveil a new plan for global policing of weapons of mass destruction. He is expected to make the case for preemptive action against any nation that possesses or supplies them to another. With North Korea the number one supplier of weapons to smaller nations they are expected to be high on the hit list. Let's see, IRAQ, Afganistan, Yemen, North Korea, the number of battle zones is increasing daily. If the announcement is broad enough we could add another dozen countries to our list of potential targets. The markets are not likely to react positively to any administration announcement that sounds like "disarm now or we will disarm you" when he is talking about countries who have nuclear weapons like India and Pakistan. The Dow bounced +100 points above support on weak volume from very oversold conditions. Period. We need to be careful not to read too much into this event. I think next year will be bullish due to new tax breaks and economic stimulus finally taking effect. However, we have to get past the next six weeks, which will include more earnings warnings, a likely war declaration, end of year tax selling, portfolio rebalancing, S&P and Nasdaq rebalancing and a good possibility of a terrorist attack over the holidays. Sounds like a wall of worry to me but nothing the market can't conquer given time. Just don't expect the rest of December to be full of long green candles. Buy the red ones, sell the green ones! Enter Very Passively, Exit Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** On Thin Ice By John Seckinger jseckinger@OptionInvestor.com Support in the YM contract did come in near 8480, and the ES contract rose on Tuesday to test an important pivotal level once again. In order for bulls to keep shorts on the sidelines, they are going to have to start to become aggressive. Tuesday, December 10th at 4:15 P.M. Contract Net Change High Low Volume ES02Z 889.50 +12.00 905.25 888.75 536,345 YM02Z 8560.00 +66.00 8578.00 8467.00 20,670 NQ02Z 1030.00 +15.00 1044.50 1020.00 207,095 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: William Donaldson was nominated on Tuesday to run the Securities and Exchange Commission (SEC), and the equity markets seemed to applaud the announcement. In other news, Nokia (NOK) stated that profits were in-line with expectations and sales were soft. Shares of NOK closed lower by 3.27% at 17.43. Amazon.com (AMZN) noted that revenues were in line with prior guidance, while Merck (MRK) reaffirmed earnings guidance for 2003. Shares of AMZN closed up fractionally to 21.86, while MRK also closed barely higher to 59. Homebuilders came under pressure on Tuesday; following a downgrade of Beazer (BZH) and KB Home (KBH) to “market perform” from “strong buy”. BZH fell 1.89% to 59.40, while KBH lost 2.26% to 41.08. Almost as a side note, the Fed announced rates would be left unchanged and maintained a balanced policy stance. Note: According to Thomson Financial, insider selling in November rose 125 percent to $2.6 billion. This is compared to a $1.2 billion figure during the month of October. Selling from insiders of technology rose to $861 million from $244 million. Also noted was insider buying, rising 5 percent to $193 million from $184 million. Technical News: Both the Utilities (UTY) and Oil (XOI) Index appear ready to break out higher; however, the operative word is “appear”. Note: A breakout should help equities. The XOI is currently at 446.85 after a 1.35% gain on Tuesday, and a move above Monday’s high of 449.66 should get some more buyers involved. The objective would be for a move to 460. The UTY, on the other hand, has been doing some price compression and is right at the top of a down trending channel at 246. A move above 249 should be viewed as a breakout, and the objective would be for a move to 260. ================================================================= The December Mini-sized Dow Contract (YM02Z) The Dow did begin higher on Tuesday, and I am now convinced that other traders were looking at the 8480 level as support. As a daily chart of the Dow shows, a diagonal trend line (see chart) would have been the neckline of the H&S formation profiled many weeks ago. Evidently, traders are still watching this line as a gauge of sentiment as well. During the next few days, traders can use the neckline and the 8480 area as a way of estimating risk. Note: The Dow still managed to set a lower low and lower high, and there is always the risk that Tuesday’s rally was just a normal pullback in a trend of long liquidation (seen if the chart produces a “b” formation). It is also interesting that the highly watched 8625 level now coincides with the 22 PMA. If prices take out Tuesday’s high at 8579 (read: not a one-tick new high), expect 8625 to be tested soon thereafter. If 8625 is taken out, look for a test of 8700. On the other hand, a move under the 8480 area should send the Dow back towards 8400. As the chart shows and was noted yesterday, 8400 is another “efficient” area (like 8480) that became rather pivotal during the rise towards 9000. Chart of Dow Jones, Daily It was also nice to see the 8515 area act pivotal on Tuesday within the YM contract, as well as witnessing prices rising off the diagonal neckline shown below. Noted yesterday, a move above the 200 PMA (8577) could spark a rally back up to 8625. Well, the 200 PMA on a 60-minute chart actually proved to be the high of the session and was not broken. If this average is cleared on Wednesday, I still expect the YM contract will test 8625 in the near term. Note: A close above 8632 should have traders expecting a move towards 8725 and then 8825. Traders looking for a move downward can use the 8515 pivot and then get aggressive once under 8450. At current levels, bears seem to be holding slightly more risk; however, if the “ice” (read: support) breaks, prices will quickly become submerged in a sea of red. Chart of YM02Z, Daily YM02Z Support Resistance Pivot 8515 8625-32 8480 8480 8700-25 8632 8400 8825 8350 The December E-mini Nasdaq 100 Contract (NQ02Z) The NDX contract did in fact rally on Tuesday, and tiered resistance was there to greet the contract at 1030 (pivot) and 1044. Moreover, since 1015 was not tested, the 1000 level fell off the radar screen during trading on Tuesday. The downside levels remain the same; once under 1015, expect a test of 1000. Moreover, the main downward objective is still 973 and only a close above 1085 will send this level deep into the back of my mind. For a number of charts on the NQ contract, turn to tonight’s Futures Corner article (link at this time not available). Going forward, a move above 1050 should be a catalyst for more buying, while a close above 1060 can be reason to hold bullish positions overnight (since going against the trend, risk is greater than normal). Aggressive bullish traders can use the 200 PMA (exp) on a 60-minute chart for a pivot (once above, go long and use a tight stop), while looking for more weakness once underneath 1023. Note: Watch for traps; meaning watch the contract when a noted level is taken out and look for confirmation (good MACD, solid volume, etc.). If simply using price levels, ‘massage’ the levels either upwards or downwards (for support) by a few points. Chart of NDX, 60-minute NQ02Z Support Resistance Pivot 1020 1040 1050 1000 1050 1017 973 1085 Bold signifies levels within the NDX. The December E-mini S&P 500 Contract (ES02Z) No man’s land. The SPX index did rise above 900 and hit the 905 area; however, solid resistance is now roughly 10 points higher with support almost 20 points lower. Short-term traders can use the 200 PMA and 22 PMA as well, which reside at 898 and 907, respectively. If long, expect the 910-915 level to not give up easily. A close above 915 should portend a move to 927, while underneath 892 will bring back the potential for at test of the 38.2% retracement at 883. Least resistance continues to be lower; however, the bulls on Tuesday seemed to get some footing and will try to definitely try to defend the 892 level. Chart of S&P 500 Index, 120-minute It is interesting how the 905.38 pivotal area basically became the high during trading on Tuesday. If this area is taken out in the near term, look for a move back towards 915 and the 38.2% retracement level shown (not 50% as noted). Aggressive bearish traders can look for a move under 900 as a catalyst for a fall to 892. Unfortunately, with no economic reports scheduled for Wednesday (Retail Sales, Initial Claims, and FOMC minutes on Thursday), price action would have to be very significant by Wednesday’s close to warrant a full position being held overnight into these numbers. Chart of ES02Z, 30-minute ES02Z Support Resistance Pivot 900 905.50 905 880-885 910-915 880 869 922 Bold signifies levels within the S&P 500. Good Luck. Questions are welcomed, John Seckinger jseckinger@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** A lack of enthusiasm Stocks opened modestly higher in the early going, added some gains by noon, which built to session highs by the close on what most would characterize as a market that lacked enthusiasm from traders in both the bullish and bearish camps. The day's economic news had wholesale inventories falling -0.3%, which was below (better than) consensus for a 0.2% rise. I say "better" as the depletion in October inventories may be rebuilt in the November/December time periods. Still, not much weight was put into today's numbers as many business look to par down inventories into the end of the calendar year, especially those with fiscal year's ending in December. Retailers as depicted by the Retail HOLDRS (AMEX:RTH) 74.10 +1.92% shrugged of some early morning blues after this morning's notes out of Bank of Tokyo-Mitsubishi and UBS Warburg said their weekly retail sales index showed a -2.3% decline from Thanksgiving week sales, but was still above year-go-levels by 2%. The BofTM/UBSW weekly data serves as a warm up to Thursday's release of November's Retail Sales data, which has economists looking for a 0.4% rise, while the excluding autos sales data is expected to gain just 0.2%. After dipping to a morning low of $51.55 a level not seen since early October, shares of Dow component Wal-Mart (NYSE:WMT) $52.49 +1.23% reversed a loss into a 64-cent gain by session's end, while Home Depot (NYSE:HD) $26.90 +4.46% lead today's Dow percentage gainers. Today's bullishness saw most sectors recouping the bulk of yesterday's losses, but few regained all of Monday's losses. Only the S&P Banks Index (BIX.X) 284 +1.91%, S&P Insurance Index (IUX.X) 261.47 +1.8%, Pharmaceutical Index (DRG.X) 307.76 +0.54% and Natural Gas Index (XNG.X) 141.65 +1.23% finished today's session higher than Friday's close. The Utility Sector Index (UTY.X) 246.06 +1.06%, which was one of the lone sectors posting a gain on Monday, added 2.5 points of upside action today. After Paul O'Neill resigned as Treasury Secretary last Friday, which found stocks recovering from their lows on an intra-day basis, the major market averages appeared pleased, but not euphoric with President Bush's nomination of William Donaldson as new SEC chief. Benchmarked from Friday's announcement, one might conclude the recent shakeup at the top of the SEC was worth a break-even in the Dow Industrials and major indexes. Dow Industrials (INDU) 8,574 +1.19%: On traditional $50 box scale, the Dow Industrials 100-point gain wasn't enough to have the point and figure chartist making any entries on their chart. The recent double-bottom sell signal at 8,650 has the longer-term bullish support trend at 8,350 in play, while near-term resistance forms at the 8,650-8,700 level. Current range as defined by Bollinger Bands with 21-day SMA and 2 standard deviations are 8,300-8,950, with mid-range at 8,600. Dow Industrials Chart - Daily Interval Using the 21-day SMA as a benchmark, we can look back to early August and see the Dow closing below its 21-day SMA for four session, but closed back above this short-term SMA and proceeded to rally to the 9,055 level, which is where we anchored the top of our retracement. Then, in early September, the Dow closed below the 21-day SMA for 5-sessions. The rebound from the lower end of the Bollinger Band then found formidable selling at both the 21-day SMA and 80.9% retracement. With bullish % readings near "overbought" levels on the bullish % charts, it would take some blockbuster retail sales numbers on Wednesday in my opinion to get the Dow much above the 8,717 level. On an intra-day basis, watch the 8,640-8,650 levels for any type of sharp turn lower or program trading executions on the sell side. Today's action saw a net loss of 1 stock to a point and figure sell signal and the VERY narrow Dow Industrials Bullish % ($BPINDU) reverses into "bear alert" status. This now has all three of our "narrower" Dow, S&P100 and NASDAQ-100 Bullish % charts in a more near-term weakening phase as the markets begin to digest gains. Again, the Dow is just 30 stocks and it only takes 2 stocks to have the bullish % reversing the needed 6%, or 2-box reversal. However, it is often times the narrower bullish % that give traders the "heads up" for potential weakness in the broader market bullish % after a more meaningful decline would take place. S&P 500 Index (SPX.X) 904.45 +1.39%: On conventional $5 box, there was no meaningful movement in the SPX. Monday's trade at 895 had the SPX testing its longer-term bullish support trend, and it is at these levels of trend where institutional bulls would most likely be found. A trade at 890 would break the bullish trend and then have the 875 level in play. SPX looks a little overextended on the downside from the p/f perspective and would look for resistance to come into play in the 910-915 range. With the S&P 500 Bullish % ($BPSPX) still bull confirmed, bulls can play long with a tight stop at 890. Should the bullish % not "confirm" bullishness on an SPX rally to 940, bulls entering positions here most likely sell strength and establish offsetting bearish trades. S&P 500 Index Chart - Daily Interval I'm thinking that bears short from 915 before the recent highs of 950 in the SPX probably took an opportunity to cover some positions on the recent decline and get things squared up. Today's market volume was light and action hinted that the only aggressive buyers were from the bearish camp as profits eroded marginally on an hour-by-hour basis. The rally building into the close hints that bears wanted to close out and not risk some type of gap higher tomorrow morning. From a swing-trader's perspective, I'm short-term bullish (1-2 days) while intermediate-term bearish (3-days to 7 days) in the indexes. The broader S&P 500 Bullish % ($BPSPX) from www.stockcharts.com shows a net loss of 6 stocks to point and figure sell signals today as the bullish % inches lower to 64%. Current status remains "bull confirmed," but a 62% reading would have this broader market indicator reversing to "bull correction" status. Should that take place, it is often found that a 50% reading would be normal. In January of this year, the SPX bullish % reversed from 68% to 54%, before rebounding to a March high reading of 76%. S&P 100 Index (OEX.X) 460.49 +1.43%: Conventional $5 box of the OEX p/f chart shows a normal pullback has been taking place. First sign of trouble for bulls on the $5 box is an OEX trade at 445, while bears assess risk to a fourth consecutive double-top buy signal at 490. However, given the higher levels of bullish % in the OEX, a trade at 490 seems unlikely. A normal 3-box reversal back to the upside would have OEX.X trading 470. The less conventional $2.50 box scale of the OEX shows p/f chart of the OEX looking more overextended to the downside with 13 boxes of O (supply). This hints of some meaningful distribution/selling from the recent highs and had overhead- supply coming into play at 465-467.50. Longer-term bullish support trend currently resides at 442.50. Today's action saw a net loss of 2 stocks to point and figure sell signals as the S&P 100 Bullish % ($BPOEX) continues to slip lower at 65% bullish, after early December's more "overbought" 76% level. Status remains "bear alert," which was established on Wednesday, December 4th. A reading of 72% bullish is needed for a reverse back higher to "bull confirmed" status, while a current decline to 16% is needed for this market to turn "bear confirmed." S&P 100 Index Chart - Daily Interval Oscillators in all of the major indexes show a Stochastics recently reaching "oversold" levels, while MACD trends lower to zero. These technicals aren't all that different than those found November 11, 12 and 13, when a rebound from 3 closes below the OEX built to a new session high. With option expiration rapidly approaching, bears holding current month puts most likely lock in gains or close out premiums with some formidable support near 450 and weighing it against rally back toward 470. NASDAQ-100 Index (NDX.X) 1,033 +1.79%: Using conventional $25 box scale, there was no chartable action in the NDX.X point and figure chart. Thursday evening, I thought bears, specifically institutional bears, would be looking to short/put with stop at 1,175 and a near-term target of 1,000 as support. Monday's lows only came to 1,014. From 1,025, a normal 3-box reversal would come to 1,100 and that would tie in nicely with a rally challenge of the 200-day SMA where a bearish trader might leg from 1/4 to 1/2 position, or bearish trader holding 1/2 might ease into 3/4 position, while looking for further deterioration in bullish % as confirmation of internal weakness. Today's 1.79% gain surprises me a bit and I would have thought more after 5-days of selling. Sectors hit hardest to the downside in the past 5-sessions saw the greatest amount of buying today, and certainly depicts short-term bears locking in some gains, but not at an alarming pace on a NASDAQ broader scale. In today's 01:00 update, we made note that the NASDAQ-Composite showed a lesser number of stocks making new highs. This perhaps goes hand in hand with recent comments of the higher bullish % hinting that bulls carry bulk of risk and no longer willing to press the issue to the upside. Bears may pick up on this and start gaining some confidence in coming weeks. NASDAQ-100 Tracking Stocks (QQQ) - Daily Interval I'm sticking with the above retracement we've been using, but "conventional" retracement taken from the October lows to recent highs will also show retracement support near $25, which is a level I think market makers will be sitting some bids. Today's trading range was "inside" of Friday's and a break above today's high of $25.95 might just gets some bears a little jittery and get a rally building back near $27. Today's action saw a net loss of two stocks to point and figure sell signals in the NASDAQ-100. Current status remains "bull correction," but a decline in the bullish % to 69% would have this market then entering the "bear alert" status. From its recent relative high reading of 82% on December 2nd, a net loss of 12 stocks to sell signals have been found as the market begins to systematically reduce risk from a more "overbought" condition. 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 **************** Is the Bounce for Real? by Steven Price The markets finally got a reprieve from the recent sell-off, bouncing around the Dow 8500 mark after re-testing Monday's low of 8475. As we head into the end of the year, which is traditionally a bullish time of the year, we are left to ponder whether there is another leg down, or if we have truly built a base off of which to rally. With strong support in the 8350-8400 range, we could certainly see another pullback, but if we don't get a bounce at the current level, we should do so in that range. However, the speed of the drop is bound to slow after a drop of over 500 points in a week and traders may want to start thinking about picking up some calls for a bounce. The SPX is also hovering around the 900 level, which has been pivotal in the past. The FOMC met today and for the first time in several months, there was no speculation over there would be another rate cut. Last month the fed dropped rates 50 basis points, surprising most traders that were looking for a move of 25 basis points. It did not do much to help the markets at that time, with a subsequent drop, rally and then almost complete erasure of that rally in the last week. However, most rate cuts take 6-9 months to work there way through the economy and the immediate reaction is more of a psychological one. In any case, today's meeting was expected to be a non-event and went according to that plan. Following the announcement that there would be no action, the markets pulled back, tested support at 8500 and rallied for a 100-point gain in the Dow. President Bush nominated investment banker William Donaldson as chairman of the Securities and Exchange Commission. He was one of the founders of Donaldson, Lufkin & Jenrette and has been a friend of the Bush family for years. He served in the Ford administration as general counsel to Vice President Nelson Rockefeller and was Undersecretary of State to Henry Kissinger. Donaldson was also chairman of the NYSE from 1990 to 1995, as well as chairman of Aetna until March 2001. The President also said he would seek to double the SEC's budget for fiscal 2004, as it continues pursuing several very public fraud cases. We got some negative news regarding the retail shopping season as we head closer to Christmas. According to Bank of Tokyo- Mitsubishi and UBS Warburg, who compile weekly retail sales data, sales last week were down 2.3% from the previous week. Not a good sign heading into Christmas, since retailers rely on this time of the year for a large percentage of their sales. BTM economist Mike Niemira said, "Unfortunately, it's beginning to look a lot like Christmas 2000, which was a dismal season." The Retail Index finished up slightly on the day, following yesterday's big drop, but is still down 23 points from its big rally following record setting sales on the day after Thanksgiving. That rally came last Monday following Wal-Mart's announcement that it saw record revenues for domestic sales on Friday, November 29. However, since that time, several retailers have said that even the big finish to November was not enough to make up for a slow month. There was some good news after the bell, as Xilinx said that their December quarter revenues would be up 1-3% sequentially, slightly above previous guidance by $5-$9 million. They cautioned, however, that North American and European revenues would be flat, while Japan and Asia would be up. The Dow's pullback to 8500, along with the SPX pullback to 900 and then, and subsequent rally may indicate that we have found a short-term bottom from which today's rally can build. However, there is significant resistance above just under 8700 (around 8680) and at 8800. Long players should look to tighten stops as we approach those numbers and lock in gains toward the end of the year. It is likely that institutions will be balancing their portfolios with stock purchases in the next couple of weeks, but after the first of the year, we will need to see continued economic improvement to avoid more profit taking after the rally that began in October. We have not yet broken the recent trend of lower highs and lower lows in the Dow or Nasdaq and it would take a trade of 8650 and 1415, respectively, to do so. Even then we need to be careful, as the recent prevailing trend still remains down. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 8574 Moving Averages: (Simple) 10-dma: 8716 50-dma: 8365 200-dma: 9138 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 904 Moving Averages: (Simple) 10-dma: 917 50-dma: 884 200-dma: 976 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 1033 Moving Averages: (Simple) 10-dma: 1077 50-dma: 992 200-dma: 1109 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): The SOX bounced after the sell- off of the last week, making up 15.39 points, but falling short of resistance at 329. The intraday high was 325 and index finished near its high of the day. The intraday chart shows a run up over 320 and then a rangebound afternoon between 320 and 325. If the index consolidates at that level, then breaks out above 330, another leg up to 360 looks possible. However, if it fails to crack 330, then this may simply be a shorting opportunity. Keep an eye on that 330 mark for short-term long plays, but look to tighten stops or take profits if the run makes its way back to the August highs of 363-366. Shorts on a failed rally at 329 will have support between 300-310 to contend with and can look to tighten stops in that area. 52-week High: 657 52-week Low : 214 Current : 323 Moving Averages: (Simple) 10-dma: 347 50-dma: 298 200-dma: 401 ----------------------------------------------------------------- Market Volatility The VIX gave up almost 3 points today, as the rally off Dow 8500 gained steam. On a low volume day in the broader markets, it is hard to attach a lot of significance to the move, but it is clear that there were far more sellers than buyers of options today. I see that as a bullish short-term signal, as long as the U.S. declaration tomorrow about pre-emptive strikes and the discovery of a North Korean ship full of SCUD missiles headed for the Persian Gulf does not derail the markets. CBOE Market Volatility Index (VIX) = 31.67 –2.80 Nasdaq-100 Volatility Index (VXN) = 51.75 –1.23 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.89 473,620 419,592 Equity Only 0.71 382,748 270,550 OEX 0.96 17,132 16,462 QQQ 1.34 25,649 34,316 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 49 - 1 Bull Confirmed NASDAQ-100 70 - 5 Bull Correction Dow Indust. 63 - 7 Bear Alert S&P 500 64 - 3 Bull Confirmed S&P 100 65 - 3 Bear Alert Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.47 10-Day Arms Index 1.44 21-Day Arms Index 1.20 55-Day Arms Index 1.18 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 1962 1973 NASDAQ 854 1251 New Highs New Lows NYSE 39 29 NASDAQ 48 31 Volume (in millions) NYSE 1527 NASDAQ 1438 ----------------------------------------------------------------- Commitments Of Traders Report: 12/03/02 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 reduced long positions by about 3,000 contracts, while reducing shorts by only 800. Small traders increased long positions by 6,000 contracts and shorts by 600. Commercials Long Short Net % Of OI 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%) 12/03/02 444,345 487,411 (43,066) (4.6%) 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 11/12/02 141,389 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% 12/03/02 162,192 82,584 79,608 32.5% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 Commercials left positions mostly unchanged with a small percentage increase to the long side and a small decrease to the short position. Small traders reduced long positions by 4,000 contracts, while reducing shorts by 2,500. Commercials Long Short Net % of OI 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%) 12/03/02 43,709 51,977 ( 8,268) ( 8.6%) 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 11/12/02 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% 12/03/02 13,749 9,869 3,880 16.4% 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 maintained the status quo, while small traders showed small reductions to long and short positions. Commercials Long Short Net % of OI 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% 12/03/02 20,176 15,427 4,749 13.3% 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 11/12/02 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%) 12/03/02 5,885 9,781 (3,896) (24.9%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ****************** WEEKLY FUND SCREEN ****************** Best in Class: International Stock This week, we look at the five Morningstar candidates for foreign stock manager of the year in 2002. Morningstar's Fund Spy report Monday indicated they will announce their winner January 2, 2003, but in the meantime have narrowed the field to five international equity fund managers/teams. Each finalist uses active management to enhance return and reduce risk relative to market indices and fund benchmarks and was selected based on their 2002 performance. After we compare the five finalists, we'll tell you which foreign stock manager we would pick if we had a vote. Each fund has been profiled on this site before but is worthy of an update; together they make an excellent short list in the international stock fund group. Morningstar's five finalists for top international stock manager of 2002 are as follows (Morningstar data as of December 9, 2002): Julius Baer International Equity A (BJBIX): Richard Pell & Rudolph-Riad Younes (Since April 1995) YTD -5.4% / 1 Year -6.6% / 3 Year Avg -7.9% / 5 Year Avg +9.5% William Blair International Growth (WBIGX): George Greig (Since July 1996) YTD -15.1% / 1 Year -14.9% / 3 Year Avg -9.2% / 5 Year Avg +7.9% First Eagle SoGen Overseas (SGOVX): Jean-Marie Eveillard and Charles de Vaulx (Since August 1993) YTD +9.5% / 1 Year +12.0% / 3 Year Avg +8.6% / 5 Year Avg +10.6% Harbor International (HAINX): Hakan Castegren (Since December 1987) YTD -7.7% / 1 Year -7.7% / 3 Year Avg -6.8% / 5 Year Avg +0.8% American Funds' Capital World Growth & Income A (CWGIX): Management Team (Since March 1993) YTD -8.1% / 1 Year -8.3% / 3 Year Avg -2.0% / 5 Year Avg +5.5% The first four funds on the short list are foreign equity funds, which generally exclude U.S. stocks. The American Funds Capital World Growth & Income Fund is a global equity fund that includes U.S. securities. Last year's winners, Eveillard and de Vaulx of First Eagle SoGen Overseas Fund might make it two years in a row, with the fund up 9.5% since December 31 versus YTD losses by the other four finalists. Three of the funds have "core" characteristics and fall into the large-cap blend style box per Morningstar, including Julius Baer International Equity, Harbor International and the Capital World Growth & Income Fund. First Eagle SoGen Overseas Fund primarily invests in equities of small- and mid-sized foreign companies in developed and emerging markets. The William Blair International Growth Fund, the only growth-oriented fund on the list, invests in a diversified portfolio of common stocks of foreign companies of all sizes, but overall has a large-cap growth style bias, per Morningstar. It has generated greater losses this year than the other four other finalists, but has held up fairly well relative to foreign stock managers with growth-oriented styles. Four of the funds have YTD 2002 performance results that rank in the top decile of their respective fund categories, according to Morningstar data through Monday, December 9, 2002. The declines sustained by Pell & Younes (Julius Baer International) and Hakan Castegren (Harbor International) this year are considerably less than the average foreign stock fund's 16.9% year-to-date decline. The American Funds Capital World Growth & Income management team has limited its YTD decline relative to the average global stock fund's 19.7% YTD loss. Only one fund finalist bucking the negative trend has been First Eagle SoGen Overseas Fund co-managed by Jean-Marie Eveillard and Charles de Vaulx since August 1993. Since December 31, the fund is up 9.5% compared with a negative 16.9% return for the average foreign stock fund, per Morningstar. While its desirable for an international equity fund to limit its losses in a downturn, the ideal goal is to make money even in bad times. Eveillard and de Vaulx have done that and more, generating an annual total return of 33.2% in 1999, and then following it up gains of 5.7% in 2000, 5.4% in 2001, and 9.5% in 2002 (YTD). While Morningstar prefers not to give their "manager of the year" award to the same people twice in a row, they say, Eveillard and de Vaulx have to be the top candidates at this time on the basis of their ability to produce positive results in an otherwise bad market environment. By investing in overlooked (and undervalued) foreign stocks in the small-to-mid capitalization range, the two managers have been able to find opportunities for capital growth. These two co-managers also run the First Eagle SoGen Global Fund A (SGENX), a global stock fund that includes U.S. securities and has a longer track record. Eveillard has managed the fund since January 1979, and was joined by de Vaulx in March 1987. The co- managers deserve credit here also for their YTD 2002 performance, producing a positive 7.8% total return for investors compared to a 5.9% loss for the average international hybrid fund, where the fund is categorized by Morningstar. The co-managers' 7.8% total return in 2002 looks even better versus the average global stock fund, which has lost 19.6% since December 31. In the next section, we profile Jean-Marie Eveillard and Charles de Vaulx and the First Eagle SoGen Overseas Fund Class A (SGOVX), who we would pick for international stock manager of the year in 2002 if we had to vote. First Eagle SoGen Overseas A (SGOVX) Jean-Marie Eveillard and Charles de Vaulx have managed this fund together since its launch on August 31, 1993. The managers seek the fund's long-term capital appreciation objective by investing primarily in the stocks of small- and mid-sized foreign companies in developed and emerging markets. When selecting stocks, Eveillard and de Vaulx emphasize companies that are financially strong, have growth potential, stability and strong management, and represent strong fundamental value. There are no prescribed limits on geographical allocation, but normally assets are invested in more than three countries. Western Europe (including U.K.) represented 48.3% of fund assets as of September 30, 2002, while Japan comprised 24.8% of assets, per Morningstar. Eveillard and de Vaulx may invest up to 20% of net assets in debt securities including lower quality, higher yielding bonds. As of September 30, 2002, the fund had 75% of assets invested in stocks with the remainder invested in cash securities, bonds and "other" securities. Because they're frugal shoppers, the two co-managers will let the fund's fixed income allocation rise when they are no bargains to be found. Note that in their other charge, the First Eagle SoGen Global Fund, their greater-than-average allocation to money market and fixed income securities has resulted in the fund landing in the Morningstar international hybrid category. It has the characteristics of a conservative global equity fund as well. Below is a 1-year chart for First Eagle SoGen Overseas A (SGOVX), a period in which the managers earned a 12 percent total return. Eveillard and de Vaulx balance risk and reward about as well as any international equity manager has since 2000. The fund is a "Lipper Leader" for total return, consistent return and capital preservation, Lipper's highest designations in those categories. For the trailing 1-year period through December 9, 2002, the co- managers increased the value of the First Eagle SoGen Overseas A fund by 12 percent. That is pretty remarkable when you consider that the MSCI EAFE index of developed foreign markets lost 17.9% over the same period and the average foreign stock fund declined by 17.6 percent, using Morningstar's numbers. Whether you look at Eveillard and de Vaulx's 2001 or 2002 return performance versus indices and peers, or their 3-year annualized total return of 8.6% through December 9, 2002, their performance ranks in the top 1% of Morningstar's foreign stock fund category. Better yet, they did so while producing a "low" level of risk in relation to other international stock funds. If Morningstar had 1-year ratings, First Eagle SoGen Overseas would be 5-star rated on a risk-adjusted return basis. The co-managers' conservative value approach has produced strong, consistent returns over longer periods of time. For the trailing 5-year period through December 9, Eveillard and de Vaulx produced an average annual return of 10.6%, ranking the fund in the top 2% of the foreign stock fund category per Morningstar. The positive results generated by the co-managers compare to annualized losses of 3.2% for the MSCI EAFE index and 2.5% for the average foreign stock fund. Since 1995, Eveillard and de Vaulx have not experienced an annual loss for shareholders. Although they did lag their international stock manager peers during the growth-led bull advance of 1997 to 1999, the two managers have shined since the markets turned south in 2000. The two have produced little downside risk (volatility) relative to other international stock managers. Conclusion When you look at what Jean-Marie Eveillard and Charles de Vaulx have done in both charges (First Eagle SoGen Overseas and First Eagle SoGen Global) since 2000, you'd have to say they hold the pole position for international stock manager of the new decade. Because they deploy their value style to the mid- and small-cap sectors abroad, the First Eagle SoGen Overseas fund may provide greater international diversification than funds with global or large-cap characteristics, adding to its appeal. But, it is no "core" international fund holding with an average market cap of just $1.2 billion and a value style bias. Eveillard and de Vaulx are one of only four international stock managers to generate positive results so far in 2002. The next best YTD performer in the international stock category has been DFA International Small Cap Value Fund (DISVX), up 3.4% through December 9, 2002. Two other international small-cap funds have also remained above water this year, but by only a small margin using Morningstar's numbers. My vote for 2002 international stock manager of the year goes to Jean-Marie Eveillard and Charles de Vaulx for their performances on First Eagle SoGen Overseas Fund (SGOVX) and First Eagle SoGen Global Fund (SGENX). Steve Wagner Editor, Mutual Investor firstname.lastname@example.org ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********************** SWING TRADER GAME PLANS *********************** Playing the Bounce We saw what appears to be at least a short-term trend reversal today, with the Dow re-testing Monday's low and staging an afternoon rally. That action was mimicked in the SPX and OEX, as well. 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The Option Investor Newsletter Tuesday 12-10-2002 Copyright 2002, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: ICOS Dropped Puts: None Daily Results Call Play Updates: CTXS, OMC New Calls Plays: MERQ, CPS Put Play Updates: AIG, DLX, CDWC New Put Plays: None **************** 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: ***** ICOS $29.82 +0.04 (-1.19) Biotechnology stocks have been losing strength this week, with our ICOS play finally starting to fray around the edges. That $30 support level had held up pretty well up until now, but we saw it start to crack yesterday. While there wasn't any sharp selloff today, the stock once again posted a lower high and then failed to rebound in the final hour. With the sector weak and important support looking more like resistance now, we're cutting our losses and dropping ICOS from the playlist tonight. If still holding open positions, use a rebound back over $30 to manage a more favorable exit. PUTS: ***** None *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu Week CPS 39.28 0.46 1.22 New, Triple top breakout CTXS 12.52 -0.26 -0.13 Pullback to support ICOS 29.82 -0.91 0.04 Drop, time to go MERQ 29.80 -0.80 0.99 New, bounce from 200-dma OMC 67.10 -2.34 1.88 Bounce off $65 PUTS AIG 60.75 -0.68 1.18 PnF support breakdown CDWC 47.04 -1.83 1.30 Inside day DLX 42.23 -1.26 -0.22 Rollover from 200-dma ************************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 ******************** CTXS $12.52 -0.13 (-0.48) Since probing up to significant resistance near $13.50 late last week, CTXS is finally relaxing from its hard charge up the charts. This is precisely what we were looking for to allow us a decent entry into the play. Recall that the stock has more than doubled since early October, but it has done so by riding up its ascending channel. Last Friday's run up near the $13.50 level tested the top of that channel and the stock has been working off its near-term overbought condition this week as it drifts down towards the bottom of the channel, currently at $12. The next high-odds entry point will come when the stock rebounds from the $12.00-12.50 area and heads back towards the top of the channel. Traders looking for confirmation of renewed strength will want to see CTXS rally through intraday resistance near $12.85 and then crest the $13 level (the site of the channel center-line) before taking a position. Since a continued rally will most likely need the stock to remain in its ascending channel, we're raising our stop to $11.50. OMC $67.10 +1.88 (-0.80) When we began coverage of OMC, the optimum entry point seemed to be a rebound from the $65 area and the market delivered that to us over the past 2 days. With broad market weakness still the theme on Monday, the stock slid sharply, only to reverse course today, catching that bounce right at the $65 level. While the past week has seen some price weakness, OMC has really held up very well compared to the broad market, and today's rebound hints that the stock's relative strength is setting us up for another run up to the recent highs. Of course, one day does not make a trend, and OMC needs to provide some confirmation by pushing back over near-term resistance near $68.50. That move should produce a bullish crossover on the daily Stochastics, providing the impetus for the stock to once again challenge the declining 200-dma (currently $69.44). Momentum entries will need to wait for the stock to rally through $70.50 (last Monday's intraday high) on strong volume. Keep stops in place at $64. ************** NEW CALL PLAYS ************** MERQ - Mercury Interactive - $29.80 +0.99 (-0.22 for the week) Company Description: Mercury Interactive, the leading provider of software and services that optimize automated business processes, delivers a complete, integrated family of enterprise testing, production tuning and performance management solutions that enable customers to optimize business processes and maximize business results. (source: company press release) Why We Like It: Software bulls haven't had much to cheer about over the past week. Pressured by a weakening NASDAQ, the GSO.X moved steadily lower after it spiked above 120 on December 2nd. The subsequent breakdown below the 200-dma sent the software index plummeting towards the 50-dma at 100. Now that the GSO has started to rebound above this level of support, it looks like the short-term downtrend may have come to an end. Sector behemoth MSFT is also above support at its converging 50-day and 200-day moving averages. This should help to put a floor under the software group. We're picking MERQ as a bullish sector play because of the way shares have pulled back to support at the 200-dma. The stock leveled out at this moving average after a rapid decline from the relative high of $35.68. The company's CEO commented this weekend that he expected the company's annual sales to grow to $1 billion over the next 3-5 years. By contrast, reported revenue for the first nine months of 2002 has ticked in at $282 million. While that bullish forecast hasn't led to any explosive upside movement, it seemed to effectively halt the two-week decline. Shares outperformed both the NASDAQ and GSO.X on Tuesday after successfully testing the 200-dma ($28.97). The daily stochastics, which are just beginning to reverse from oversold levels, offer technical encouragement for the bulls. With no significant levels of overhead resistance, we think MERQ could quickly reach the $35.00 area. Traders can look for a move over $30 and intraday support over that level for entry. Our stop will be placed at $28.00, slightly under today's low. ****** December Contracts Expire Next Week *************** BUY CALL DEC-25 RQB-LE OI=1746 at $5.10 SL=2.60 BUY CALL DEC-30*RQB-LF OI=4290 at $1.45 SL=0.70 BUY CALL JAN-25 RQB-AE OI= 712 at $6.10 SL=3.00 BUY CALL JAN-30 RQB-AF OI=2259 at $2.90 SL=1.50 Average Daily Volume = 3.88 mil --- CPS – ChoicePoint, Inc. $39.28 +1.22 (+1.45 this week) Company Summary: ChoicePoint is a provider of identification and credential verification services. The company provides risk management and fraud prevention information and related technology solutions to the insurance industry. CPS also offers risk management and fraud prevention solutions to organizations in other industries. The company operates its business through two primary service groups, Insurance Services, and Business & Government Services. The Insurance Services group provides information products and services used in the underwriting, claims and marketing processes by property and casualty insurers. The Business & Government Services group provides information products and services and direct marketing services primarily to Fortune 1000 corporations, consumer finance companies, asset-based lenders, legal and professional service providers, healthcare service providers and federal, state and local government agencies. Why We Like It: Managing risks is the key to any successful endeavor, and if that weren't true, we wouldn't need insurance and government regulatory agencies. Insurance premiums are based on reams of statistical data, and with the heightened risks in our ever-changing world, it is more critical than ever that companies insuring against those risks have the best data available. CPS is a key provider of that data, serving both the business and government sectors. After the sharp rebound from the October lows, the stock has been consolidating in an ever-tightening range for almost 2 months. With the highs being capped near the $39 level and the lows consistently moving higher, the stock has traced out a classic bullish triangle formation. Until today that is. Following last Friday's upgrade to Outperform from Barrington Research, buying volume picked up this week and today the stock broke out of its consolidation pattern, gaining more than 3% in the process. Not only does that look bullish, but the PnF chart confirms this strength with the trade at $39 generating a triple-top breakout. Additionally, moving above $39 broke through the bearish resistance line. The current PnF vertical count projects up to $55, but we aren't likely to see that level any time soon. What it tells us is that the stock has some room to run. It is unlikely that CPS is going to just charge up the chart without some confirmation of today's breakout. We want to target new entries into the play on a dip and rebound from the vicinity of $38, which now appears to be very strong support. Momentum traders can enter on a continuation of today's rally, with a push through the $39.50 level (just above Tuesday's intraday high), but need to watch out for possible resistance at the 200-dma at $41.12. If trading on the breakout, make sure that any further upside is accompanied by strong buying volume. Place stops initially at $37, just below the ascending trendline that has been supporting on the stock on pullbacks for the past 2 months. *** December contracts expire in less than two weeks *** BUY CALL DEC-35 CPS-LG OI= 5 at $4.60 SL=2.75 BUY CALL DEC-40 CPS-LH OI= 17 at $0.55 SL=0.25 BUY CALL JAN-35 CPS-AG OI= 25 at $4.90 SL=3.00 BUY CALL JAN-40*CPS-AH OI=104 at $1.15 SL=0.50 Average Daily Volume = 500 K ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* PLAY UPDATES - PUTS ******************* AIG $60.75 +1.18 (+0.26 for the week) AIG finally managed to post a gain today after moving lower for six straight sessions. Shares benefited from a 1.8% rebound in the IUX.X insurance index, which closed slightly above its 50-dma. Speaking at a conference in New York this afternoon, AIG Chairman Hank Greenberg said he believes that property insurance rates should continue to increase in 2003. This appeared to spark a powerful rally during the final hour of trading. Shares finished with a gain of nearly 2% but were unable to break through short-term resistance at $61.00. Additional resistance lies overhead at the 50-dma ($62.36) and $63.00. Pulling back to a daily chart, today's rebound looks pretty weak - AIG wasn't even able to trade above the previous session's high. Shares traded an inside day on average volume. On Wednesday we'll be looking for shares to move out this consolidation pattern and break under the relative low of $59.42. For the time being we're keeping our stop set at $66.51. Traders looking for a little less upside risk could use a stop just above the 200-dma at $65.28. --- DLX $42.23 -0.22 (-1.58 for the week) A nice reversal for this short play, albeit one that wasn't totally unexpected. We'd been looking for any rebound in DLX to peter out below the 200-dma ($43.97) and short-term resistance at $44.00. That's exactly what happened during the past two sessions, as shares rolled over from a short-term high of $43.95. A 100-point rally on the Dow Jones wasn't enough to keep DLX from drifting lower throughout the day. Although it's a little early to say whether or not this reversal is the beginning of another downward leg, bears can be pleased that the volume that accompanied the rebound was relatively light. Volume seems to be picking back up now that shares are heading lower. We're also encouraged by the daily stochastics (5,3,3), which are beginning to head lower near the mid-level. Overall it looks like DLX is poised to continue its downward journey, now that the stock has bounced off the top of its descending channel. New entries can be targeted on a move below $41.00. --- CDWC $47.04 +1.30 (-0.69) The bears finally took a break on Tuesday, potentially halting the slide that has been dominating the broad market action for over a week. As has been the pattern lately, Technology stocks outperformed on the upside, with the SOX gaining a healthy 5%. Even the lagging Retail index (RLX.X) managed to advance by almost 2%, so with those factors at work, it is no surprise that CDWC managed to post its first daily gain in 2 weeks. What was surprising was the fact that it came on rather strong volume (nearly 50% over the ADV). While that may be encouraging to the bulls, we're looking at the rebound as setting up the next solid entry point. CDWC now has strong overhead resistance at $48 and then again up at $49.50. A failed rally near either of these levels is likely to usher in a fresh wave of selling and a fresh test of the recent lows near $45. Keep in mind that the PnF chart gave a solid double-bottom Sell signal has a bearish price target of $35 in play. Our stop remains at $50. ************* NEW PUT PLAYS ************* None ************************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 12-10-2002 Copyright 2002, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: CALL - CPS Futures Corner: Tracking the NQ ********************** PLAY OF THE DAY - CALL ********************** CPS – ChoicePoint, Inc. $39.28 +1.22 (+1.45 this week) Company Summary: ChoicePoint is a provider of identification and credential verification services. The company provides risk management and fraud prevention information and related technology solutions to the insurance industry. CPS also offers risk management and fraud prevention solutions to organizations in other industries. The company operates its business through two primary service groups, Insurance Services, and Business & Government Services. The Insurance Services group provides information products and services used in the underwriting, claims and marketing processes by property and casualty insurers. The Business & Government Services group provides information products and services and direct marketing services primarily to Fortune 1000 corporations, consumer finance companies, asset-based lenders, legal and professional service providers, healthcare service providers and federal, state and local government agencies. Why We Like It: Managing risks is the key to any successful endeavor, and if that weren't true, we wouldn't need insurance and government regulatory agencies. Insurance premiums are based on reams of statistical data, and with the heightened risks in our ever-changing world, it is more critical than ever that companies insuring against those risks have the best data available. CPS is a key provider of that data, serving both the business and government sectors. After the sharp rebound from the October lows, the stock has been consolidating in an ever-tightening range for almost 2 months. With the highs being capped near the $39 level and the lows consistently moving higher, the stock has traced out a classic bullish triangle formation. Until today that is. Following last Friday's upgrade to Outperform from Barrington Research, buying volume picked up this week and today the stock broke out of its consolidation pattern, gaining more than 3% in the process. Not only does that look bullish, but the PnF chart confirms this strength with the trade at $39 generating a triple-top breakout. Additionally, moving above $39 broke through the bearish resistance line. The current PnF vertical count projects up to $55, but we aren't likely to see that level any time soon. What it tells us is that the stock has some room to run. It is unlikely that CPS is going to just charge up the chart without some confirmation of today's breakout. We want to target new entries into the play on a dip and rebound from the vicinity of $38, which now appears to be very strong support. Momentum traders can enter on a continuation of today's rally, with a push through the $39.50 level (just above Tuesday's intraday high), but need to watch out for possible resistance at the 200-dma at $41.12. If trading on the breakout, make sure that any further upside is accompanied by strong buying volume. Place stops initially at $37, just below the ascending trendline that has been supporting on the stock on pullbacks for the past 2 months. *** December contracts expire in less than two weeks *** BUY CALL DEC-35 CPS-LG OI= 5 at $4.60 SL=2.75 BUY CALL DEC-40 CPS-LH OI= 17 at $0.55 SL=0.25 BUY CALL JAN-35 CPS-AG OI= 25 at $4.90 SL=3.00 BUY CALL JAN-40*CPS-AH OI=104 at $1.15 SL=0.50 Average Daily Volume = 500 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 ************** Tracking the NQ By John Seckinger jseckinger@OptionInvestor.com Pattern recognition is critical, and it certainly helps if the contract has some room to run once a particular pattern is spotted. As a trader, it is important to wake up with a clear mind and expect absolutely anything to happen. I did just that on Tuesday, but was not too shocked to see futures showing a higher opening. As the chart shows, the market did not trade under 1019 during the first hour, and was by definition above the mentioned 1017 pivot (futures wrap column) as well. Ok, so I wanted to look towards taking a long position; however, the 1036.50 relative low stood in my way. I needed confirmation. Note also the 200 and 22 PMA’s are right below resistance at 1050. That should cap the upside; however, I need to do some more research since it is only 10:30 a.m. Maybe a shorter time frame will give a better execution level. They usually do. Chart of the NQ02Z, 60-minute Roughly one hour later, the NQ contract rose above the 1036.50 area and gave a buy signal for those only looking at a 60-minute chart. However, it was the break of the bearish regression trend line within in a 5-minute chart that certainly would have provided a better long entry. This break, to me, occurred at 1028, and risk to the downside would be for a move to 1016. With 12-points of downside, what is the objective? The 200 PMA is the most obvious, currently at 1043. This is 15-points of upside, so is the trade worth it? I think it would be. Note: Most traders would have gone long above 1036.50 (say 1038), which was the initial thought; therefore, let us also monitor what it would be like with execution at 1038. Also, if long at 1028, I do think it would make sense to add a quarter of a position above 1036.50. Chart of the NQ02Z, 5-minute As the chart below shows, we now we have a rising channel that needs to be monitored. There is a trend line from the break out that took the contract over 1036.50, and also a bullish regression channel that should be watched. MACD also looks like it might roll higher. Note how the 200 PMA did act as resistance, and the thinking is that a solid move above (when I say solid, I mean the average will become support) should place the NQ at 1050. So, we got our initial objective at the 200 PMA. That should take care of half of our long position. Why? Well, a rise in the NQ is going against the recent trend, and there is not strong confirmation either in the bond market or the Dow to warrant a very aggressive bullish trade with a lot of conviction. If the 200 PMA does become support, then adding to the remaining long position would make sense. Chart of the NQ02Z, 5-minute Now it is time to go to a one-minute chart and look for more patterns. Notice how the 1044.50 level is starting to look like a trap. Also, the contract is back below the apex of 1038.50 and under 1035 as well. 1035 was the low pullback after hitting the 200 PMA, and this price action definitely gets me a little nervous. Stop is below at 1028, not 1032 as listed. Also worrying is the fact that the contract is below all three period moving averages. A “smart” trader would have probably gotten out at 1038 (or even 1035) on the move lower, but that is all under the bridge now. Chart of the NQ02Z, 1-minute Looking at the last chart that ends at 4:15 p.m., prices did manage to get back above the 1038.50 apex once more; however, late day weakness (as the Dow rallied) pressured the contract into the close. With the MACD unable to break out higher, I have a feeling that holding a long heading into Wednesday is a little too risky. Moreover, I don’t mind buying a move higher if 1050 is cleared and internals look promising. When it was realized that the MACD was not breaking out, the contract fell back under 1038.50 for the second time. It was then that the 1028 stop should probably be moved up to 1034.50 and just under the 1035 support area. At the close, I wondered about the index not testing the 50% retracement level and if this means longs hold the upper hand. We should know very soon. Now it is time to go to sleep and wake up expecting anything and everything. Chart of the NQ02Z,5-minute 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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