The Option Investor Newsletter Thursday 12-12-2002 Copyright 2002, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: New Streak? Futures Markets: Price Compression Index Trader Wrap: Seeing double Market Sentiment: Just Say No Weekly Manager Microscope: Bob Olstein: Olstein Financial Alert Fund Updated on the site tonight: Swing Trader Game Plan: Conflicting Signals Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 12-12-2002 High Low Volume Advance/Decline DJIA 8538.61 - 50.50 8615.13 8510.84 1.53 bln 1646/1569 NASDAQ 1399.55 + 3.00 1411.69 1388.51 1.39 bln 1633/1702 S&P 100 458.54 - 2.15 462.32 456.10 Totals 3279/3271 S&P 500 901.58 - 3.38 908.37 897.00 RUS 2000 395.36 + 1.48 396.37 393.37 DJ TRANS 2336.46 - 11.60 2349.56 2325.46 VIX 30.81 - 0.59 31.86 30.38 VXN 51.05 - 0.57 52.41 50.51 Total Vol 3,108M Total UpVol 1,681M Total DnVol 1,376M 52wk Highs 109 52wk Lows 124 TRIN 1.18 PUT/CALL 0.77 ************************************************************ New Streak? Today was the third day in a new losing streak that most investors are ignoring. The losing streak I am referring to is not the jobless claims or retail sales but the new 52 week highs and lows. A new trend is emerging and traders should be aware of it. Dow Chart – Daily Nasdaq Chart – Daily Just when economists would have you believe that new jobs are being created and the record unemployment number from last week was an error the jobless claims deflated their argument. The new claims for the week soared to 441,000 and a level not seen since April. Analysts who ignored the holiday impact last week when bragging about the artificially low numbers were quick to claim holiday impact for this week to diminish the reaction to this very bad report. The headline number for the week was +63,000 over the consensus estimate of 378,000 claims. Claims for the prior week were also revised upward slightly. Considering the pace of layoffs rose sharply in Oct/Nov this is not a welcome sign. A new wave of layoffs in the airline sector due to the UAL bankruptcy could add to the current tide. New hiring is not increasing and the risk of a jobless recovery, if any, is increasing. Another misleading number came from the November Retail Sales report. The headline number came in at +0.4% and surprised nearly everyone who has been following the weak same store sales reports. The November number was held up almost entirely by sales at Furniture and Home Furnishing Stores, Appliances and Building Materials. Furniture stores showed a spike in sales of +2.3% in one month after averaging only +0.17% over the last seven months. Why? With the boom in housing now a year old why would one month suddenly spike +1000% from the prior months +0.2% number? Is this another instance of a number that will be revised downward next month? Nobody knows today but the fact remains that mall stores are in trouble. The numbers for department stores dropped -1.4% and clothing stores -1.3%. General Merchandise stores only gained +0.3%, which was a -75% drop from October. With retail stores already complaining about holiday sales the outlook for the December numbers is not good. Also weighing on the markets today was the FOMC minutes from the November meeting. The Fed saw dissipating stimulus as a problem which means the impact of the first series of rate cuts was slowing and the vaccinations did not work. The Fed decided that another larger injection was required to slap the economy out of its doldrums. They decided that risk of inflation from such a move was minimal considering the lack of movement in the economy to date. The biggest argument was the change in the bias back to neutral. Several members opposed the move back to neutral based on the severity of the current problem. They were swayed to go along with the decision by discussions of market reaction to a 50 point rate cut and leaving the bias to further reductions. There was a fear the markets would self destruct due to the Fed's negative outlook. No kidding! Now that the truth is out there for all to see the markets did not self destruct but they are far from happy about the Fed's concerned outlook. The concern is that the soft spot in the economy does not become a black hole. Also putting the brakes on the holiday sentiment were several geopolitical concerns. One news report claimed that Al-Queda had acquired VX nerve gas from Iraq over the last couple months and the weapons had disappeared into the terrorist network. Iraq of course denied it since a non-denial would mean they actually had the weapon(s) to begin with. North Korea said they were restarting their plutonium based nuclear power program, which the U.S. had claimed was a thinly disguised effort to build a nuclear weapon. This was a nose thumbing at the U.S. for being unable to keep the Scud missiles that were stopped on the way to Yemen. It was also open defiance to the Bush policy statement yesterday that the U.S. could and would respond with nuclear weapons if any nation used a weapon of mass destruction against us. It appears North Korea is calling our bluff while knowing we cannot attack them. While this war of words continues on the global school yard the markets are beginning to show signs of concern. Reports also surfaced that IRAN could be close to developing nuclear weapons after news reports that two different nuclear plants for weapons production were under construction. The assets in all money market mutual funds rose by +$10.36 billion in the week ended Dec-11th. However, retail MM funds fell -$3.64 billion. The overall gains were due to institutions stashing cash to the tune of +$14.55 billion last week. While retail investors were taking money out for the holidays or to put into the markets, corporations were adding to cash reserves instead of stocks. Since the market dropped during that week it appears corporations were selling stocks just when a typically bullish period was about to begin. Makes you wonder if Santa Clause is really coming to town. CIEN provided hope for tech investors today and was probably the main reason the Nasdaq finished in positive territory. CIEN raised its guidance for the first quarter and predicted a lower than expected loss. After taking huge write offs for restructuring over the last two years any positive outlook is an improvement. CIEN gapped up to $6.20 on the news for a gain of +20%. Unfortunately it did not help the Semiconductor sector. Despite the positive TSM news about better than expected sales from the largest foundry in the world and affirmed guidance from several major chip companies the sector remains flat. The comments from Intel CEO Andy Grove continue to weigh on the sector. He said on Tuesday that it might be too early to forecast a rebound in the sector despite recent industry reports indicating an upturn may be on the horizon. He said Intel had not seen any material increase in overall chip sales and for the sector to pull out of the doldrums companies would need to cut back on capacity on a global scale. Don't hold your breath. The new streak I mentioned earlier was the new lows beating the highs for the third straight day 124 to 109. While this is not a break away rout it is a troubling indicator. The Dow remains trapped in the 8500-8600 range and it appears the ceiling is dropping faster than support is getting higher. In this typically bullish period the most bullish indicator from Thursday was the gain in the Russell-2000 to 395 but it was a weak gain and stopped just below strong resistance at 400. There is simply no conviction for a further rally and the lack of volume, only 3.1 billion total, makes it tough for bulls to force any gains. Several of the big caps in the Dow are looking particularly weak including MMM, IBM, JNJ, IP and WMT. This should be the best quarter of the year for Wal-Mart as the biggest discount retailer yet investors are fleeing the stock. IBM said they were busy and were not asking employees to take extra time off like other tech companies but the stock has dropped nearly $10 in two weeks. MMM closed within cents of breaking its 100 and 200 DMA. While I am not trying to paint a bearish picture there is cause for concern. I had originally expected this week to be up slightly with a dip before Christmas week to prime the typical holiday rally. If this was the bullish week I hate to see what next week could bring. Actually, I think we are safe from any major market drop with very strong support just below us from 8350-8500. It appears we are going to drift just above that support until something happens to energize the buyers. War talk on multiple fronts, live fire exercises only ten miles from Iraq and the word nuclear being used more in one day than in the past six months is enough to make even the most aggressive investor a conservative. The +$14 billion of institutional money moving into money market funds instead of stocks is confirmation of that idea. With the big caps resting on critical support there is potential for strong holiday gains but there is also the potential for those gains to evaporate just as quickly. As investors maybe we should be investing in the malls instead of the markets next week. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** Price Compression By John Seckinger jseckinger@OptionInvestor.com On Thursday, all three futures contacts once again traded within a very definable range. With the appearance of a number of wedges taking form, things should start to heat up. Thursday, December 12th at 4:15 P.M. Contract Net Change High Low Volume ES03H 901.00 -0.25 908.00 895.25 458,484 YM03H 8556.00 -28.00 8602.00 8494.00 13,427 NQ03H 1043.00 +4.50 1055.50 1032.00 188,210 ES03H = E-mini SP500 futures YM03H = E-mini Dow $5 futures NQ03H = 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. The December Contract is set to expire on December 20th. Volume has picked up dramatically in the 03H contracts, and all contracts will now be quoted in March. Fundamental News: The headline economic event took place one hour before the NYSE opened, as Retail Sales reportedly rose 0.4% and was in line with consensus estimates. The ex-auto figure rose a stronger than expected 0.5% (0.2% consensus). Also reported was the Jobless Claims report, rising 83K to 441K and significantly above the 378K consensus. In company specific news, Ciena (CIEN) reported better-than-expected Q4 results and raised revenue guidance for Q1. Additionally, Amgen's (AMGN) raised 2002 outlook and offered better-than-expected 2003 outlook. Shares of CIEN rose 19.69% to 6.2, while AMGN climbed higher by 6.72% to 50.45. In other news, the new head of the FDA, Dr. Mark McClellan, discussed plans to accelerate the approval of brand name and generic drugs, as well as medical devices. Technical News: The XAU index did print 72 (P&F buy signal) on Thursday, and the Index ended up higher by 6.81% at 75.39. Moreover, the dollar continued to fall, losing 0.81 points to 104.54 and pressuring stocks in the process. Amazingly, the Sox closed exactly on the daily bearish trend line for the third session in a row. Moreover, the Sox used the 22 DMA as resistance (330 versus intra-day high of 330) and 50 DMA as support (317 versus 318, respectively). Also, the trend line in the 10-year yield (tnx.x) proved formidable on Thursday. Going forward, Thursday’s low of 3.97% should hold if equity bulls are going to keep prices from drastically falling. ================================================================= The December Mini-sized Dow Contract (YM03H) Unfortunately, volatility didn’t exactly heat up following the Retail Sales report. Nevertheless, patience is an important part of trading and I learned that today. A daily chart of the Dow shows a lower high and higher low; by definition, price compression. It was interesting how the 22 DMA (exp) acted as resistance while the 50 DMA provided support for the blue chips. It is still nice to hope for an explosive move outside this range; however, until that happens, expect support from the 8480 area and resistance near 8625. Aggressive traders can use the wedge (light green) as entry levels, and look to capture a move towards one of the aforementioned levels. A solid move above 8625 should place the Dow near 8725. Support below 8480 is near 8400. Chart of Dow Jones, Daily Switching to March changes the scope slightly, as traders can now expect resistance near 8662. Notice how the contract almost performed an exact double top at 9025, high set on August 21st. With this contract also finding support and resistance at its moving averages, seeing a clear direction remains difficult. The contract appears to be forming a long liquidation pattern (“b”) beginning at the high near 9025; however, these patterns do not always continue lower. It appears as though the apex (pivot) is at 8550, and traders can look for a move to begin there. Common in the “b” pattern is a take out of a relative low/high, and then for prices to reverse lower. Both of these relative levels should be the high and low of trading on Wednesday (8609 and 8472). Therefore, extend these levels out slightly (10-points or so) for confirmation purposes. Chart of YM03H, Daily YM03H Support Resistance Pivot 8450 8625 8550 8400 8662 8350 8700-25 8225 8825-8850 The December E-mini Nasdaq 100 Contract (NQ03H) The high in the NDX index was 1.55 points above the 1050 resistance level. I wondered in the monitor if it was indeed a trap? It was. These traps happen so often when trading. At current levels, we are once again in a very efficient area. Look for stops to be placed above the 22 PMA (1046), and a break below the ascending trend line (blue) should attract many more shorts to the marketplace. Volume has been light as of late, so look for confirmation. If the downward trend is broken, support is seen at the 200 PMA (1019). Interesting how it lines up with the other relative low. If the market remains quiet, think first about playing the range (buying support, selling resistance) and, if the contract does fall below support, there is a good chance it will come back to see if it will act as resistance (read: giving traders better odds for a profitable trade). Chart of NDX, 30-minute The NQ03H contract formed a “b” liquidation pattern within a five-minute chart on Thursday, rallying back up to the 50% retracement on relatively light volume. Notice how the spike in volume under 1035 foreshadowed buying at the same level later in the session. When trading is slow, look for everything to enhance profitable probabilities. Going forward, a move above the 1045 area should be a catalyst for more buying (1050, and then no real resistance until 1070), while a break of the trend lines shown below should have more longs liquidating. Note: There should be some support at 1032. Chart of NQ03H, 5-minute NQ03H Support Resistance Pivot 1025 1045 1035 1000 1050 973 1070 1085 Bold signifies levels within the NDX. The December E-mini S&P 500 Contract (ES03H) Price compression at its finest. The 22 PMA on a 60-minute chart was too much for buyers during trading on Thursday, and the contract settled once again in “no man’s” land. No problem; trading levels should still work. The descending trend line (red) comes in at 907, and should offer resistance, while a move above could take the index to 915 on an intra-day basis. If the blue trend line gives first, look for a move towards 890. Chart of S&P 500 Index, 120-minute In the futures corner article published tonight, I am touching on pivot analysis and used the ES03H contract as an example. If this works (or if readers express a solid interest in this calculation), I will use this calculation for all three contracts (note: I probably will, since they do line up well versus my calculations). This are the calculations used: Pivot point (P) = (H + L + C) / 3 First resistance level (R1) = (2 * P) – L First support level (S1) = (2 * P) – H Second resistance level (R2) = P + (R1 - S1) Second support level (S2) = P - (R1 - S1) Note: H, L, C are the previous day's high, low and close, respectively: Using ES03H as an example: High: 908.00 Low: 895.25 Close: 901.00 Pivot becomes 901.41 First Resistance: 907.57 First Support: 894.82 Second Resistance: 914.16 Second Support Level: 888.66 Note how the pivot lines up with the 50% retracement, and the second resistance is almost at the top of the resistance channel. 910 was the high just a few days earlier, so keeping the bottom green line still seems to make sense (versus only highlighting 915). The 907 level is seen in the SPX contract, so that matches up well also. Please let me know what you think. Chart of ES03H, 10-minute ES03H Support Resistance Pivot 894.82 907.57 901.41 888 910-915 869 922 927 Bold signifies levels within the S&P 500. Good Luck. Questions are welcomed, John Seckinger jseckinger@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** Seeing double I had to check some of today's market stats twice, make that three times, to make sure I wasn't seeing double. While the major market indexes showed little change for the third straight session, today's volume and breadth indicators look almost identical to yesterdays. A plethora of economic data that came out before the opening bell had a hard time budging stock futures, and when the cash markets opened for trading, a seesaw session took place that found the major indexes trading either side of unchanged for the better part of the day. There were little "surprises" in the economic data release. While the weekly jobless claims number came in at +441K and well above consensus for a rise of just 378K, investors seemed to shrug off the data, which isn't too different than last week's number that came in below consensus. The Labor Department has been saying that the weekly claims numbers this time of year, due to the holiday season can provide some wild swing, and the past two week's data has certainly shown that. Retail sales were slightly better than expected, and while the Retail HOLDRS (AMEX:RTH) $73.30 +0.2% traded a slightly wider range than yesterday, the 65-cent daily range shows that even a sector which has important economic news being released has market participants sitting on their hands and lacking any type of conviction on a bullish or bearish type of bias. The only "excitement" found was a 6.8% jump in the Gold/Silver Index (XAU.X) and a rather sharp decline in the U.S. Dollar Index (dx00y) $104.51 -0.79%. Investors are left to think that some extensive short-covering in gold stocks, combined with geopolitical worries in regards to an eventual U.S.-lead attack on Iraq, and worrisome developments in North Korea with the reactivation of a nuclear power plant that U.S. officials suspect was being used to develop weapons, had gold and the U.S. Dollar heading in separate direction. It's my feeling that the DIVERGENCE in the gold/dollar action is not that different than the stretching of a rubber band, which may currently have stocks and even Treasuries being squeezed in- between. Should the rubber band get stretch enough, it will eventually "snap" and some type of resolution to the recent 3-day consolidation that the equity indexes are under will be found. Today's "rate of change" in the dollar/gold action was rather sharp and abrupt, and should have index traders on the alert. I've never been one for trading "gut feels," but right now, that's what I feel any technician would be trading on as it relates to last night's charts and scenario based on trend. My "swing vote" for bearishness would come from the higher levels found in the bullish % charts which have found the narrower based and faster-more-volatile Dow, OEX and NDX bullish % charts showing some internal weakening. Today market volumes were nearly identical to that found yesterday. The NYSE traded just over 1.23 billion share (yesterday 1.25 billion) while the NASDAQ traded a smidge over 1.41 billion (yesterday 1.4 billion). Breadth on the NYSE was slightly bullish at 17 to 15 (yesterday 17:14) while NASDAQ breadth was even at 16 to 16 (yesterday 16:16). The number of stocks trading new 52-week highs versus 52-week lows had the NYSE at 40:28 (yesterday 40:22) and the NASDAQ ever so slightly negative with 39 stocks trading a new high versus 40 stocks trading new lows (yesterday 36:37). If the market internals compare similar to Wednesday's, then traders may squint eyes at tonight's charts, as they too look very similar and little changed to yesterday. Dow Industrials Chart - Daily Interval The Dow Industrials finished the session lower and traded inside of yesterday's range. I've placed a horizontal near-term support (dashed pink) on the Dow's daily interval chart and it would really take a break of the 8,468 level to signify a break of upward trend we placed on the chart last night. Stock traders might take note of Intl. Paper's (NYSE:IP) $34.76 -3.71% decline. I think much of today's declines were due to the continued rise in natural gas prices. Paper mills use a lot of natural gas to heat vats in the conversion of wood pulp into paper and the rise in price of natural gas may put added pressure on paper manufacturers margins. Drug components MRK and JNJ traded weak in sympathy with Bristol Myers Squibb (NYSE:BMY) $25.35 -6.62% on concern over accounting methods. Components GM and HD both benefited marginally from today's retail sales and ex-autos information. The ex-autos declined, but were inline with expectations. Today's action saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU). Status remains "bear alert" at 63.33% bullish. S&P 500 Index Chart - $5 box It can be helpful for an index trader to actually "hand chart" a point and figure chart each night. This will give the trader a "feel" for the market. The supply/demand chartist would observe the SPX chart and first question he/she was ask is... "Since the SPX chart is currently in a column of O, did it trade 890?" Answer: No. Today's low was 897. Then, since no chart entry was made a second question is asked. "Did the SPX trade 910, which would be a 3-box reversal?" Answer: No. Today's high was 908.37. The "feel" I get from the SPX chart is that it has had a nice distribution lower and the three days of no chartable entries feels like the MARKET just isn't ready to make a further decision on things. Based simply on risk/reward, bulls are present and looking to use the upward trend their advantage with a tight stop at 890 and looking for a rebound back into overhead supply near 925 or back near the upper Bollinger range. (note: the 925 level was taken from our bar chart and 9/11/02 high near 925). Bears may be hesitant to press the SPX at this point as past "sell signals" have been reversed to higher highs. However as noted in the past, those sell signals came at lower levels of bullish %. This gives feel that bears are more interested in entry points near 925, when they could then look for a bearish trade opportunity to the downside. A rally back near 925 could then be measured against the bullish % readings. If the bullish % was not showing any new buy signals, that could give the feel of a "dead cat bounce" with little internal strength taking place. A bear would then look to short/put with a goal of breaking the bullish support trend and triggering a spread- triple-bottom sell signal at 890. Try hand charting the index you trade on a p/f chart. All you need is a piece of graph paper and a pencil. It takes about 10- seconds to chart a day's activity. Speaking of "double vision" and similar breadth as to yesterday. The S&P 500 Bullish % ($BPSPX) as a net gain of 1 stock to a point and figure "buy signal" today, which once again has the bullish % inching up .2% to 64.4%. Still "bull confirmed" and would take a reversal reading of 62% to see a "bull correction" status. The highest bullish % reading during the recent bull run has been 68.4%, which was reached on Monday/Tuesday of last week. Lowest reading recently has been 64.00% on Tuesday, 12/10/02. S&P 100 Index Chart - Daily Interval I can't argue with a trader that thinks there might be some support in the OEX at 447.50 should the OEX violate trend on a near-term basis. The subscriber/trader likes to use the 2.5 box scale of the OEX on the point and figure chart and makes good correlation between the bullish support trend on the p/f chart and correlation to past support at the 447.50 level. Today's action saw the narrower S&P 100 Bullish % ($BPOEX) remain unchanged at 64% for the third straight session. Current status is "bear alert." NASDAQ-100 Trust (QQQ) - 60-minute chart A close-up view of the QQQ on 60-minute interval shows that our "cheater" trend attached to Monday's low does look to be finding buyers on the intra-day pullbacks. At the same time, this morning's rally high of $26.17 was a penny shy of where we felt market makers might have a sell bias. The 3-day wedge may be building pressure and a move above $26.18 could find a decent little rally back to our volume pivot of $27. Conversely, a break of today's low most likely has the Q's falling to market maker support of $25. Should that happen, then $26.18 begins to become greater resistance in coming sessions and the next downside level of risk is $23.82. Today's action saw no net change in the NASDAQ-100 Bullish % ($BPNDX). Still "bear alert" at 70%. 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 **************** Just Say No by Steven Price We haven't seen this much slow drifting since the continents divided. Or that's how it seemed today. We played up to yesterday's highs and yesterday's lows, but got no real breakout in either direction. We've tested support and resistance, following this morning's economic data and each move had analysts citing a different facet of the numbers. In reality, it seems that the low volumes heading into the holiday season simply are not producing enough momentum in either direction to get rolling. This morning's retail data showed retail sales up 0.4% in November, which was higher than expectations of a 0.2% gain. However, the increases came mostly from stores selling hardware and furniture, underscoring the effect that continuing low interest rates are having on home purchasing and remodeling. The other side of the coin was the decline in sales at traditional mall-type stores. I've been beating the drum about the lack of spending heading into the holiday season. It appears as though I was only partially right. Consumers are still spending in a few places, just not in the stores that sell non-home related merchandise. I expect those numbers to continue to reflect ugliness as we finish out the holiday shopping season. I also think the same store sales numbers will not reflect the aggressive price markdowns in the next couple of weeks and when earnings time rolls around for many retailers, we'll get a better picture of just how little shoppers spent on gifts. The other significant economic data out this morning were the initial and continuing jobless claims numbers. Because of the season, the weekly numbers are difficult to dissect, but weekly jobless claims were up 83,000 to 441,00. This was the first increase in a month and raised the four-week moving average by 10,000 claims. It still remained under the 400,000 mark that economists consider an important gauge for an improving or declining picture. However, the number of continuing claims, which increased in the last data release, did drop significantly. That indicates one of two things. Either unemployed workers are dropping off the list as their benefits run out, or they are starting to find jobs. I'm leaning toward the first possibility, since I haven't heard about anyone hiring with any regularity recently and that is definitely a negative for the economy. However, this season does bring quite a bit of volatility in these numbers, so I'm not betting the farm on them, just paying close attention. Oil prices are headed higher, following an OPEC meeting today, at which the group raised its production quotas. While this may seem contrary to basic economics, the move was actually aimed at curtailing the current cheating on the old quota. The quota of 21.7 million barrels per day has been largely ignored, as the group has been producing an average of over 24 million barrels. Today's meeting, which set a new quota of 23 million barrels, was aimed at raising the quota, and agreeing to reign in the recent overproduction, in effect lowering total supply. The markets finished mostly in the red for the day, but right in the middle of recent trading ranges. The Dow finished down 51.22, but successfully tested support around 8500. The SPX finished down 3.43, but held up over 900. The Nasdaq Composite finished up on the day, but failed to hold over 1400, with a close of 1399.29. Confused on direction? I hope so, since we are simply bouncing around without a significant trend right now. As volumes get lighter toward the holidays, we can expect more of this. However, if we do get some moves through resistance or support, sometimes light volume leads to a vacuum effect with a big move, since there are fewer buyers and sellers to get in the way. We saw a number of conflicting signals from different markets, as well. We usually see an uptick in the bond market as cash shifts from equities into treasuries in bearish markets. However, today saw selling in both the equities and the five and ten year notes. The dollar dropped, as well, another bearish signal. However, as I mentioned earlier, support is not only holding, but we are getting slightly higher bottoms on a daily basis. We are simply not seeing multiple market confirmation of a trend right now, and although I am getting a bearish "feel," I don't have the numbers to back it up. Until that time, I'll play small and take profits quickly when they are present. Many analysts try to force things when trading is slow, searching for indications, rather than identifying that signals are unclear. There is nothing wrong with knowing when to take a step back and right now appears to be one of those times. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 8538 Moving Averages: (Simple) 10-dma: 8668 50-dma: 8394 200-dma: 9122 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 901 Moving Averages: (Simple) 10-dma: 913 50-dma: 887 200-dma: 974 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 1039 Moving Averages: (Simple) 10-dma: 1063 50-dma: 999 200-dma: 1106 ----------------------------------------------------------------- The Retail Index (RLX.X): The RLX saw some action today, as retail sales for the month of November were released this morning. The data showed a 0.4% gain, which was better than expectations, leading to an initial surge in the sector. However, once the data was digested, it became apparent that the increase was more related to the housing boom, than a rush of shoppers hitting stores ahead of Christmas. There were increases in furniture and hardware, typically related to home improvements and new home purchases, while there was a drop-off in mall and department store sales. This mirrors what we've been hearing from stores such as Wal-Mart and Federated, which is that holiday sales have been soft. By the end of the day, the index has traded in a 5 point range, finishing almost unchanged at -0.29. 52-week High: n/a 52-week Low : 244 Current : 279 Moving Averages: (Simple) 10-dma: 285 50-dma: 282 200-dma: 312 ----------------------------------------------------------------- The VIX certainly reflected the aimless drifting we saw in the broader markets today. We bounced between previous resistance and support levels, in a tight range, taking the VIX down slightly. It remained over 30, however, as the Dow, OEX and SPX all finished down on the day. The VXN also finished down slightly as the Nasdaq posted a small gain. CBOE Market Volatility Index (VIX) = 30.81 –0.59 Nasdaq-100 Volatility Index (VXN) = 51.05 –0.57 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.77 486,222 373,419 Equity Only 0.69 374,096 258,028 OEX 0.77 19,870 15,239 QQQ 0.56 56,329 31,597 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 50 + 1 Bull Confirmed NASDAQ-100 70 + 0 Bull Correction Dow Indust. 63 + 0 Bear Alert S&P 500 64 + 0 Bull Confirmed S&P 100 64 - 1 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 1.26 10-Day Arms Index 1.40 21-Day Arms Index 1.15 55-Day Arms Index 1.17 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 1512 1316 NASDAQ 1562 1601 New Highs New Lows NYSE 43 29 NASDAQ 50 34 Volume (in millions) NYSE 1518 NASDAQ 1383 ----------------------------------------------------------------- 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 MANAGER MICROSCOPE ************************* Bob Olstein: Olstein Financial Alert Fund Bob Olstein is chairman and chief investment officer of Olstein & Associates L.P. of Purchase, New York, which serves as investment adviser to Olstein Financial Alert Fund C (OFALX), a $1.3 billion mid-cap fund that has produced high returns relative to its peers since its September 1995 inception. Mr. Olstein, a veteran stock picker, is primarily responsible for the day-to-day management of the fund's portfolio of securities. Olstein's bio states that he has been engaged in various aspects of securities research and portfolio management for institutional and retail clients since 1968, and is considered to be an expert in corporate financial disclosures and reporting practices. His early work included the co-founding of an earnings quality report service that pioneered the concept of using inferential financial screening techniques to analyze company balance sheets and income statements. His service alerted institutional portfolio managers to positive or negative factors, which can affect a corporation's future earnings power and the value of its company stock. Prior to founding Olstein & Associates LP in 1995, Mr. Olstein managed portfolios for individuals, companies, and employee benefit plans at Salomon Smith Barney and its predecessor companies between 1981 and 1995. When with Salomon Smith Barney, Olstein was a senior VP and portfolio manager. The Olstein Funds website (www.olsteinfunds.com) lists six of Mr. Olstein's credits. First, he is a senior member of the New York Society of Securities Analysts and second, he is a fellow of the Financial Analysts Federation. Third, he is a past recipient of the Graham & Dodd and Gerald M. Loeb research awards. He's also a frequent testifier before the U.S. Senate Banking Committee on bank accounting practices, a fourth credit. Fifth and sixth, he is a frequent participant on various business-related television and radio programs, and he's frequently quoted and featured in a variety of business publications. Olstein's Financial Alert Fund is available in two share classes. The original Class C shares (OFALX) have been around since 1995, and are available either directly or through financial advisors. In 1999, Olstein launched a new Adviser Class share that is sold exclusively through fee-based financial advisors as well as some 401k plans. The Adviser Class shares are not available for sale directly to the public. Class C shares have deferred loads, and 12b-1 fees; Advisor shares have lower 12b-1 fees. Investment Style/Strategy Bob Olstein seeks the Financial Alert Fund's long-term capital growth objective by investing primarily in stocks of companies that his team believes to be undervalued. His "value-oriented" approach is suited to investors who have the patience to follow such a strategy; those with a longer-term investment outlook of 3-5 years or more. Olstein believes value investing requires a disciplined, patient approach because anticipated equity values often take time to emerge, he contends. Olstein may also invest assets in convertible securities, rights and warrants, preferred stocks, high-quality debt securities and American depositary receipts (ADRs). One of the things that Olstein & Associates prides themselves on is looking behind the numbers. Olstein believes that the fund's objectives are best achieved by minimizing investment errors, as opposed to selecting companies with the highest growth potential without regard to downside risk. He and his research staff look behind the numbers of a company's financial statements to assess its financial strength versus its potential downside risk. This risk-adverse philosophy is called "defense first." In security selection, Olstein focuses on companies that produce more cash flow than necessary to sustain the business operations, avoid aggressive accounting practices, demonstrate balance sheet fundamentals consistent with the fund's "defense first" approach, and whose stock is selling at a discount to its "private market" value. The Olstein website cites the firm's belief that value can occur anywhere. Accordingly, Olstein invests in equities of companies without regard to whether they are conventionally categorized as small, mid or large cap or whether they're characterized such as growth, value, cyclical or any other category. Nor does Olstein focus on characteristics such as the number of years in business, sensitivity to economic cycles, industry categorization or stock price volatility, the website states. Unlike most active managers, Olstein eschews management meetings, preferring instead to dissect company financial statements in an effort to assess company strengths and weaknesses, or to uncover "accounting irregularities" which could indicate further trouble. In an October 2001 interview with Morningstar, Olstein said that in his 33 years he has never had a management team tell him what their problems are, and that if they didn't solve them, he would lose money on their stock. He would rather focus his efforts on scrutinizing financial reports to see whether management attacks their problems (and discusses them) and whether they discuss any inconsistencies, irregularities, or projections. Everything one needs to know about management, Olstein contends is available in a detailed inspection of financial statements. He opts to spend his time reading what management does and not what they say they. Mr. Olstein believes that in the investment business, the good performers are the ones who make the fewest errors or mistakes, not the people who hit the most home runs and strike out a lot. Like a tight football game, he believes the equity manager that makes the fewest mistakes wins. The result is a fairly diversified portfolio of about 100 value stocks across all capital sectors. As of September 30, Olstein Financial Alert Fund had 96.4% of its assets invested in stocks, with about 18% of stock assets in large-cap names and the other 82% of stock assets invested in the extended market (mid, small and micro cap sectors). The fund's average market cap value of $2.1 billion and its average forward P/E of 14.7 land it in the Morningstar mid-cap blend style box currently. However, in the past, the fund had more of a mid-cap value bias so that's where Morningstar categorized the Olstein fund prior to November 2002. The fund is now evaluated against other mid-cap blend funds for Morningstar star rating purposes. In the next section, we look at Olstein's performance relative to similar funds, as adjusted for risks and costs. Investment Performance Olstein's performance over the past five years has been stellar. His trailing 5-year average total return as of December 11, 2002 of 11.6% beat the S&P 500 large-cap index by an average of 11.2% a year and the S&P Midcap 400 index by an average of 4.1% a year. In doing so, Olstein produced investment results that ranked the Financial Alert Fund in the top 4% of the mid-cap blend category, per Morningstar. His 11.6% annual-equivalent rate of return for the trailing 5-year period compares to just 3.4% for the average mid-cap value fund and only 3.1% for the average mid-blend fund. The fund's outstanding long-term record is the result of several strong performance years. Between 1996 and 2001, Olstein closed each calendar year with a "double-digit" percentage gain. Below is a performance summary for the fund, using Morningstar data as of December 11, 2002. Year-To-Year Investment Returns (OFALX): 1996: +24.4% (29th percentile) 1997: +34.8% (21st percentile) 1998: +15.0% (29th percentile) 1999: +34.9% (14th percentile) 2000: +12.9% (44th percentile) 2001: +17.3% (6th percentile) 2002: -16.8% (64th percentile) You can see that with the exception of this year, performance has consistently fallen in the top half of the category, with Olstein delivering double-digit total returns six consecutive years until 2002. This year, it looks like Olstein will experience his first annual decline, with the fund down 16.8% on a YTD basis. Olstein continues to sport one of the best long-term records, beating 96% of all mid-cap blend funds over the same 5-year period. The chart above depicts the fund's net asset value movements in the last three years. Morningstar grades the fund risk as high relative to other mid-cap blend funds over the past three years, giving it a 4-star overall rating based on above-average return and high risk relative to its category (mid-cap blend funds). Over the past five years and overall, Morningstar rates the fund risk level as above average (not high) and fund return as "high" relative to other mid-blend funds, giving it its highest overall rating of 5 stars for risk-adjusted performance. Olstein is one of the few portfolio managers to overcome the fund's higher risk and cost structure to earn a Morningstar 4-star rating for risk- adjusted (cost-adjusted) performance relative to category peers. Morningstar's modern portfolio theory statistics for the Olstein Financial Alert Fund suggest that Olstein has rewarded investors for the risk incurred by the fund. As of November 30, 2002, the fund had a beta of 1.17 relative to the S&P 500 index (1.00) and a high alpha score of 24.4. Compared to its best-fit index, the S&P Midcap 400 index, this fund had a 1.11 beta, and a 4.2 alpha based on trailing 3-year numbers. Olstein's risk level is above that of the large- and mid-cap markets, but his long-term return performance has also exceeded index benchmarks and category peer groups by wide margins. Conclusion Although Olstein's performance is more average in 2002, there's nothing average about his long-term record. Morningstar states that he has "amassed a terrific long-term record here by moving into unpopular names and sectors and then sticking around for a recovery." This contrarian philosophy along with the manager's goal of limiting mistakes has generated strong returns for risk- tolerant investors willing to stay the course. Long-term investors seeking a stock manager who scrutinizes the financial statements and disclosures of companies to find value opportunities across all capital sectors have a top choice here. For more information or a fund prospectus, logon to the Olstein Funds website at www.olsteinfunds.com. Steve Wagner Editor, Mutual Investor email@example.com ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********************** SWING TRADER GAME PLANS *********************** Conflicting Signals We got a number of conflicting signals today that left me on the sidelines, rather than trying to pick my way through murky waters. The economic data released this morning also gave conflicting signals about the economy within the reports themselves. To read the rest of the Swing Trader Game Plan Click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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The Option Investor Newsletter Thursday 12-12-2002 Copyright 2002, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: None Dropped Puts: CDWC Daily Results Call Play Updates: CPS, CTXS, OMC, MERQ New Calls Plays: IDPH Put Play Updates: AIG, DLX New Put Plays: MMM **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** None PUTS: ***** CDWC $46.77 -0.84 (-0.96) Just when it looked like CDWC was finally going to fall apart yesterday with a negative reaction to the company's reduced revenue guidance, buyers appeared out of nowhere. By the end of the day, the stock had rallied more than $3 from its intraday low. That buying continued this morning, with the stock challenging the 10-dma above $48 before falling back from there. Normally, we'd look at today's failure at the 10-dma as a solid bearish entry point, but volume tells a different story. Wednesday's rally came on huge volume (more than triple the ADV), while today's decline came on below average volume. This hints that yesterday's low was likely an important bottom, drastically reducing the likelihood of significant price weakness over the near-term. Let's use the current price weakness to exit any open positions and look to deploy our cash into more favorable plays. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu Week CPS 39.95 0.46 1.22 0.76 –0.09 Holding level CTXS 12.45 -0.26 -0.13 -0.12 0.05 Bounce from support IDPH 34.84 0.77 -0.43 0.05 0.63 New, Into gap MERQ 31.50 -0.80 0.99 1.37 0.32 Rebound continues OMC 68.65 -2.34 1.88 1.13 0.42 Testing 200-dma PUTS AIG 60.09 -0.68 1.18 0.87 –1.57 Rolled from 50-dma CDWC 46.77 -1.83 1.30 0.57 –0.84 Drop, Strong bounce DLX 41.99 -1.26 -0.22 -0.37 0.13 Failed bounce entry MMM 123.65 -2.06 0.75 -0.39 –1.06 New, Look under $123 ************************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 ******************** CPS $39.95 -0.09 (+2.12) Mirroring the action in the broad market on Thursday, CPS spent the day trading in a very narrow range. In contrast to the broad market though, the stock is consolidating its recent price rise, while the overall market is consolidating last week's sharp decline. The rally in CPS earlier this week was particularly important, as it pushed the stock through resistance that had been holding it back since early October. In the process of trading through the $39 level, the stock generated a fresh PnF Buy signal and pushed right through the bearish resistance line. Wednesday's price action saw the stock claw its way above the $40 level, where it spent today's session consolidating. While we are looking for the stock to continue its northward trek towards major resistance in the $44-45 area, it is likely that we'll see a short-term pullback to support before the bulls manage a successful breakout over the 200-dma, currently at $41.12. A pullback to the $38-39 level will give us a chance to see how well this former resistance level performs as new support. A successful rebound from that level would make for a solid entry point ahead of a serious assault on the 200-dma. Because of the proximity of the 200-dma (which coincides with the 62% retracement of the stock's sharp slide from June-October, momentum traders need to be very careful about chasing a breakout move above current levels, only playing such a move if it is accompanied by strong volume. We're keeping our stop set at $37. --- CTXS $12.45 +0.05 (-0.55) Vigilant and quick traders got an ideal entry point into our CTXS play yesterday morning, when the stock dipped to and then rebounded from just below the $12 level in the first hour of trade. Despite the gyrations in the overall market this week, the stock has been holding its ground pretty well, with the $12.50 level acting as a price magnet, while the stock digests the gains accrued over the past month. While the oscillators have eased out of overbought territory, price action has remained rather flat, which is bullish. Adding to the positive tone is the fact that the consolidation over the past week has come on declining volume. While price has been drifting sideways, the bottom of the ascending channel has been rising to meet it, and we'll soon know whether there is another upward leg in store for the stock. A rebound from current levels can be used for initiating new positions, so long as our $11.50 stop (just below the rising 20-dma) is not violated. More cautious traders will want to see a volume-backed rebound push through the $12.90 level before entering the play. --- OMC $68.65 +0.42 (+0.75) After Tuesday's rebound from the $65 level, the next important price development we were looking for from our OMC play was for another test of the 200-dma and we got that at the open this morning. OMC gapped up and quickly fell back, failing on its second test of that important level in as many weeks. But the pullback was fairly mild, with the intraday lows coming just above the 10-dma ($67.54). Positive comments from YHOO about expectations of growth in the advertising market late in the afternoon lit a fire under OMC, with a quick $1 rise into the close. That rise came on increasing volume, leading to the possibility of a continuation of that rebound tomorrow morning. OMC looks like it wants to break out over the 200-dma, and momentum traders can use a breakout over that level for initiating new positions. Those wanting a bit more confirmation before committing to new positions will want to see the stock push through last week's intraday high of $70.50. Alternatively, another intraday dip into the $65-66 area can be used as a lower risk entry. Keep stops set at $64. --- MERQ $31.50 +0.32 (+1.48 for the week) Shares of MERQ traded strong on Wednesday morning after Siebel Systems (SEBL) tapped Mercury to provide testing services. The stock reached our entry trigger ($30.27) shortly after the opening bell, gravitated towards the $31.00 area, and closed near the best levels of the session. Today's action saw some morning profit-taking before buyers stepped in near the bottom of the December 6th gap. The stock climbed higher in afternoon trading and closed with a 1.0% gain. Not too shabby, considering the NASDAQ's flat performance. P-n-f chartists will note that the intraday high of $32.00 created a three-box reversal. Traders looking to open new long positions can watch for a move above this level. We're keeping our stop set at $28.48, while those with a more conservative strategy could use a stop slightly below $30.00. In related sector news tonight, ADBE reported Q4 results that were 2 cents better than expectations. This should help to give the software group a bullish spin on Friday morning. ************** NEW CALL PLAYS ************** IDPH - IDEC Pharmaceuticals - $34.84 +0.63 (+1.23 for the week) Company Summary: IDEC Pharmaceuticals Corporation is a leader in the discovery, development, and commercialization of targeted immunotherapies for the treatment of cancer and autoimmune diseases. IDEC discovered and developed the first monoclonal antibody product (Rituxan.) and the first radioimmunotherapy product (Zevalin.) approved in the United States for the treatment of cancer. IDEC is a San Diego based, integrated biopharmaceutical company with multiple products in clinical stage development and strategic alliances in a variety of research platforms. (source: company press release) Why We Like It: In the ever-changing and speculative world of biotechnology, investors find a good deal of comfort in companies that are actually producing drugs with promising results. Such is the case with IDEC Pharmaceuticals. The company announced on Monday that an investigational study of its Rituxan drug had "indicated a 55% reduced risk of disease progression in patients with indolent non-Hodgkin's lymphoma." Although Rituxan has already received FDA approval, cancer study groups are carrying out larger studies to evaluate the effectiveness of using the drug for extended treatment. Further positive news came on Tuesday, when the company said that a clinical trial of IDEC-114 (a Phase I/II drug) was successful in treating follicular non-Hodgkin's lymphoma. IDEC-114 has got a long way to go before it's marketable in the U.S., but these results are certainly a good start. Buoyed by the recent developments, IDPH has started to move into its November 26th gap, which resulted from a Merrill Lynch downgrade. Once this gap is filled, the daily chart doesn't show any significant overhead resistance until the $40.00 area. The rising stochastics (5,3,3) and fresh bullish MACD crossover suggest that IDPH will be able to extend this week's breakout above short-term resistance at $34.00. Additionally, shareholders can be encouraged by the recent three-box reversal on the p-n-f chart. In terms of sector strength, we like how the BTK.X biotech index has bounced from its converging 50-day and 100-day moving averages near 350. The BTK.X showed good relative strength on Thursday with a 1.5% gain. Shares of IDEC outpaced the index by tacking on 1.8%. We will enter at the current level, buoyed by recent support between $31 and $34. This would offer the highest risk reward ratio. More conservative traders, can wait until the stock fills its gap with a trade of $36 to initiate. The descending 50-dma at $39.66 might throw a wrench in our plans, so we'll re-evaluate our exit strategy if/when the stock approaches that moving average. We will place our stop at $32, below its recent pullback, as a trade at that level would indicate that it has failed in its rebound attempt. ***** December contracts expire in 1 week ******* BUY CALL JAN-30*IDK-AF OI= 213 at $6.60 SL=3.30 BUY CALL JAN-35 IDK-AG OI= 1516 at $3.30 SL=1.65 BUY CALL APR-30 IDK-DF OI= 63 at $8.80 SL=4.40 BUY CALL APR-35 IDK-DG OI= 1250 at $5.80 SL=2.90 Average Daily Volume = 5.16 mil ************************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 $60.09 -1.53 (-0.40 for the week) The oversold bounce in AIG that materialized earlier this week had absolutely no staying power. The bears piled on board once the stock reached its 50- dma ($62.51) on Wednesday afternoon. Shares trended lower during today's session and underperformed the broader market with a 2.4% loss. Shares also showed relative weakness versus the IUX.X insurance index, which drifted lower by 1.4%. AIG can't seem to attract much buying attention after rolling over from moving average resistance. A close below support at $60.00 was averted by the narrowest of margins today. With the p-n-f chart still looking weak and the MACD drifting lower, we think odds are good that AIG will soon be trading at fresh lows. New entries can be targeted on a move under the relative low of $59.42. Another failed rally at the 50-dma might also yield an entry point. For the time being we're keeping our stop at $65.51. --- DLX $41.99 +0.13 (-1.82 for the week) It's not pretty, but DLX has slowly been moving in a southbound direction ever since it topped out under the 200-dma last Friday. The stock has posted lower highs and lower lows over the past four sessions. Shares showed some relative strength today with a fractional gain but weren't able to close above intraday resistance at $42.00. Interestingly, these gains came on the weakest volume since the abbreviated post-Thanksgiving session. This maintains the pattern of lighter volume on up days. Further technical encouragement can be gleaned from the falling daily stochastics (5,3,3) and negative MACD histogram. DLX looks like it could reach new multi-month lows within the next few sessions if the current downtrend remains intact. Traders looking to open new positions can continue to watch for a breakdown below $41.00. ************* NEW PUT PLAYS ************* MMM – 3M Company $123.65 -1.06 (-2.45 this week) Company Summary: Commonly known as the maker of the ubiquitous, adhesive-backed Post-It Notes, MMM is also a leading manufacturer of a variety of industrial, consumer, and medical products. Reflective sheeting on highway signs, respirators, spill-control sorbents, and Thinsulate brand insulations are just some of the company's industrial products. MMM also makes microbiology products, making it easier for food processors to test for the microbiological quality of food. Why We Like It: There hasn't been a lot of good news in the market recently, and this is reflected in the fact that the broad market has pulled back considerably since Thanksgiving. Even some of the stocks that have held up fairly well are starting to fray around the edges. MMM is a perfect example, as the stock has once again failed to break out over the $130-131 zone, a level of resistance that has kept the bulls in check on numerous rally attempts since May. Throughout the month of November, the stock made numerous attempts to break through this level, all to no avail. Over the past couple weeks, MMM seems to be weakening significantly, falling back under all of its shorter-term moving averages, and the past few days have seen the stock threatening to break under its 200-dma (currently $123.46). With broad market internals continuing to weaken and MMM threatening to break below this important moving average, now looks like a good time to start lining up for a bearish play. Over the past several weeks, MMM had built up some significant support, first at $125 and then $126-127. Since both of those levels have now been violated, they ought to provide solid resistance on any weak broad market rebound. Note how the stock has consistently found resistance this week, just below the $126 level. Another failed rally attempt near that level can be used to enter the play, although more conservative traders will really want to wait for a definitive breakdown first. Such a breakdown will occur when MMM breaks under the 200-dma and then continues south below the $123 level. We're initially placing our stop at $127, as a close back over that level would indicate a reduced likelihood of a breakdown. *** December contracts expire next week *** BUY PUT DEC-125 MMM-XE OI=4546 at $2.80 SL=1.50 BUY PUT JAN-125*MMM-ME OI=3810 at $5.20 SL=3.25 BUY PUT JAN-120 MMM-MD OI=5603 at $3.20 SL=1.75 Average Daily Volume = 2.73 mln ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Thursday 12-12-2002 Copyright 2002, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: PUT - MMM Traders Corner: When Does A Condor Deserve To Be Strangled? Traders Corner: Wave patterns to trends using Elliott Wave analysis; part 2 Futures Corner: Using Pivots Effectively Options 101: Gold Revisited (Again) ********************** PLAY OF THE DAY - PUT ********************** MMM - 3M Company $123.65 -1.06 (-2.45 this week) Company Summary: Commonly known as the maker of the ubiquitous, adhesive-backed Post-It Notes, MMM is also a leading manufacturer of a variety of industrial, consumer, and medical products. Reflective sheeting on highway signs, respirators, spill-control sorbents, and Thinsulate brand insulations are just some of the company's industrial products. MMM also makes microbiology products, making it easier for food processors to test for the microbiological quality of food. Why We Like It: There hasn't been a lot of good news in the market recently, and this is reflected in the fact that the broad market has pulled back considerably since Thanksgiving. Even some of the stocks that have held up fairly well are starting to fray around the edges. MMM is a perfect example, as the stock has once again failed to break out over the $130-131 zone, a level of resistance that has kept the bulls in check on numerous rally attempts since May. Throughout the month of November, the stock made numerous attempts to break through this level, all to no avail. Over the past couple weeks, MMM seems to be weakening significantly, falling back under all of its shorter-term moving averages, and the past few days have seen the stock threatening to break under its 200-dma (currently $123.46). With broad market internals continuing to weaken and MMM threatening to break below this important moving average, now looks like a good time to start lining up for a bearish play. Over the past several weeks, MMM had built up some significant support, first at $125 and then $126-127. Since both of those levels have now been violated, they ought to provide solid resistance on any weak broad market rebound. Note how the stock has consistently found resistance this week, just below the $126 level. Another failed rally attempt near that level can be used to enter the play, although more conservative traders will really want to wait for a definitive breakdown first. Such a breakdown will occur when MMM breaks under the 200-dma and then continues south below the $123 level. We're initially placing our stop at $127, as a close back over that level would indicate a reduced likelihood of a breakdown. *** December contracts expire next week *** BUY PUT DEC-125 MMM-XE OI=4546 at $2.80 SL=1.50 BUY PUT JAN-125*MMM-ME OI=3810 at $5.20 SL=3.25 BUY PUT JAN-120 MMM-MD OI=5603 at $3.20 SL=1.75 Average Daily Volume = 2.73 mln ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** TRADERS CORNER ************** When Does A Condor Deserve To Be Strangled? By Mike Parnos, Investing With Attitude The Iron Condor is a hit -- again. Why? Because CPTI students have better things to do with their time than to be plastered to their computers and play with their mouse all day. They’d rather be plastered to their TV, their spouse, their girlfriend, or all three – which is entirely understandable and conjures up an interesting image. Questions have been raised and suggestions made by CPTI students regarding the Iron Condor. First, it’s against the laws of nature to try to do that to a condor and condors cannot live “where the sun don’t shine.” Secondly, yes, you can use your profits for that, but first you’ll have to prove you’re not a cop. In the words of the season, “Ho, Ho, Ho.” Here are some of the other questions. Hi Mike, I like the Iron Condor and am trying to decide when to choose it versus a Strangle. Is it just when you may be willing to do a Strangle, but want less risk? The percentage return is better on the Strangle, but it has greater risk. In the example, you are looking for a volatile stock to benefit from the premium and sell an Iron Condor. Instead, when would you sell a QLGC Strangle with a $30 to $50 range for a profit of $2.05? To benefit from selling options, it seems that the greater the volatility the higher the potential for the best return on investment. What is the ideal situation for the Iron Condor versus the Strangle? Is it only a risk consideration or is there more to it? Thank you. Response: I use the Iron Condor primarily because of the risk element. You're protected against catastrophic loss. I also prefer to use indexes for that same reason. Indexes are much less vulnerable to dramatic swings due to their diversification. I'm also assuming you're referring to a “short” strangle. Most OI readers do not have the trading approval level to do uncovered options. Spreads they can do. Naked they usually can't. But, as you know, I did include a short strangle in the CPTI portfolio (TTWO) that has worked out very well. There is a happy medium between the Iron Condor and the Short Strangle -- for those with the appropriate trading approval level. For example (and this is only for demonstration purposes): If you thought MSFT was going to remain between $50 and $60 through January expiration, you could: A. The typical Iron Condor -- the "safest" of the plays Sell the Jan. $60 call @ $.75 Buy the Jan. $65 call @ $.25 Sell the Jan. $50 put @ $1.25 Buy the Jan. $45 put @ $.50 You would have taken in a total credit of $1.25 and you are protected against catastrophic events by having a defined risk. B. The Short Strangle -- the "riskiest" of the plays Sell the Jan. $60 call @ $.75 Sell the Jan $50 put @ $1.25 You will have taken in a total credit of $2.00 -- BUT, you have two NAKED (completely in the buff) options. The risk is virtually unlimited and you are vulnerable to gap ups or downs and market direction changes. C. The A-typical Iron Condor -- the "compromise" between the Iron Condor and the Short Strangle. Sell the Jan. $60 call @ $.75 Buy the Jan. $70 call @ $.10 Sell the Jan. $50 put @ $1.25 Buy the Jan. $40 put @ $.20 You would have taken in a total credit of $1.70 and you are somewhat less protected against catastrophic events though you still have a defined risk. The wings of the condor that were purchased for protection are an additional $5.00 away from the short put and call strikes. Technically, these are spreads and will allow a trader, who does not have "uncovered" trading approval, to take in more premium, but assuming greater risk. Also, the "compromise" play would require twice the maintenance by your brokerage firm because the $5.00 exposure has now become a $10.00 exposure on both the put and call sides. The Ideal Iron Condor vs. Short Strangle The ideal situation for an Iron Condor is entering a position when the underlying has an uncharacteristically inflated volatility and you can have a very large range with a respectable amount of premium. Keep in mind that we’re trying to create strategies and positions for OI readers that would require a minimal amount of attention. I suspect most OI readers actually have to work for a living to support their (after work) couch potato lifestyles. The money they make trading is additional gravy for those delicious Banquet TV dinners. If traders can't keep a close eye on the market, it limits the strategies they can use. That's one of the big problems. Traders, who are not able to monitor their trades, miss entry points, exit points and adjustment opportunities. In an ideal world all condors would expire worthless and I could eat Cheese Doodles, pizza and apple pie, and have only 3% body fat. The mirror never lies – but I know that damn scale has an agenda of its own. ____________________________________________________________ Mike: I'm doing some research on option pricing and delta's for the purpose of covering positions. Here's an example: Stock XYZ trades at $27.50; sell $25 put. Let's say the stock starts to drop. If the stock goes below $25, why not buy an ITM put (a month or two out) to cover my sold put rather than shorting the stock? From my "research" it looks like the delta for the sold put would be about the same as the delta for the bought put. It seems like this way would use less capital than the purchase/short of stock outright. Am I missing something? Answer: Great suggestion! The only difference is that options usually have a wider bid/ask spread than stocks. When you buy (or short) a stock, you're participating penny for penny in the stock movement. Unless (according to your example) you buy a put that's very deep in the money and has an almost 100% delta, you might be sacrificing money using an option. Plus, if you need to hold onto the option (if the stock continues to move against you), you will be losing some time value as well. But, I do like it as a choice for those who do not have a large reserve fund for buying and selling the stock when it bounces around a short strike. Thanks! Keep the ideas coming! _____________________________________________________________ Hello Mike: I have a question related to credit spreads. Lets assume that we sold a spread and then stock moves against us and violates strike that we sold. In that case you recommend to buy (or sell depending on spread we sold) underlying stock and therefore create a hedge. Then if stock moves back through the strike we sold we should close stock position. What if stock jumps around this strike many times during the day? It is impossible to buy/sell every time it goes through. I guess there should be some leeway, so you buy/sell with some offset from the strike. Answer: Before establishing the position, ask yourself, where is the resistance level on this stock? Has the stock broken through resistance? It's recommended that, ideally, when you put on the position, you sell a strike price just above resistance or just below support. That way, if the support (or resistance) level is violated, and it continues to your short strike price, that the stock has indeed "broken out" and will continue in that direction – thereby requiring only a few purchases and selling of stock. ____________________________________________________________ CPTI PORTFOLIO UPDATE – As Of Thursday’s Close BBH Iron Condor – Currently trading at $89.56 We want BBH to finish the December option cycle anywhere between $80 and $95. Big up day today. We’re still looking good – still in mid-range. TTWO Short Strangle – Currently trading at $25.65. We want TTWO to finish the December option cycle anywhere between $22.50 and $35.00. TTWO has pulled back with the market, but there’s still enough breathing room not to be concerned.. IMCL Covered Call – Currently trading at $12.30. We want IMCL to finish the December option cycle over $10 so it will be called away. IMCL has pulled back from the $15 level, but we still have a nice cushion with a little over a week to go. QQQ ITM Strangle – Currently trading at $25.85. Before rallying later in the day Friday, the QQQs dipped to $25.74. For the traders who were still holding their long $26 or $25 put, it was a good profit-taking opportunity. I suspect that most CPTI students are already out of the position. Last week, the QQQs finally made its predicted 3-point move – and then some – it turned out to be a $4.25 upward move. CPTI students, sold their long calls, covered the cost of the strangle, and have profited (or are now profiting) from the long puts as the market has reversed direction. ____________________________________________________________ Happy trading! Remember the CPTI credo: May our remote batteries and self-discipline last forever, but mierde happens. Be prepared! In trading, as in life, it's not the cards we're dealt. It's how we play them. Your questions and comments are always welcome. mparnos@OptionInvestor.com ************** TRADERS CORNER ************** Wave patterns to trends – using “Elliott Wave” analysis; part 2 By Leigh Stevens lstevens@OptionInvestor.com This Trader’s Corner is a bit different in the sense that part 1 from last week is a fairly important read prior to this one, as it gives some foundations for understanding movements of a trend in terms of “wave” structure – Elliott wave that is; after R.N. Elliott, who devised the wave theory. (Like Dow theory, Elliott’ work was a theoretical construct about how the market works – AND difficult to “prove” also – so, these remain theories.) Part 1 is at – http://www.OptionInvestor.com/traderscorner/tc_120502_2.asp To recap a bit – A bull market or a basic up trend breaks down into 3 advancing “impulse” waves, with 2 intervening counter- trend corrections or downswings and that these all together make up a 5-wave structure. The END of a wave is where we put the number or letter. A “typical” look to this is as seen below – A related rule of waves and wave structure is the “rule of alternation”, which suggests that the strength of a move or the (price) distance carried will alternate; e.g., a stronger longer move will follow a relatively lesser advance and vice versa. And, if the first correction is relatively shallow, the next one will be deeper. Bear markets or declining trends usually subdivide into the 3- part “a-b-c” structure, which is illustrated in the chart below. In order so that you do not think that the wave structure to trends only applies to longer-term chart, the S&P 100 (OEX) Index chart here is of the hourly closes for a 6-week period and is a “typical” a-b-c or down-up-down declining trend – The foregoing is Elliott wave in a very small nutshell – I don’t claim to be someone who knows all there is to know about wave patterns but I do see valuable trading clues in knowing for example (from experience) that the 2nd upswing is quite often longer and stronger than the 1st. As well, knowing that an overall decline takes the form typically of a down-up-down pattern and that the second decline or wave “c” is the move that is usually most prolonged and steep – an example of this being (in my estimation) the bear market decline of March to October of this year (2002), the severity of which had the “feeling” and look of a “c” wave decline. FURTHER BREAKDOWN OF WAVE PATTERNS - There is a further subdivision of the larger wave structure and its value is in helping you figure out when a particular move may in a FINAL stage of completion. Applying a different kind of alternating rule, impulse waves or up moves in bull market trends (waves 1, 3, and 5) in the same direction of the trend or up in this case, break down into a smaller wave-5 structure. The counter-trend waves 2 and 4 which are counter to the trend or are down moves in this case, break down into a further a-b-c (down-up-down) pattern or structure. Conversely, an a-b-c bearish downtrend has 2 moves in the direction of the trend which is down (“a” & “c”) and 1 counter- trend wave “b”. The moves in the SAME direction as the down trend (a & c) break down into a “smaller” 1-5 structure, whereas the counter-trend upswing “b” breaks down into a smaller a-b-c pattern. Here, some sample charts will help you to visualize this – as well, its helpful to memorize this simple rule: Moves in the SAME direction as the overall trend (up OR down) break down into further or “smaller” 5-part patterns AND ...... Moves AGAINST the trend (up OR down) that is ongoing break down into a smaller a-b-c structure. An advancing trend that has 3 impulse waves up (1,3,5) and 2 counter-trend downswings making a 5-wave structure, also breaks down into smaller 1 to 5 and a-b-c patterns per the example shown in the chart below - Moves in the same direction as the up trend above break down into smaller 5-wave patterns, whereas the counter-trend downswings 2 & 4 break down into smaller a-b-c patterns; or, down-up-down price swings. A declining or bear market trend or an a-b-c (down-up-down) breaks down further into smaller 5-wave component moves for the “a” and “c” moves that are in the direction of the down trend; the “b” wave rebound that is counter to the trend, is broken down further into an a-b-c correction, only in this case the direction of the price swings are UP-down-UP as shown by going back to the OEX hourly chart: An example chart from my book - below - shows both bull and bear markets for bellwether IBM and breaks down the 5-wave Bull and the A-B-C major Bear market (capital letters are used for a major trend) in some detail – To show how this kind of analysis can be used in trading – and, we should imagine we can imagine we are seeing this unfolding wave structure on an hourly or daily chart – it can be ascertained above that wave 3 (the 2nd big advance) is in a completion phase when the “smaller” 5th wave (wave 5 of a “smaller degree”) is underway. This knowledge of how wave structure works typically tells us to get READY to trade out of calls and go into Puts, especially when there are some “confirmations” such as from other technical indicators or patterns (e.g., a trendline break) that the trend has reversed. Examples or how I have labeled where one wave begins and ends, etc., are for demonstration purposes and in an attempt to provide the basic concepts of how a trend is viewed in terms of its (Elliott) wave structure. I use ideas gleaned from the wave principle in patterns where the wave structure appears pretty clear cut – the success of successfully identifying a “classic” wave structure to me is in whether it provided early recognition of a trend that led to a profitable investment or trade. My last Trader’s Corner article (part 3) next week, on using the Wave principle to help pick apart trends, will conclude with how wave theory differs in defining long-term trends, how to use wave analysis along with OTHER technical analysis tools and also describes wave characteristics. In the meantime, surfs up and the waves are out there! ************** FUTURES CORNER ************** Using Pivots Effectively By John Seckinger jseckinger@OptionInvestor.com Using pivots effectively can increase a trader’s confidence when entering or exiting a position, and such a simple formula can at times be one of the most powerful tools. When describing a pivot, I like to use the word “equilibrium,” since it is this level that will act as a focal point for market makers, institutions, and retail traders. When a specific contract trades away from the recognized pivot, traders will already be aware of important support and resistance areas calculated from using the calculated pivotal level. The calculation is as follows: Pivot point (P) = (H + L + C) / 3 First resistance level (R1) = (2 * P) – L First support level (S1) = (2 * P) – H Second resistance level (R2) = P + (R1 - S1) Second support level (S2) = P - (R1 - S1) Note: H, L, C are the previous day's high, low and close, respectively: Let us use the ES03H contract as an example: High: 908.00 Low: 895.25 Close: 901.00 Pivot becomes 901.41 First Resistance: 907.57 First Support: 894.82 Second Resistance: 914.16 Second Support Level: 888.66 Chart of ES03H, 10-minute Note how the pivot at 901.41 lines up with the 50% retracement at 901.65, as well as the second resistance area just under the 915 area? Coincidence? Not likely. Note: 910 was the high just a few days earlier, so keeping the bottom green line intact still seems to make sense (versus only highlighting 915). Moreover, the 907 level is seen in the SPX contract (50 PMA), so that matches up well also. In theory, trading throughout a session should remain between the first support and resistance levels due to market maker activity. If either of these first levels penetrated, then it is time to look for off-floor traders coming into the market and taking the contract towards the second levels of support and resistance. Of course, once a support or resistance area is broken, look for support to become resistance and vice versa. Intermediate and long-term traders should then become involved if the second support or resistance level is cleared. When is there a caveat that changes the scope of the pivot? When there is a gap the following morning; since a move outside the projected pivot will usually hurt the market makers ability to move the market effectively around the aforementioned pivot. It is important to realize that pivot analysis should be used with other technical indicators, since those other indicators will provide a higher confirmation of the level(s) listed. Example: The ES trades 907.57 and oscillators, trend lines, etc. are all pointing bullish; therefore, look to buy above that level with 914.16 as the upside target instead of looking to sell the resistance area short. If used blindly, the chances of being caught in a trap greatly increases. Why? I am sure that I am not the only person looking at these exact levels, and traders like nothing more than getting another trader into the market just above a support or resistance level, only to reverse price action and try to force that same trader to take an immediate loss. If using other analysis, confidence grows and traps occur less frequently. Let us do one more example, and this time we will back test the pivot theory. Note: I really am randomly picking a day. Chart of NQ02Z, Daily The 1078 noted resistance area really turned out to be important (top of a wedge pattern), while 1013.50 came extremely close from being the low on December 9th and 10th (1014 and 1014.50, respectively). The 975 level does hold a solid intermediate level of importance, but 1104.50 never really materialized into much. I would still stay this pivot analysis worked out rather well. Of course, traders can use pivot analysis on any timeframe that has a low, high, and close. Obviously, all of them do. However, be careful about the shorter moving averages. Remember, from S1 to R1, this is an area that should be controlled by market makers. With that said, I am not sure if they look at 17 minute chart patterns when trying to figure out levels to reduce or increase inventory. I recommend starting with a daily chart and then playing with a 120 and 60-minute chart. If another timeframe works and you are profitable trading it, perfect. Why do traders like pivots? It is a “matter-of-fact” number and emotions are stripped away. It is almost like putting together a trading plan via some simple math. That is what worries me. I have absolutely no problem using the levels for small positions (or even exiting large positions); however, it is too costly to simply rely on these numbers to be the holy grail. Trading is too much of an art for that to happen. I do, however, think these support and resistance areas from pivotal analysis makes for an excellent tool to trading. If I have resistance at 906.50 and pivot analysis has 907.25, I can see (as long as other indicators match up) putting on a quarter position at each. If the pivot analysis works better on a consistent basis, confidence grows and position sizes increase. I have used pivot analysis when trading in the past, and on a scale of 1-10 I give it a 7.5. Solid, but not great. I will start incorporating the numbers into the futures wrap and we can together see how it works. Good Luck. Questions are welcomed, John Seckinger jseckinger@OptionInvestor.com *********** OPTIONS 101 *********** Gold Revisited (Again) Buzz Lynn buzz@OptionInvestor.com A funny thing happened on the way to the FOREX. If you are wondering what the FOREX is, it's the foreign currency exchange. That's where Yen and Euros get traded for Dollars, and to a lesser extent, India Rupia get traded for Dutch Guilders. OK, here's the funny part. There is not a single currency traded today that is even remotely tied to the price of gold, as currencies once were. So what? The big deal is that consumers - bless their open wallets - are spending their brains out. But they are not doing it with hard- earned money. They've taken the easy way out and borrowed themselves into prosperity! Or at least they feel that way. $0 down, 0% interest, and 0 payments for one year is almost like getting a new car for free. Except that eventually, we have to pay for it. For much of America, the $400 payment foregone now will be an incredible burden in 2004. So why is this possible? The simple answer is that the Fed has been waging a fierce battle against deflation by inflating US currency supplies. It's all been in an effort to keep borrowers from defaulting, as their assets deflate in value. Thank God for the Real Estate Bubble that has allowed the average citizen to refinance and suck some cash out of his/her property - cash spent on a vacation or other consumable, but not invested. Here's a concept: How about we refinance at a lower rate and merely pay off the loan faster instead of splurging? Bringing this full circle, the only reason that consumers have $$$ to spend is because they borrow from the future. That pot from which borrowed money originates is the U.S. Federal Reserve, which, thanks to the obsolescence of the printing press, can now electronically "print" money in the form of new credit. If you are now thinking back to basic economics where you learned about supply and demand, by now you've recognized that a flood of Dollars into the economy is a recipe for inflation. And thus we have an epic battle on our hands of the Fed's "Inflate or Die" mantra vs. world deflation born of overcapacity, especially in China. I don't know how this will turn out in the near term. But I do know that eventually, when a central bank floods money into the system, inflation results. It's only a matter of time. Now that we know that, is there anything we can do to protect ourselves? Yes. Consider gold. Gold is the only "real" currency to withstand the test of centuries and even millenniums. But please do not misinterpret my motives here. This does not mean that Fundamentals Guy has become a gold bug nor am I recommending you dump everything else and sleep with your newly purchased metal under your mattress. Here, I'm keeping completely in the tradition of Fundamental's Guy building his financial ark. Minus the Gopher wood used by Noah to build his ark (Nobody really knows what gopher wood is anyway), gold is a part of my financial ark. Right now, I actually own the shiny yellow metal in coin form as somewhat of an insurance policy in case the world, shall we say, becomes a bit more chaotic. While I don't envision waking up tomorrow to find my Federal Reserve notes have no value, history shows that fiat (aka fake) money will always be replaced by real money, and that's gold. I can spend it if grocery shopping requires literal wheelbarrows of cash like in early 20th century Germany. Talk about value erosion of the currency! Plus, if it gets to that point, I won't have to worry about my paper depreciating. My gold still buys the same goods, if not more. So anyway, what has tripped my trigger to revisit gold again as a diversified investment/insurance policy/ark material? Well, it's tradable. It's investable. And I believe gold is at the cusp of confirming its entry into a long-term secular bull market. While the major indexes have lost something from 15%-25% in value this year, gold is up about 10%. Don't buy it now, but look at the charts - first, the point and figure chart for the gold futures composite. It's a conglomerate of the gold futures prices back to 1990 that separates futures contracts expiration away from the contract price. All that’s left is price. PnF Composite Gold chart ($GOLD): What's great about this chart is that it's from December 11th, yesterday, which alone, was enough to get the breakout. Today, the price was even higher at a close of $332. While we don't see it on this point and figure chart, $330 resistance that we would see on a candle chart was broken, and the futures volume of February, 2003 contract (GC03G) was huge - not just traders rolling out of December '02 contracts, but real buying interest. Interest, as defined by volume was clearly there. Check it out on the following chart. February Gold chart - GC03G (weekly/daily): OK, that looks good breaking out over $330 on the weekly and the daily charts. The daily is about a one-in-a-thousand chart that shows its 200-dma on a steady incline too. MACD, which I don't usually watch, is turning up as well. In my opinion, the bull is confirmed for the yellow metal, though it's been an erratic ascent. Now get this. DON'T buy it now just because you read about it here. For while the chart action has been nice, after a big run- up, it always pulls back. If you want some gold, PnF pullbacks to $316 would be buyable in my opinion. Nearest price target is $344, with every expectation, given the confirmed bull market in gold that gold will eventually exceed that level. For quicker trades, $325-$326 is another point of support. Unfortunately, I got a late start. Meanwhile I had every intention of drilling down into a potential play. So it will just have to wait until next week. Again, all we saw yesterday and today was a confirmation of a bullish gold market. The good news is that we don't need to chase it. The train is not leaving the station without us. Recent action has merely given us a basis to make a bullish entry on any pullback. We will see a pullback. For those who want to venture forth in a research exercise, take a look at Newmont mining (NYSE:NEM) and the XAU (INDEX:XAU.X). You will see the bullish action there too. But I can't emphasize enough the need to be patient and wait for this one to come to us. No chasing! Got gold questions? Send them in! I may not be able to get to all of them. But I'll do my best to address those most focused on education and financial character. Until next time, make a great weekend for yourselves! ************************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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