The Option Investor Newsletter Thursday 12-19-2002 Copyright 2002, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Bah Humbug Futures Markets: When Will This Pullback End? Index Trader Wrap: Material Breach of Support Market Sentiment: And the Wheels Came Off Weekly Manager Microscope: John C. Hathaway: Tocqueville Gold (TGLDX) Updated on the site tonight: Swing Trader Game Plan: Material Breach Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 12-19-2002 High Low Volume Advance/Decline DJIA 8364.80 - 82.60 8505.23 8327.78 1.58 bln 1448/1770 NASDAQ 1354.16 - 7.40 1384.58 1346.18 1.58 bln 1479/1886 S&P 100 449.12 - 3.66 456.97 446.81 Totals 2927/3656 S&P 500 884.26 - 6.86 899.19 880.32 RUS 2000 383.42 - 0.51 387.69 381.29 DJ TRANS 2306.01 + 0.30 2336.37 2296.86 VIX 30.81 - 0.59 31.86 30.38 VXN 51.05 - 0.57 52.41 50.51 Total Vol 3,395M Total UpVol 1,015M Total DnVol 2,325M 52wk Highs 107 52wk Lows 186 TRIN 1.78 PUT/CALL 0.96 ************************************************************ Bah Humbug It may be starting to look a lot like Christmas in homes but not in the markets. It appears to be turning into a jobless holiday for more and more workers. Even more workers are expected to be paying the holiday bills with unemployment checks after the first of the year. Dow Chart – Daily Nasdaq Chart – Daily The headline news that jobless claims for this week fell by -11,000 to "only" 433,000 was not met with cheers. Actually the numbers were worse. The 441,000 from last week was revised up to 444,000 meaning this weeks 433,000 was only a drop of -8,000 from the previously reported numbers. Using their logic any upward revision does not count and they might as well just report 250,000 each week and then upwardly revise it to 400+ the next week. That would always provide them with a strong drop in jobless claims from the "revised" number. Yes, I am griping about the number games. It is all scripted for the uneducated investor that happens to hear a sound bite on a news channel. OIN readers are hopefully more literate and can see through this smoke screen. A better gauge for the real numbers is the continuing claims which rose to 3,497,000 from 3,268,000 the week before. That +229,000 gain in the jobless rolls is a clear sign of trouble. Those who dropped off the list last week because their claim period expired are not reported which makes the +229,000 jump even more drastic. There is also a number of rumors of mass layoffs, which will be announced after the holidays. Stay tuned. Another indicator of the lack of recovery was the Chicago Fed National Activity Index, which came in at -0.51. This is the fourth consecutive month the index has been below zero and indicating a pull back in economic activity. Specifically weak were the employment and production categories. Hiring at temporary agencies, which is a leading indicator of a rebounding economy, fell for the third month in a row. The extended weakness in the CFNAI for the last four months shows an increasing risk of the economy slipping back into recession. The year-end boost in production has passed and future production will require new and currently unseen demand. Contrary to the two items above the Philadelphia Fed Business Outlook Survey for their region showed an increase from 6.1 to 7.2. This slight increase in their diffusion index indicated a very slight pickup in manufacturing in their area. However, shipments fell to a negative -3.4 and new orders fell from 11.0 to 9.3. Inventories rose to 13.9 from -6.1 but the gains came mainly from a drop in orders and shipments. Only 30% of the respondents said they were considering adding employees in the 1Q of 2003. The 1Q spending expectations component fell from 25.8 in November to only 9.1 in December indicating a significant drop in plans to spend money for any reason. The Conference Board's index of leading indicators also picked up very slightly in November from 111.5 to 112.3. This index has been very flat for the last eight months but may be showing early signs of improvement. More of a serious challenge to Americans is the current rise in oil prices. With oil trading at $21 a barrel and not expected to drop over the next 30 days consumers are faced with an undeclared tax on almost everything they buy. For every $1 over $25 a barrel the US consumer will fork out about $7 billion more a month in energy related expenses. At $31 a bbl this represents a extra $42 billion monthly drain on the economy. Nobody is exempt since energy is required not only to heat our homes but in some form for almost every product we consume. This drain on the economy will drag on corporate earnings and eventually the stock market. With the war not likely to happen until February, after the Jan-27th report to the UN Security Council, this means oil could go higher. The situation in Venezuela is getting worse not better and there is no resolution in sight. Tech stocks tried to rally at the open on the Oracle earnings news and the semi book-to-bill numbers. Oracle managed to gain +.37 cents on their news. The semi B-T-B number rose only slightly from 0.78 to 0.79 but orders were flat and shipments fell -0.9%. The flat headline number for November was likely related to last minute orders for rush holiday shipments for computers and cell phones. There are no indications that there are any new orders on the horizon and falling capital spending will continue to drag on the sector. The latest CIO Magazine Tech Poll in November showed more CIOs expected to cut spending than increase spending in the current quarter. This was the second consecutive month the trend was down. The long awaited upgrade cycle for Y2K computers may be coming but it is still too far in the distance to be seen. Microsoft just keeps getting hit with security problems with yet another warning today. Security holes in Windows XP make playing media files off the Internet very risky. The same flaw was found in WinAmp from Nullsoft, which is a unit of AOL. Both programs would allow for an attacker to disguise his program as a MP3 or WMA file with the same name as a popular music download. Once the user clicks on the file the computer belongs to the attacker and he could modify/delete anything on the PC without the user being aware. Windows XP does not even require a user to click on the icon. Just moving your mouse over it is enough to trigger the program. This makes music file sharing over the Internet even more risky. Both companies have posted fixes on their websites. MSFT is hugging support at $53 and AOL is still glued to $13.25. With multiple Internet companies running very high profile attack ads against AOL on national TV the odds are AOL will be looking up at $13 soon. The market sell off on Thursday was primarily related to the "material breach" claim against Iraq. The news brought to reality what everyone knew was coming. We will be going to war against Iraq in February. I had thought this news was already priced into the market but obviously there were still some traders with their head in the sand. The next deadline is the Jan-27th report to the UN Security Council where the specific material claims will be spelled out for all to see. There is no doubt this will be played out in the media well in advance. The US has already stationed 60,000 troops in the gulf and authorized another 50,000 today. There are already enough men and equipment in the gulf to start a war since the first 30 days are expected to be a series of surgical strike air attacks. Those attacks will be carried out from air bases hundreds if not thousands of miles from Iraq and with assets already in place. The markets on Thursday suffered from a series of attacks in the form of sell programs. They were repulsed only when the Dow neared last-ditch resistance near 8300. It was not a wave of carpet bombing that drove the index down but several lightning attacks by small sell programs that exploited the thin ranks of buyers. Each penetration to a lower level brought a rush of buyers to fill the gap but due to their limited numbers they were not able to repulse the attacks for more than a few minutes. The defensive lines at the 50 DMA of 8498 and the 100 DMA at 8408 failed. Only a valiant stand at the 38% retracement level of 8344 prevented the defenders from being overrun. The defenders were able to mount a weak counter attack in the last 30 minutes and managed to regain some of the ground lost earlier. The buyers continually ran out of volume and were frantically trying to induce others to join their cause to no avail. (I obviously should not write war novels.) The bulls are counting on historical trends to save them. Since 1945 the Santa Claus rally has averaged a +10.6% gain in the Dow from the Nov/Dec lows to the highs in late December and early January. Since 1945 this string is unbroken. The smallest gain recent times was 0.86% in 1968-69 and the largest of +22.22% in 1974-75. The Nov/Dec low for this year was 8298 on Nov-13th. Using the average gain of +10.6% that would equate to a potential of 9177 on the Dow. Personally I think this is not possible in the current state of pre-war. Still only half of the average gain would put us back near 8750. While nobody can guarantee Santa will appear there is ample historical evidence to suggest traders will see some sort of bounce over the next couple of weeks. Since 1968 only five of the eventual highs occurred in December while 28 occurred in January. In our current bear market for the last three years the highs occurred on Jan 8th, 14th and 3rd. In 1990 when the US was preparing for the gulf war the Dow sold off from its high of the year at 3010 to the October low of 2344. A it became evident that the US and the growing coalition was going to kick Iraq troops back to Baghdad the Dow rebounded over the December holidays to 2662 but fell sharply back to 2448 when the attack started. Within a week the Dow began to rebound and hit 3017 again by March. That +20% rebound began a new bull market that climaxed at 11,750 in Jan-2000. We know that economic conditions were almost the same this year as they were in 1990 and that our odds are significantly better in Iraq now than they appeared to be then. A casual observer would expect no further drops in the market due to war sentiment since the massing of troops tends to build patriotic spirit. Couple that with extreme oversold conditions and the Dow at strong support and I would say the potential for a Santa Claus rally is strong. That opinion and $4 will get you a coffee at Starbucks but that is the way I see it. I am still a buyer of the market below Dow 8450 with a stop at 8250. My sell target is 8750. That is where I think the economic issues will again take center stage. Of note were the TRIN, which closed at 1.78 and the put/call ratio which closed at .96. Both are indicating a level of fear and oversold conditions which could produce a bounce at Friday's open. It is a quadruple witching Friday but most squaring of positions should already be complete. I expect some strong volume on the Nasdaq as the rebalancing becomes effective as of the close of business. Heavy selling in those 15 NDX stocks being removed should not significantly impact any chance of a Nasdaq bounce at the close because they are already nearing penny stock status. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor ********************** Annual Renewal Special ********************** The annual special this year is far too large to put into an email. The highlights include two option expiration mousepads to which we have added the FOMC meeting dates this year. There are also two videos with Jim, Jeff and Buzz and seven books by leading market professionals like John Murphy and and Jim Rodgers. We even brought back the Trading Strategies CD from last year for all the new subscribers who have been asking for it. Click here for the full details: https://secure.sungrp.com/03renewal/ *************** FUTURES MARKETS *************** When Will This Pullback End? By John Seckinger jseckinger@OptionInvestor.com On Thursday, both the Dow and S&P 500 tested a popular retracement level (38.2%) based off the move from October to December. What happens if these levels fail? If a bounce develops, what else needs to happen? Thursday, December 19th at 4:15 P.M. Contract Net Change High Low Volume YM03H 8355.00 -80.00 8495.00 8307.00 21,834 NQ03H 1012.50 -22.00 1039.50 1002.00 318,724 ES03H 884.75 -10.50 900.25 878.75 543,027 ES03H = E-mini SP500 futures YM03H = E-mini Dow $5 futures NQ03H = E-mini NDX 100 futures Note: The 03H suffix stands for 2003, March, 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 Dec Contract is set to expire and settle on December 20th. I expect more volatility overnight due to Geopolitical events than trades based off triple witching. Fundamental News: Chief U.N. Arms Inspector Hans Blix confirmed to the U.N. Security Council on Thursday that "not much information about the weapons" is contained in Iraq's 12,000-page arms declaration. Afterwards, John Negropont, the U.S. ambassador to the U.N., declared that Iraq's omissions constituted a "material breach". It was then Secretary of State Colin Powell’s turn, who followed up in a press conference adding that Iraq's weapons declaration "totally fails to meet the U.N. resolution's requirements.” It is now rumored that late January could be the start of a war with Iraq. Looking elsewhere, Leading Indicators for November rose to 0.7% and above the consensus estimate +0.6%. Moreover, the Philadelphia Fed Index for December rose 1.1 points to 7.2 versus the consensus of 5.0. Note: Fed Chairman Greenspan is scheduled to speak at the Economic Club of New York tonight. Technical News: The 30-year (ZB03H) contract did rise substantially (1’01) to 110’28; however, the high was right at resistance at 111’00. A move above should be viewed as bearish for stocks. Looking elsewhere, the Sox index is still setting lower highs and lower lows; however, the 0.26% loss does signify that indecision is entering into market participants’ minds. Additionally, the US Dollar remained near the 103.50 area and seems to be compressing before a next wave begins. A move above 103.77 should be positive for both the dollar and stocks. On the other hand, a move under 103.40 would be viewed as a negative for equities (and bullish for gold). ================================================================= The December Mini-sized Dow Contract (YM03H) Which is more powerful, a 38.2% retracement of the October to December move, or the fact that the 8400 level was breached and a sell signal was issued on a P&F chart? Which will weigh more on investors’ minds, the Dow testing the bottom of its daily Bollinger Band, or the fact that equities are far underneath the 8515 intermediate pivotal level? Under 8400, it did make sense to put on a quarter short position. Therefore, if short, stops should be very close to breakeven, since a rally back through the 8400 area could become a catalyst for a move back to 8515. On the other hand, weakness under the 38.2% retracement level once more can be viewed as an opportunity to add to a short position and look for a move towards the 8200 area (ideally 8120). If long from bottom of Bollinger Band or retracement level, look to exit once the Bollinger Band is beached. Bollinger Bands (BB) combines a centered moving average that is part of the indicator but usually NOT shown. Since each Bollinger bands is placed at a fluctuating line that is equal to two standard deviations, 95% of all price action will theoretically occur within the upper and lower lines. With that said, resistance could be found at the top of the band, while support would be at the lower region. Additionally, if prices do break, they should stay under or over the outside band. Remember, a break of the Bollinger Band is only viewed as an opportunity to go long once prices come back inside this band. Chart of Dow Jones, Daily The YM contract traded outside both the bottom and top of its Bollinger Band on a 10-minute chart during early trade on Tuesday. Volatility continued, as the contract fell under 8450 and 8400 and then used the mid-part of the band as resistance. Note that the pivot going forward is at the top of the 10-minute period band. Also interesting to see how regression analysis and Bollinger Band studies work well when they correspond to the same level. If a bearish scenario develops, the YM contract could fall under 8300 and through the bottom of the band (oversold), then rebound to the mid-part of the band before heading lower once more. On the other hand, the market could bid above both the mid-point and top of regression channel, test the pivot and contract, and then look to find support at current prices. Chart of YM03H, 10-minute YM03H Support Resistance Pivot 8277.00 8465.00 8386.00 8198.00 8574.00 Bold signifies levels based on Pivot Analysis (Globex included). The December E-mini Nasdaq 100 Contract (NQ03H) The NDX contract barely penetrated 1000 (most likely hitting stops) before slightly recovering into the close and above the mid point of a regression channel. This can definitely be viewed as positive; however, watch for selling pressure if the NDX falls underneath 1000 once again. The intermediate downward objective remains at 973. If support does hold and the index starts to head higher, look for resistance at the 1022-25 area. Thursday’s price action would normally have definite bearish implications; however, I would wait until 1000 is cleanly breached and MACD rolls lower and confirms the bearish trend line within the oscillator. Chart of NDX, 120 Minute The chart of the NQ03H contact (30-minute basis) is pretty simple, but states its point. A move above the mid point of the Bollinger Bands and 1018 should send the index towards 1034 before selling pressure takes over. If the 996.50 support area is tested, expect the mid-part of the Bollinger Bands to become resistance and take an even more aggressive slope heading into the weekend. The first hour should be critical, because bulls might lose confidence if red fills the screen and creates an almost panic-like atmosphere during option expiration and worries over Iraq. Chart of NQ03H, 30 Minute NQ03H Support Resistance Pivot 996.50 1034.00 1018.00 980.50 1055.50 Bold signifies levels based on Pivot Analysis (Globex included). The December E-mini S&P 500 Contract (ES03H) The SPX Index appeared to fall off the proverbial cliff on Thursday, but will the 38.2% retracement area save longs and get shorts to rethink their positions? I don’t think so; however, a move back above 900 would seem to do the trick. Traders should expect a bounce from the 38.2% area, albeit a small one. If this level does fail once more, the 50% retracement level will become the next area discussed by technicians. The MACD oscillator could easily continue to fall, and prices falling underneath the lower end of the Bollinger Band would not be uncommon. Least resistance is clearly lower, and the market will have to prove (moving above 900 to say 905) that it doesn’t make sense to be short. Chart of S&P 500 Index, Daily The pivot at 888 seems to perfectly highlight the risk/reward scenario for being short. At current levels, I think it makes sense to keep a short position; however, a rally just above the 888 area and we could easily see a move to 897.25 before rolling over again. MACD has broken the upward trend and looks bearish as well heading into Friday. You could state the case that MACD is setting a bullish divergence when compared to the low at 888, and I would agree. But the divergence does not override the breakdown seen on Thursday. As noted just above, a move over 900 and shorts might really have to rethink positions held over the weekend. I do believe the Dow at 8515 holds the most weight, however. On the other hand, if the downtrend continues early, use all rebounds to the mid-point of the Band as an opportunity to add to bearish positions. If you go long from above 888 to 897, see if the mid-part of the band becomes support. If it does, prices might really rise. Chart of ES03H, 120-minute ES03H Support Resistance Pivot 875.75 897.25 888.00 866.50 909.50 Bold signifies levels based on Pivot Analysis (Globex included). Good Luck. Questions are welcomed, John Seckinger jseckinger@OptionInvestor.com ********************** Annual Renewal Special ********************** The annual special this year is far too large to put into an email. The highlights include two option expiration mousepads to which we have added the FOMC meeting dates this year. There are also two videos with Jim, Jeff and Buzz and seven books by leading market professionals like John Murphy and and Jim Rodgers. We even brought back the Trading Strategies CD from last year for all the new subscribers who have been asking for it. Click here for the full details: https://secure.sungrp.com/03renewal/#m ******************** INDEX TRADER SUMMARY ******************** Material Breach of Support There were some interesting "thoughts" mentioned by investors, traders and U.N. officials today. Unfortunately, many of the "thoughts" had investors, trader and officials putting a spin on things as if to say things weren't really what they seemed and not that big of a deal. I hope that Chief U.N. inspector Hans Blix's comments (approximately 10:50 EST) that he wasn't prepared to say that Iraq was in violation on its weapons report, despite that report not providing enough information, is true. However, the Dow's 66-point decline to 8,400 had the Dow "materially breaching" the 8,400 level in 25-minutes time. However, the U.S. Ambassador to the U.N said gaps in Iraq report constituted "material breach." The "material breach" comments by the U.S.'s Ambassador to the U.N. hit the newswires at approximately 01:10 PM EST and that had the Dow giving up an additional 27-points in about 5-minutes. What some "bullish traders" once deemed important support at 8,500 and then 8,400 seemed to be brushed aside in today's trade. Bulls are now saying a quick U.S. victory like the one a decade ago would remove uncertainty holding back a market that should trade higher. After all, today's 10:00 AM EST release of the Conference Board's index of leading economic indicators rose 0.7% in November after gaining a revised 0.1% in October, and showed some economic warming which had the Dow Industrials at its session high near 8,500 and the S&P 500 Index at 899 (where did we think intra-day resistance was at? 900) and the NASDAQ 100 Trust (AMEX:QQQ) surging to $25.77 (where was that downward trend? $25.75). There was also some sign of economic improvement when the Philly Fed's index rose to 7.2 in December from 6.1 in November. However, the modes increase in the main number, the new orders, shipments and employment portions all worsened in December. The new orders index dropped to 9.3 from 11.0, while the shipments index fell to a negative 3.5 from +1.5. Not too different from this morning's weekly jobless claims, the employment portion of the Philly Fed report fell to -5.7 from -0.5%. The Philly Fed report is based on a survey of manufacturers in the bank's district, including eastern Pennsylvania, Delaware and southern New Jersey. While today's economic data is rather mixed, economists remain near-term positive, but expectations about hiring and capital spending worsened. Sixty percent of the firms surveyed expect their business to get better in the next six months versus 10% expecting business to get worse. Forty-six percent of the firms expect to hire more workers in 2003, while 40% say that their payrolls will be unchanged and 14% expected to cut workers. Big bets on capital spending supporting technology stocks took a blow as the future capital spending index fell to 9.1 from 25.8 in November. A summary of today's action would certainly be that the economic data wasn't purely ignored, but that geopolitical concerns appear to be the overriding influence. Last night, I was watching "Hardball" with Chris Mathews on his college tour. Last night's stop was the Air Force Academy in Colorado Springs, CO. I can't remember his panel guests by name, but their general timeline for some type of "war with Iraq" or resolution to things was in April. Market History Now.... I've said before that I am a believer in Market History, or will at least use it as a SCENARIO for a market to trade a particular direction. One reason some BULLS are "ignoring" today's technical action is this. A study by William Lefever from the end of World War II to 1986 does have some historical credence/credibility to the proverbial "Santa Claus Rally," which shows the Dow Industrials rallying an average 9.15% from the LOW made in NOVEMBER (this would be Nov. 13th 8,299) or December (today's low was 8,327) to the high in December or January. This phenomenon has a perfect record since 1945 although the major bear market of 1968 saw the Dow gain just 0.86%. Mr. Lefever's study ended in 1986, but a continuation would have the average gain higher at 10.62% on average. Using the more "conservative" 9.15% average gain, from 8,299, such a reproduction of average market history gain could have a Dow target of 9,058. The question right now is this. Has Santa already come and gone? The December high has been 9,043, set on December 2nd. I believe in market history, and I believe in the spirit of Santa. However, for Santa to put some presents under a bull's tree, he's got to squeeze down the chimney. In the scope of technical analysis, for the Dow to reach 9,058, its got to get through 8,700 first. Onto the Indexes I couldn't buy today's 8,400 trade in the Dow, and while today's close at 8,364 is just 36-points below that level, longer-term technical damage has been done. This I can't ignore and I won't ignore. I consider this a "material breach" and mark the last upward trend I can come up with for the Dow Industrials. This doesn't mean the Dow can't put together a rally, but my perspective on the major indexes shifts to "will trade bullish short-term only, with a cognizant realization that the new trend is lower." While I feel this train of thought has been my general belief for the past three weeks, due to the higher levels of the bullish %, today's trade and 8,400 becomes technical confirmation to what the bullish % had been alerting us to in recent weeks. I showed the p/f chart of the Dow last night, and again today in the 01:00 Update. While I haven't read Iraq's weapons report, nor the Philly Fed report, I've seen the Dow's supply/demand chart (black and white, X's an O's) and while it is just representative of 30-stocks, it certainly appears to be confirming the internal weakening of the various bullish % charts. Let's take a look at the Dow on our bar chart, with retracement and Bollinger bands. Dow Industrials Chart - Daily Intervals Today's technicals look somewhat similar to that found back in early September. The Dow fell to lower Bollinger Band, MACD fell below zero. In early September (red 9 on a p/f chart) the Dow tested and bounced from its bullish support trend. However, today, the Dow didn't bounce from its bullish support trend. For me, "my" 8,400 level of critical support in the Dow Industrials (INDU) was violated and therefore I must be defensive toward the Dow Industrials. I'm cognizant toward a potential rally attempt SHORT-TERM, but with the bullish % charts showing weakness building on a broader scale, I begin to question the potential for Santa to show up in a meaningful way. Stockcharts.com appears to be having some difficulty with their bullish % charts tonight. Dorsey Wright has the Dow Industrials bullish % falling by 3.33% (net loss of 1 stock to a p/f sell signal). Status remains "bear alert" with bullish % falling to 56.67%. S&P 500 (SPX.X) 884.25 -0.77%: Today's action saw the SPX's $5- box point and figure chart give a double-bottom sell signal at 885. This sell signal comes after recent break of bullish support trend at 890. First sign of strength would be a trade at 915, which would be a double top buy signal. Rally attempts become suspect after yesterday's action had the bullish % reversing into "bull correction" status. S&P 500 Index Chart - Daily Interval To tell the truth, I had no clue what was going on when the SPX rallied to 899, stalled and then began falling back. All I did "know" was that it rallied to a level we looked for resistance due to our scenario that index option expiration might have that level as resistance. Look for the SPX to begin finding willing sellers into rallies in the 900-914 zone as risk is assessed on a longer-term basis to 825, which is the p/f bearish vertical count objective. Until a reversing "buy signal" is given, this becomes my longer-term objective. It will be measured against the SPX's internals, as depicted by the bullish %. Today's action saw the S&P 500 Bullish % ($BPSPX) fall 0.63%, or see a net loss of roughly 3 stocks to point and figure sell signals. Status remains "bull correction" at 60.17%. It would take a reversal back to 68% to have the bullish % back in "bull confirmed" status, and I could tie that in currently with a trade at SPX 915 or thereabouts. Should the bullish % continue a decline and reach the 18% level, which would be "bear confirmed" status, I could envision the SPX trading 825 or lower. This is my current mindset as it relates to risk reward with the bullish % and the SPX itself. S&P 100 Index Chart - Daily Interval Using the traditional $5 box scale of the OEX, we don't have a bearish vertical count to work from at this point. Our less conventional $2.50 box scale of the OEX gave a double-bottom sell signal at 450 and broke the bullish support trend and now sits on 447.50 support (445.00 would be spread-triple-bottom sell signal). Current levels are where the OEX did rebound from their November lows to make a new high. As such, if Santa is going to make an appearance, then current OEX levels are the place to be on the alert. First sign of strength on the $2.5 box scale is a trade at 465, and that's right near our retracement resistance of 468.30 and rounding 21-day SMA (middle Bollinger Band) of 465. Today's action saw a net loss of 3 stocks to point and figure sell signals. Status remains "bear alert" and bullish $ falling to 58%. NASDAQ-100 Trust (QQQ) - Daily Interval I'm willing to short-term trade the Q's for now, but I'm going to lose my "predictability" of option expiration scenario tomorrow. Then, for me at least, the addition of 15 new stocks and deletion of 15 stocks gives the QQQ and the NASDAQ-100 enough of a "face lift" to create some potentially different dynamics that will take a week or so to get used to. However, that's no different than what market makers will have in some of the newly added NASDAQ-100 stocks. Just remember, the mindset for trading the QQQ and the NASDAQ-100 is to think like a market maker and always think about levels of risk from the retracement. Today's trade at $25.00 to me means that market makers are having to put on more hedges in the QQQ (shorting) and this now has me looking at $26.18 as much firmer resistance as the next level of risk to the downside becomes $23.82. With the bullish % still rather "high" and the broader SPX bullish % showing weakness on a broader basis, the I'm more bearish than bullish the QQQ, but just not overly comfortable with how QQQ will trade with 15 new stocks. Today's action saw a net loss of 2 stocks to point and figure sell signals. This has the bullish % falling to 62%. In December of last year, the NASDAQ-100 bullish % did fall from 78% to 58%, then rebound to 68% by January (Santa Claus type of rally?). Jeff Bailey ************************************************************** Annual Renewal Special ************************************************************** The annual special this year is far too large to put into an email. The highlights include two option expiration mousepads to which we have added the FOMC meeting dates this year. There are also two videos with Jim, Jeff and Buzz and seven books by leading market professionals like John Murphy and and Jim Rodgers. We even brought back the Trading Strategies CD from last year for all the new subscribers who have been asking for it. Click here for the full details: https://secure.sungrp.com/03renewal/#m ************************************************************** **************** MARKET SENTIMENT **************** And the Wheels Came Off by Steven Price What started as a nice bounce in the markets into the green, quickly turned south as world events took a turn for the worse. We saw a move higher following good news from Oracle after the bell on Wednesday, as the company beat earnings estimates and guided slightly higher. That was followed by mixed, but mostly positive economic data, as the Philly Fed report came in at a reading of 7.2, above expectations of 5.0. The index of leading economic indicators also jumped 0.7%, versus a consensus of 0.6% and saw the October reading revised upward from a flat reading to a gain of 0.1%. The one piece of negative data was an important one, as the initial claims number showed jobless claims jumped to 433,000 and the four-week average increased by 12,750 to 400,750. That average is the highest since the first week of November. The jobs report certainly looks bearish, but numbers out at this time of the year are somewhat unreliable due to seasonal fluctuations and the recent drop in the average as low as 377,250 may have been overly bullish, as well. In any case, the market shook off those numbers and rallied to a high of 8505 in the Dow and 1384 in the Nasdaq Composite. Then, the bleeding started. News came out that Chief U.N. inspector Hans Blix would tell the U.N. that the Iraqi weapons declaration was lacking the answers he was looking for. That sent the ball rolling downhill and as more reports surfaced that the U.S. would declare Iraq in "material breach" of the U.N. agreement, that sell-off picked up steam. The Dow gave up 140 points from its high, and fell through recent support at 8400. The "material breach" term was the key phrase that puts us one step closer to war. While not many traders predicted that Iraq would fully comply with the UN resolution, the statement that it had not sent us reeling. It was not, however, a massive sell-off and so far the heavy support at Dow 8300 has held up. If there is going to be an end of year rally, it will have to come in spite of the geo-political picture, which seems to be getting worse, rather than better. One political factor that has been weighing on the economy, but may be seeing a glimmer of hope, is the general strike in Venezuela. Today Venezuela's Supreme Court issued an injunction against the oil worker strike, sending oil prices lower after the recent surge in oil futures up to $31.25. The U.S. imports about 15% of its oil from Venezuela and the recent surge in prices has mirrored the recent drop in equities. While that relationship also mirrors Iraqi tensions, a drop in oil prices can only help lower costs for industries across the board. Much of the cash that came out of stocks today flowed into bonds, as the five, ten and thirty-year treasuries were all green. The five and ten-year notes have broken downward sloping trend lines and are approaching horizontal resistance, while the thirty-year has yet to break the trend. While today certainly had a bearish tone, it is hard to make a case that the stock market looks terrible. The sell-off was in concert with the Iraq news after a rally following the economic data releases and Oracle news. If not for the war talk, we may very well have finished the day in the green. Of course, coulda- woulda-shoulda doesn't get us very far swimming against the tide. Colin Powell's statements carried a lot of strong rhetoric about what Iraq failed to include in its declaration. However, he also said that the ball is in their court to rectify the situation and cooperate with inspections. Sounds like yet another chance (17 now by the President's count in a previous speech) for Saddam to avoid an immediate invasion. A law professor once told me that when analyzing a Supreme Court decision I should look at what they did, not what they said. So far, we just gave Iraq more time. That doesn't mean we aren't laying the foundation for an invasion, but I was expecting a little more direct threat than what we heard this afternoon, given the opportunity to side with Blix and declare that Hussein had run out of chances. If the Dow continues its slide below 8200, then all bets are off, as this area of support may end up as resistance on a rebound attempt. However, the so-called traditional Santa Claus rally, taken from a low made in November or December, to a high in December or January, has averaged over 10% in the Dow since 1968. That rally just might form a nice right shoulder if we rollover following the rally. With that data behind us, I would still expect some type of bounce over the next few days. If not, look out below. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 8364 Moving Averages: (Simple) 10-dma: 8522 50-dma: 8493 200-dma: 9072 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 884 Moving Averages: (Simple) 10-dma: 899 50-dma: 897 200-dma: 968 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 1006 Moving Averages: (Simple) 10-dma: 1029 50-dma: 1019 200-dma: 1094 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): The Semiconductor Index was quite a surprise today. After leading the broader markets lower for the last couple of weeks, for once it wasn't the culprit on a big drop. Following Oracle's earnings release, the chip stocks followed the software companies higher this morning for a brief period of time. When the Iraq news hit the wires, the bottom fell out of the market. By the end of the day, however, the SOX gave up only -0.79, barely a blip on the radar screen. As this average has been very closely correlated with the S&P 500, having matched drops of 2.5% or more on 53 of 55 days in the last year. Is this telling us that the broad market drop was simply news related and we can expect a bounce in the morning? We can't be sure, but the fact that the SOX failed to confirm the drop is likely a bullish sign. 52-week High: 657 52-week Low : 214 Current : 297 Moving Averages: (Simple) 10-dma: 315 50-dma: 309 200-dma: 392 ----------------------------------------------------------------- Market Volatility The VIX popped to 34.55 today, as the Dow/OEX/SPX dropped on war- related fears. However, the VXN actually dropped slightly, indicating the tech sell-off may be coming to an end, at least temporarily. The techs did not react violently to the Iraq news, along with the blue chips, indicating the drop had less to do with fundamentals than geo-political fears. In the past the techs have led the broader markets, and although we saw a drop in the NDX, the 1000 support level held up and the VXN reflects that support. CBOE Market Volatility Index (VIX) = 34.55 +2.80 Nasdaq-100 Volatility Index (VXN) = 49.47 –0.17 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.95 599,998 572,089 Equity Only 0.81 395,592 320,754 OEX 1.10 43,956 48,303 QQQ 1.68 59,944 100,762 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 49 - 1 Bull Confirmed NASDAQ-100 62 - 2 Bear Alert Dow Indust. 57 - 3 Bear Alert S&P 500 60 - 3 Bull Confirmed S&P 100 58 - 6 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 1.45 10-Day Arms Index 1.36 21-Day Arms Index 1.30 55-Day Arms Index 1.16 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 1290 1575 NASDAQ 1435 1749 New Highs New Lows NYSE 42 47 NASDAQ 56 65 Volume (in millions) NYSE 1617 NASDAQ 1627 ----------------------------------------------------------------- Commitments Of Traders Report: 12/10/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercials added 2,000 long contracts and 16,000 shorts, leading to a 30% increase in the net short position. Small traders took the opposite approach, leaving the net long position unchanged, while reducing shorts by 9,000 contracts. Commercials Long Short Net % Of OI 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%) 12/10/02 446,831 503,583 (56,752) (5.9%) 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 11/19/02 143,070 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% 12/10/02 162,115 71,505 90,610 38.8% 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 saw a small gain to the long side, but left shorts virtually unchanged. Small traders increased long positions by 1,300 contracts, while slightly reducing the short side. Commercials Long Short Net % of OI 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%) 12/10/02 44,651 51,716 ( 7,065) ( 7.3%) 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 11/19/02 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% 12/10/02 15,026 9,242 5,784 23.8% 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, with no significant changes to positions. Small traders followed suit, making only slight reductions to both the long and short side. Commercials Long Short Net % of OI 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% 12/10/02 19,953 15,759 4,194 11.7% 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 11/19/02 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%) 12/10/02 5,394 9,499 (4,105) (27.6%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************************************************** Annual Renewal Special ************************************************************** The annual special this year is far too large to put into an email. The highlights include two option expiration mousepads to which we have added the FOMC meeting dates this year. There are also two videos with Jim, Jeff and Buzz and seven books by leading market professionals like John Murphy and and Jim Rodgers. We even brought back the Trading Strategies CD from last year for all the new subscribers who have been asking for it. Click here for the full details: https://secure.sungrp.com/03renewal/#m ************************************************************** ************************* WEEKLY MANAGER MICROSCOPE ************************* John C. Hathaway: Tocqueville Gold (TGLDX) Risk-tolerant investors that believe the gold rally will continue may want to consider the Tocqueville Gold Fund (TGLDX) managed by John C. Hathaway with Tocqueville Asset Management. This no-load NTF fund with $144 million in assets is up 79.1% through December 18, 2002, and in its short history has outperformed its index and fund peer benchmarks by wide margins. If we had to vote for 2002 gold/precious metals manager of the year, John Hathaway would get our vote. Mr. Hathaway is a portfolio manager with New York-based Tocqueville Asset Management, his employer since 1997. Prior to joining Tocqueville, he spent eight years with investment advisory firm David J. Greene where he became a partner. He then founded and managed Hudson Capital Advisors, followed by 9 years as the chief investment officer with Oak Hall Advisors. Hathaway earned his MBA from University of Virginia, his BA degree from Harvard University, and is a Chartered Financial Analyst ("CFA"). Since the fund's inception (June 29, 1998), Hathaway has produced an average annual total return of 17.6% through November 30, 2002 compared with a 1.0% average annual loss by the fund's benchmark, the Philadelphia Stock Exchange Gold/Silver Index per the company website (www.tocquevillefunds.com). Morningstar shows Hathaway's gold fund has risen over 79 percent since December 31, 2001 for a 10th percentile ranking in the Morningstar precious metals (gold) category. According to Morningstar, Hathaway's 79.1% YTD return topped both index benchmarks they provide by huge margins. Since December 31 the MSCI EAFE index has fallen 16.1% while the MSCI World Metal & Mining Index is up just 27.3 percent; so, Hathaway has beat these two benchmarks by 95.2% and 51.8%, respectively, in 2002. Please note that precious metals funds fall into the international stock fund peer group for Morningstar ratings purposes, since most gold funds invest in stocks of companies with mining operations across the globe, including Canada and South Africa. Tocqueville Gold Fund has a $1,000 minimum initial investment for regular accounts, and just $250 for IRA's. At 1.94%, its expense ratio isn't cheap but it's still below the 2.06% category average per Morningstar. Like emerging-markets funds, gold fund expenses are usually high because they invest in less-developed markets of the world where entry and trading costs are greater. But, if the fund makes 81% in "gross" return and gives 2% of it back in fees, no one is complaining. Such is the case this year, with Hathaway up 79.1% after deduction of all fees and expenses, ranking among the category's best. Investment Style/Strategy Mr. Hathaway seeks the fund's long-term capital growth objective by investing at least 65% of assets in gold and in securities of companies worldwide that are engaged in the mining or processing of gold. A look at Morningstar's report shows that Hathaway had 81.1% of fund assets invested in stocks as of September 30, 2002, with foreign stocks representing 62.6% of assets. Hathaway will allow the fund's cash position to rise as evidenced by the 18.1% cash stake at the end of the third quarter. In terms of regional exposure, nearly 66% of assets are invested in North America (42.9% Canada and 22.8% U.S.), with the balance invested mostly in South Africa. Hathaway maintains a portfolio of 63 stock holdings per Morningstar's report with 45% of assets in the fund's top 10 holdings. Gold Fields ADR, a South African mining concern, was the fund's largest holding at quarter-end at 6.5% of assets. The fund's annual turnover of 58% is relatively low compared to other international funds. At 0.21%, the Tocqueville Gold Fund's yield is pretty low so the main focus here is long-term capital appreciation. According to Morningstar's report, Hathaway has maintained a consistent small- cap growth style bias. Essentially all of the fund's assets are invested in the mid-cap, small-cap or micro-cap sectors. As the Tocqueville Funds website cites, gold mutual funds can be an important ingredient of a diversified portfolio and can offer insurance against adverse financial climates. Gold mutual funds have typically performed best during periods of rising inflation so they offer people a way of participating in gold as a "hedge" against inflation. However, gold fund returns have historically been volatile, so unless you fully understand the risks involved, and accept them, you may wish not to invest. Fund Ratings and Performance Since Tocqueville Gold Fund was launched in June 1998, it doesn't have a Morningstar 5-star rating yet, but it does sport a highest 5-star overall rating for the trailing 3-year period. During the last three years, Hathaway has earned a "high" return relative to his gold fund peers with "average" relative risk, producing a top return-risk tradeoff for investors. Hence, its 5-star rating for risk-adjusted performance relative to category peers. The 3-year chart below shows how well the fund has performed over the past three years, but it also shows the kind of volatility it can produce in the short-term (i.e. 2002). For the 3-year period ended December 18, 2002, Hathaway produced an average annual total return of 25.6% for shareholders to rank in the category's 6th percentile. His annualized rate of return outperformed the average gold fund by 8.9% a year on average for the same period. In terms of year-to-year performance, the worst Hathaway did was to rank in the 37th percentile in 2001. His 21.9% annual return in 2001 was still 3.1% above the category average. In 1999, his first full year, Hathaway put up a 21.7% annual return, followed by a 10.7% annual loss in 2000. In 2001, the fund rose 21.9% as we just said, followed by an impressive YTD 2002 return of 79.1%. To reduce risk, the fund can't invest more than 10% of assets in gold bullion. While Morningstar's style analysis suggest he has a small-cap growth bias, the prospectus cites that Hathaway will identify companies that are out of favor or undervalued in price based on their growth potential. Average P/E information wasn't currently available, so it's hard to say with certainty how much price risk Hathaway takes. It would appear that Hathaway limits how much he's willing to pay for growth, a GARP-like approach to gold stock investing. Conclusion In four full years of operation (including 2002 we'll say), John Hathaway has captured more return for shareholders than category peers in three up-market years, and has preserved capital better than peers in one down-market year. Although this fund is still relatively new, Hathaway has shot the lights out versus the gold fund competition since starting the fund in 1998, and offers the retail gold fund investor a compelling choice. For his outstanding 79% total return through December 18, John C. Hathaway gets our nod for gold stock manager of the year in 2002. For more info or to download a prospectus, go to the Tocqueville Funds website at www.tocquevillefunds.com. Steve Wagner Editor, Mutual Investor firstname.lastname@example.org ************************************************************** Annual Renewal Special ************************************************************** The annual special this year is far too large to put into an email. The highlights include two option expiration mousepads to which we have added the FOMC meeting dates this year. There are also two videos with Jim, Jeff and Buzz and seven books by leading market professionals like John Murphy and and Jim Rodgers. We even brought back the Trading Strategies CD from last year for all the new subscribers who have been asking for it. Click here for the full details: https://secure.sungrp.com/03renewal/#m ************************************************************** *********************** SWING TRADER GAME PLANS *********************** Material Breach Quite a day of extremes for swing traders. Following positive news from Oracle on Wednesday night, the market shook off a disappointing jobs report to make a run in the Dow over 8500. Then news began to trickle out that Chief U.N. inspector Hans Blix would tell the U.N. that Iraq had breached its agreement and the wheels came off. 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. 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The Option Investor Newsletter Tuesday 12-19-2002 Copyright 2002, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. http://www.OptionInvestor.com/htmlemail/e19x_2.asp In Section Two: Dropped Calls: ISSX, MERQ, OVER Dropped Puts: None Daily Results Call Play Updates: CTXS New Calls Plays: BSX, TRMS Put Play Updates: DLX, COST, AIG, MMM, RKY, ROOM New Put Plays: None **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** ISSX $19.10 -1.03 (-3.20 for the week) ISSX rebounded strongly after a downgrade on Monday. The stock then found support at its 50-dma for the last few days, but fell below that level on Thursday, as well as previous support at $20. The sell-off in the Nasdaq took down plenty of techs today and while we may see a bounce in the broader market, ISSX's failure at crucial support levels has shaken our confidence in the play and we'll close it now, rather than hold it and hope for a bounce. Traders who want to give it a little more time can keep an eye on the $19 support level from Nov 11-12 and Dec 11-12. However, if that level fails, the next likely support comes at the converging 100-dma and 200-dma around $18. --- MERQ $29.09 (-1.22 for the week) MERQ has once again tested support above $28 successfully. While we like the show of support, we don't like the fact that it continues to test that level, while finding resistance at $32. Another big push over $32 could certainly see the stock head back to $35 and traders who want to give this play some time can use the $28 stop. However, we are going to move on and place our call money on an issue that is spending more time testing its recent high, rather than its recent low. If the stock breaks support at $28, then it could be a quick trip down to $25, so traders hanging onto the play should keep a close eye on this one and close out quickly below $28. --- OVER $27.40 -2.60 (-1.59) Thomas Weisel initiating coverage with a positive rating on Wednesday did nothing to help shares of OVER on Thursday. After opening flat, the stock dove underwater and continued drilling lower throughout the session, ending just above its low of the day. The nearly 9% loss took out support near $28, the ascending trendline and the 20-dma, all in the same day. With a violated stop ($28) coming on heavy volume, there should be no question that the play is a drop. The trend has changed, and we don't want to stick around to see how bad things might get. PUTS: ***** None *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu Week BSX 43.70 1.38 -0.33 0.97 0.45 New, Climbing CTXS 13.15 0.62 0.49 -0.24 0.26 Relative strength ISSX 19.10 0.42 -0.23 -0.16 –1.03 Drop, Broke support MERQ 29.09 0.98 -0.22 -0.58 –1.32 Drop, Testing low end OVER 27.40 1.04 0.69 -0.48 –2.60 Drop, Off the cliff TRMS 42.45 -0.20 1.43 -1.38 2.49 New, News is out PUTS AIG 58.09 2.05 -0.73 -1.54 –0.95 Still dropping COST 27.58 0.13 -0.97 -0.17 0.06 $27.50 next DLX 40.09 0.19 -0.09 -0.45 –0.31 Slowly dripping MMM 120.30 1.74 -2.15 0.11 –0.56 Tighten stops RKY 60.88 -0.40 -1.15 0.31 0.17 Weak bounce ROOM 58.50 2.59 -1.33 -0.20 –2.20 Got the breakdown ************************************************************** Annual Renewal Special ************************************************************** The annual special this year is far too large to put into an email. The highlights include two option expiration mousepads to which we have added the FOMC meeting dates this year. There are also two videos with Jim, Jeff and Buzz and seven books by leading market professionals like John Murphy and and Jim Rodgers. We even brought back the Trading Strategies CD from last year for all the new subscribers who have been asking for it. Click here for the full details: https://secure.sungrp.com/03renewal/#m ************************************************************** ******************** PLAY UPDATES - CALLS ******************** CTXS $13.12 +0.23 (+1.03) Resilience is an apt description of CTXS, as the stock continues to defy the weakness being found in the broad market. Support is gradually rising along with the ascending trendline, which now comes in right at the $12.90 level. The bulls actually got a little bit of excitement this morning when the stock powered through recent resistance, moving as high as $13.99 in the early going. But with a lack of follow through, CTXS fell back to earth, once again finding support just above the bottom of the rising channel. So long as the stock continues to rise in the channel, bounces from the bottom continue to be solid entry points. But given the sharp retracement of Thursday's breakout attempt, we want to limit our risk in the event that the channel does fail to provide support. Stops have now been raised to $12.50, just below today's intraday lows. The pullback from today's early rally attempt shows the reason why we prefer entering the play on bounces from support, rather than a breakout over resistance. ************** NEW CALL PLAYS ************** BSX - Boston Scientific - 43.70 +0.45 (+1.95 for the week) Company Description: Boston Scientific is a worldwide developer, manufacturer and marketer of medical devices whose products are used in a broad range of interventional medical specialties. (source: company press release) Why We Like It: A glance at the daily chart for BSX reveals that investors have had an insatiable appetitive for shares of this medical device company. What's driving the stock higher? The current uptrend can be traced back to early-October, when a federal judge ruled against Guidant (GDT) in a case involving drug-coated heart stents. Guidant is competing with Boston Scientific to bring the lucrative gizmos to market. The judge's ruling significantly delayed GDT's research, effectively leaving BSX and JNJ as the only major players. Meanwhile, BSX has moved ever-closer to FDA approval of its own stents. On November 18th the company reported that its TAXUS IV product had shown positive results in a safety study. More positive news arrived nine days later, when Guidant's appeal of the previous decision fell flat. This second ruling helped to propel the stock to new 52-week highs. Technically, we like how BSX has bounced back after pulling back to the bottom of its ascending regression channel. The stock showed good relative strength today and closed at levels not seen since 1999. The rising volume and MACD (which is poised to give a bullish crossover) bode well for a continuation of the existing uptrend. In terms of upside potential, we'll be aiming for a rally to the $50.00 level. Shorter-term traders may want to target a move to the all-time highs near $47.00. Our entry trigger for this play will be set at $44.01. If shares reach this level our stop will be located at $40.99, just below the December lows. This creates a risk/reward ratio of roughly 1:2. Those with slightly more conservative strategy could use a stop just below $41.50. *** December contracts expire Friday*** BUY CALL JAN-40*BSX-AH OI=4527 at $4.50 SL=2.25 BUY CALL JAN-42.50 BSX-AV OI=828 at $2.85 SL=1.45 BUY CALL FEB-40 BSX-BH OI=1341 at $5.50 SL=2.25 BUY CALL FEB-42.50 BSX-AV OI=828 at $3.90 SL=2.00 Average Daily Volume = 2.59 mil --- TRMS – Trimeris, Inc. $42.45 +2.49 (+2.11 this week) Company Summary: Trimeris is a biopharmaceutical company engaged in the discovery and development of a class of antiviral therapeutics called viral fusion inhibitors (Fis). The company's most advanced product candidates, T-20 and T-1249, are for the treatment of human immunodeficiency virus (HIV), type I. T-20 is a first-generation FI that prevents HIV from entering and infecting cells, while T-1249 is a rationally designed second-generation FI in an earlier stage of development. Using its proprietary viral fusion platform technology, TRMS has identified and filed patent applications disclosing numerous discrete peptide sequences that appear to inhibit fusion for several viruses. Why We Like It: Volatility is the life-blood of options traders. Those that learn to dance to its tune can carve out a nice, regular paycheck. Those that don't, well, they don't last long in this profession. Frequently a stock will carve out an important bottom (or top) marked by one day of heavy volume and wild gyrations in price. That certainly seemed to be the case with TRMS today, as the stock traded in a $5.50 range in the opening 15 minutes. Ever since rumors surfaced at the beginning of December that the company was having production problems with its AIDS drug Fuzeon, the stock has been in a steady downtrend. Throughout the decline, TRMS' development partner, Roche had been dismissing the rumors as speculation. Well, last night TRMS admitted that manufacturing problems have forced the company to sharply lower their supply forecasts for the soon-to-be-approved drug. That combined with a Prudential downgrade to HOLD sent the stock tumbling at the open, breaking major support at $40 and trading as low as $38 in the opening frenzy. As quick as it materialized though, the selling evaporated and by the end of the first 15 minutes of trading, TRMS had surged back above $43.50. That excitement soon faded as well, with the stock falling back to the $40 support level and then steadily marching higher throughout the day. The premise of the play is that the production problems had been factored into the stock price over the past few weeks and now that the news is out, buyers are ready to come back. The Prudential downgrade seems akin to closing the barn door after all the animals have escaped. The good news is that the wild gyrations this morning likely did a good job of washing out any near-by stops and we're looking for TRMS to work its way back towards the $50 level over the next couple weeks. Effectively, today's wild range appears to have put in an important bottom for the stock. Entries are a bit tricky after today's wild ride, but for now a dip and bounce near the $41 level looks attractive for initiating new positions. Momentum traders that want to see strength proven before taking a position will want to wait for a rally through $44.50, getting back over the 20-dma before playing. Initial stops are in place at $40. BUY CALL JAN-40*RQM-AH OI=213 at $4.60 SL=2.75 BUY CALL JAN-45 RQM-AI OI=833 at $1.75 SL=0.75 BUY CALL APR-40 RQM-DH OI=210 at $7.50 SL=5.25 BUY CALL APR-45 RQM-DI OI=518 at $4.80 SL=3.00 Average Daily Volume = 581 K ************************************************************** Annual Renewal Special ************************************************************** The annual special this year is far too large to put into an email. The highlights include two option expiration mousepads to which we have added the FOMC meeting dates this year. There are also two videos with Jim, Jeff and Buzz and seven books by leading market professionals like John Murphy and and Jim Rodgers. We even brought back the Trading Strategies CD from last year for all the new subscribers who have been asking for it. Click here for the full details: https://secure.sungrp.com/03renewal/#m ************************************************************** ******************* PLAY UPDATES - PUTS ******************* DLX $40.09 -0.31 (-1.90 for the week) A 15-minute chart for DLX brings to mind images of sap on a tree, slooowly dripping lower. This gradual downtrend has been intact ever since the stock rolled over from its 200-dma earlier this month. Shares haven't been able to attract many buyers, and the recent broader market weakness sure isn't helping matters. The main challenge the bears face is psychological support at $40.00, which was tested at the tail-end of today's session. If a bounce ensues from this level we'll be looking for shares to find resistance at $41.00 and $41.50. $42.00, which previously provided support, also coincides with the top of DLX's descending regression channel. A move below $40.00 would provide an opportunity to consider new short positions. Our stop has been lowered to $42.50, just above recent resistance. $42.00. --- COST $27.58 +0.06 (-0.94 for the week) Our short play in COST was triggered on Wednesday morning after shares dipped to new multi- year lows. The stock spent the remainder of the session trading near $27.50. Today's action was very similar, with the exception of a brief move higher during the first hour of trading. These gains evaporated once the broader market started to drift lower. Shares tagged a new relative low but managed to hold up pretty well while the retail index drifted into negative territory. Sector bears can be pleased with the fact that the RLX.X has fallen below support near 270. On Friday we'll be looking for COST to abandon the $27.50 area and move under today's low of $27.20. New entries can be targeted if a breakdown does occur, but be sure to first confirm weakness in the RLX.X. --- AIG $58.09 -0.95 (-0.91 for the week) It's taken almost two weeks but AIG is finally picking up some bearish momentum. The recent trend of lower highs gave the bulls a heads-up that the technical picture was worsening, even though shares had continued to gravitate towards $60.00. Savvy bears may have been able to take advantage of this morning's rollover from that level. Today's broader market weakness provided the perfect catalyst to take AIG down to new lows. Shares headed lower after topping out at $59.97, moved below the relative low of $58.64, and finished with a loss of 1.6%. By way of comparison, the insurance index posted a loss of 1.2%. With the IUX.X also trading below support, we think AIG will continue to move lower in the near-term. New entries can be gauged on another rollover from $60.00. In the news this afternoon, a New York judge denied a motion by several insurance companies (including AIG) in a case related to the World Trade Center attacks. The issue at hand is whether the terrorist acts count as one or two events. If the judge rules that the attacks were two separate events (two buildings targeted by two different planes), the liable insurance companies would be forced to pay a larger amount. --- MMM $120.30 -0.56 (-1.47) Trader's that have gone along for the ride have been treated to a consistent (if somewhat slow) decline in MMM, as it has worked its way down to the $120 level since we added it to the Put list last week. Now we're coming up on a significant inflection point, and our primary consideration is to not give back those gains should the stock rebound from the $120 level. $120 is the 50% retracement of the stock's advance from the October lows, and odds of a rebound from this level after a more than $10 slide are good. A breakdown below $120 (confirmed by more broad market weakness) would likely take the stock down to the $116-117 level, where there is strong support. In order to balance that possible downside, we're tightening up our stop to $122.50, just above Thursday's intraday high. With the broad market near strong support, we want to get out of open positions should we get a strong bounce and a rebound through Thursday's intraday high would be a good signal that is what is happening. But if we get the breakdown, we want to still be in the play, targeting the $116-117 level as a level to harvest gains. Simply put, if you're in the play, manage the position with a tight stop. But we aren't advocating new entries at this time. --- RKY $60.88 +0.17 (-0.61) RKY treated us pretty well earlier this week as it broke down through several intermediate levels of support, and we mentioned on Tuesday that it looked like the stock was due for a break from the selling. Sure enough, that's been the case, as enough buyers have emerged from the woodwork to keep it from falling below the strong $60 support level. But there hasn't been enough buying to clear any of the meaningful resistance (broken support) levels overhead. Note how the $61 level has kept the intraday rallies in check over the past 2 days. With RKY so close to strong support, it's tough to find an actionable entry point for new entries right here. The best approach would appear to be to enter on a rally failure in the $61.50-62.00 area. Otherwise we need to wait for a breakdown below $59 (bullish support line on the PnF chart) before entering on weakness. Lower stops tonight to $62.25, which by tomorrow will be just above both the 10-dma and Monday's intraday high. --- ROOM $58.50 -2.20 (-0.95) After a precipitous fall from the mid-$70s, ROOM came oh so close to stopping us out of our bearish play on Tuesday when it briefly traded above our $63 stop. Fortunately, the bears prevailed and drove the stock down below $61 by the closing bell, keeping the play alive. We've seen two more intraday rally attempts turned back below the 10-dma (currently $61.93) over the past two days and then this afternoon we finally got what we were waiting for. ROOM broke down below the $59 level, breaking last week's intraday low and generating another PnF Sell signal. That Sell signal got reinforced late in the day, with the stock briefly trading below $58 and adding another O to the current column and removing all doubt about a potential bear trap. ROOM should now find solid resistance near $61 and strong resistance at $62 on any subsequent oversold bounce. Traders still looking to enter the play will want to target a failed rally in that area. On the downside, since ROOM has now broken near-term support, the next possible help for the bulls comes from the $55 level, although the $53 level is more likely. That is the site of the 200-dma ($53.12) and the top of the October 15th gap. Momentum traders can look to enter new positions on a continuation of the breakdown under $57.50, but need to keep a watchful eye for a possible rebound from the support levels listed above. We want to see another day of weakness before lowering our stop, so for now keep stops set at $63. ************* NEW PUT PLAYS ************* None ************************************************************** Annual Renewal Special ************************************************************** The annual special this year is far too large to put into an email. The highlights include two option expiration mousepads to which we have added the FOMC meeting dates this year. There are also two videos with Jim, Jeff and Buzz and seven books by leading market professionals like John Murphy and and Jim Rodgers. We even brought back the Trading Strategies CD from last year for all the new subscribers who have been asking for it. Click here for the full details: https://secure.sungrp.com/03renewal/#m ************************************************************** ********** 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 12-19-2002 Copyright 2002, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: CALL - BSX Traders Corner: Temptations! More Than Just A Motown Group Traders Corner: Wave patterns to trends – using “Elliott Wave” analysis; part 3 Options 101: More On Gold Futures Corner: Playing Failures ********************** PLAY OF THE DAY - CALL ********************** BSX - Boston Scientific - 43.70 +0.45 (+1.95 for the week) Company Description: Boston Scientific is a worldwide developer, manufacturer and marketer of medical devices whose products are used in a broad range of interventional medical specialties. (source: company press release) Why We Like It: A glance at the daily chart for BSX reveals that investors have had an insatiable appetitive for shares of this medical device company. What's driving the stock higher? The current uptrend can be traced back to early-October, when a federal judge ruled against Guidant (GDT) in a case involving drug-coated heart stents. Guidant is competing with Boston Scientific to bring the lucrative gizmos to market. The judge's ruling significantly delayed GDT's research, effectively leaving BSX and JNJ as the only major players. Meanwhile, BSX has moved ever-closer to FDA approval of its own stents. On November 18th the company reported that its TAXUS IV product had shown positive results in a safety study. More positive news arrived nine days later, when Guidant's appeal of the previous decision fell flat. This second ruling helped to propel the stock to new 52-week highs. Technically, we like how BSX has bounced back after pulling back to the bottom of its ascending regression channel. The stock showed good relative strength today and closed at levels not seen since 1999. The rising volume and MACD (which is poised to give a bullish crossover) bode well for a continuation of the existing uptrend. In terms of upside potential, we'll be aiming for a rally to the $50.00 level. Shorter-term traders may want to target a move to the all-time highs near $47.00. Our entry trigger for this play will be set at $44.01. If shares reach this level our stop will be located at $40.99, just below the December lows. This creates a risk/reward ratio of roughly 1:2. Those with slightly more conservative strategy could use a stop just below $41.50. *** December contracts expire Friday*** BUY CALL JAN-40*BSX-AH OI=4527 at $4.50 SL=2.25 BUY CALL JAN-42.50 BSX-AV OI=828 at $2.85 SL=1.45 BUY CALL FEB-40 BSX-BH OI=1341 at $5.50 SL=2.25 BUY CALL FEB-42.50 BSX-AV OI=828 at $3.90 SL=2.00 Average Daily Volume = 2.59 mil ************************************************************** Annual Renewal Special ************************************************************** The annual special this year is far too large to put into an email. The highlights include two option expiration mousepads to which we have added the FOMC meeting dates this year. There are also two videos with Jim, Jeff and Buzz and seven books by leading market professionals like John Murphy and and Jim Rodgers. We even brought back the Trading Strategies CD from last year for all the new subscribers who have been asking for it. Click here for the full details: https://secure.sungrp.com/03renewal/#m ************************************************************** ************** TRADERS CORNER ************** Temptations! More Than Just A Motown Group By Mike Parnos, Investing With Attitude This is the time, just prior to expiration, that the temptation arises. I’m not talking about a pint of Haagen Daz or that or that 22-year-old blonde that just moved into the house across the street. Now that’s a daily challenge. I’m talking about the temptations that involve MONEY! – not the ones that involve calories or a trip to Fantasy Island. Expiration week is when traders are tempted to roll out their positions. “Rolling Out,” for CPTI newbies, simply means the closing of a current position and re-establishing another position, using the same underlying, for another option cycle. Hi Mike, I read about option strategies before, but your articles actually got me to quit day-trading and put on some spreads. Before it didn't seem a fast enough way to make money, but after seeing your first portfolio return, I ran some numbers and realized that the trick is to build up the account and keep increasing the size and number of positions. I actually lost a lot of money this year trading 1 E-mini contract trying to become consistent before increasing my size, but with these strategies I can comfortably trade more contracts per position and bring in more money instead of the fewer contracts I would in a directional trade. This might be my first profitable month this year. My question is whether it is a good idea to close out some of these December trades that aren't going anywhere and put on some new trades that expire in January and get some good premium (especially with the weekend coming up). Response: I'm glad you're enjoying the column and benefiting from it as well. Many readers have been participating in the CPTI portfolio and using the strategies to line their pockets with more than lint and stale cough drops. If I can help put some money in your pockets and a smile on your face, I’m a happy camper. Closing Trades With regards to closing out trades, you could have closed out the TTWO $35 short call (part of the CPTI Short Strangle) for a nickel, but that would cost $50 (for a 10 contract position) plus a commission. If you close it out just one side of a strangle, you're not freeing up any additional margin to put on another trade. For example: As of Wednesday's close, to close out the BBH spread would cost $.35 plus four commissions. Can you make up (take in) that much when putting on a new position? Also, in the old BBH position, we're pretty much (nothing is for certain) assured that the condor will expire worthless. So that $.35 is a great bet to stay in our pocket. However, if we put on a new position, we're exposing ourselves to an additional 3-4 days of market activity. And the idea is to limit our exposure, not increase it. You have to: 1. Weigh the cost of closing out an old position against how much time value you would be sacrificing when establishing a new position. 2. You have to figure out how much maintenance will be freed up to use in a new position. Just how enticing is this new position you’re considering? It’s only during the afternoon (usually in the last hour) of the Friday expiration, that a roll out would be advisable. Then, the time value of an OTM option is only a nickel. If you like the potential position, you can buy it back because the new option will likely lose a nickel due to the erosion that takes place over the weekend. The same holds true for an ITM option. If you have a covered call or a calendar spread, late Friday afternoon the time value disappears and it becomes reasonable to roll it out without sacrificing more than a commission. Other than that, I would rarely recommend rolling out a short option while there is still time value. The one thing you can be sure of is that the time value will disappear. That’s money that is already in your pocket. The whole idea is to keep it there! ________________________________________________________________ The Worst Traders Did you ever notice that the worst traders (stock or option traders) are professionals like doctors or lawyers? Think about it. When is the last time you heard lawyers or doctors admit he was wrong about anything? I’ve been watching “ER” and “The Practice” for years and they screw up plenty, but only admit it about once a season. It’s an ego thing. They’ll hold onto a position for dear life and become addicted to the drug we call “hopium.” To be a successful trader, you need to cut losses short and move on. Their future as traders is about as promising as Trent Lot’s political future. _____________________________________________________________ Something Interesting On occasion, while perusing option chains, you may stumble across some unusual activity in the form of larger than normal volume. It’s always interesting to speculate on what’s going on. Today, while scanning the QQQs, I noticed the following: 1. QQQ 2005 January 24 Calls – 5500 traded at $6.20 2. QQQ 2005 January 24 Puts – 5200 traded at $4.20 3. QQQ 2004 January 25 Puts – 5000 traded at $3.70 This is like a puzzle. With all the option strategies, it’s tough to figure out what they’re really up to – especially when we don’t know if those trades were purchases or sales. It’s often easier to figure it out when there are only two high volume trades. Then it can be a bull put, bear call, or calendar spreads, straddles, strangles or any number of other strategies. All we know is that someone – with deep pockets – is placing a big bet. _______________________________________________________________ Temptations . . . A Final Thought Do I want to be delivered from temptations? Absolutely not! I have important decisions to make and I’m perfectly capable. Now, what flavor of Haagen Daz to have and wait a minute, there she is . . . look at those . . . what the hell did I do with those darn binoculars? _______________________________________________________________ CPTI PORTFOLIO UPDATE – As Of Thursday’s Close (REMINDER – This Sunday’s column be devoted to the new CPTI Portfolio positions for the January cycle and a wrap-up of how we fared in the December cycle. Hint: We did really well – again!) BBH Iron Condor – Currently trading at $88.12. We want BBH to finish the December option cycle anywhere between $80 and $95. We’re still looking good – still in mid-range. TTWO Short Strangle – Currently trading at $23.33. We want TTWO to finish the December option cycle anywhere between $22.50 and $35.00. TTWO has pulled back with the market. Even though it came in with excellent earnings, other companies in the sector did not and it has been pulling TTWO down. On Wednesday, the short strike ($22.50) was violated. We shorted shares at $22.50 and repurchased them as TTWO bounced back over $22.50. Today, TTWO twice broke below $22.50 and we repeated the process. Thus far, we’ve accumulated three round trip commissions and $150 of slippage for a total additional cost of $210. I know that some traders who wisely, stuck to the 75% rule, bought back the short call for $.25 yesterday. That opportunity again exists as of tonight’s closing. Tomorrow morning, if TTWO open’s near tonight’s closing price, you may be able to buy back the same short call for $15-.20. IMCL Covered Call – Currently trading at $11.91. 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 comfortable cushion with a day to go. QQQ ITM Strangle – Currently trading at $25.05. The QQQs finished near their lows on Friday. 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) handsomely 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 3 By Leigh Stevens lstevens@OptionInvestor.com As I said in my last Trader’s Corner article, my last and concluding part of this series on Elliott Wave analysis of market trends finishs on how wave theory differs in defining long-term trends, how to use wave analysis along with OTHER technical analysis tools and also describes general wave characteristics. As I said in part 2 at - http://www.OptionInvestor.com/traderscorner/tc_121202_2.asp and in part 1, at - http://www.OptionInvestor.com/traderscorner/tc_120502_2.asp ..... the best use of this information will be realized if you read the Trader’s Corner articles that came before, and in sequence. Come on, it’s not THAT much material! The series taken together helps you break down an important tool of trading – looking at unfolding wave patterns – helpful in figuring out whether a market index is at the beginning, middle or end of its trend. Longer-term trend definition in Elliott wave analysis is different than the way that a primary bull market is defined in Dow theory interpretation. In the chart below, taken from my book (Essential Technical Analysis), up wave 1 could be considered to be a “primary” bull market, corrective wave 2, a primary bear market, up wave 3, a primary bull market and so on in terms of how Charles Dow might have defined it. However, in terms of Elliott’s viewpoint (as I interpret him), the entire sequence of wave 1 through wave (which could also be termed a “component move”)5 constituted a bull market – The entire sequence of the correction that follows wave 5, consisting of the large moves labeled A-B-C, is all part and parcel of a major bear market trend and can go on for many years. The up move of the down-up-down (A-B-C)bear market pattern would be considered part of a bear market; wave B would be a bear market rally, even if it was a year long and reflected a big percentage rebound. Elliott defined different degrees of bull and bear markets by different terms than Dow’s simple use of primary bull or bear markets – he related the type of bull or bear market to the smaller or larger “degrees” of bull or bear markets and used modifications of “cycle” to describe some of them; e.g., supercycle. EMPLOYING WAVE ANALYSIS ALONG WITH OTHER TECHNICAL TOOLS - Using the same chart as the first one above, I’ve added a bit more explanation or text below – My next chart shows a weekly time frame for just part of the years shown above. In this chart the interpretation made was that corrective wave 2 might have run its course – at such a juncture, good use can be made of the next smaller time frame (weekly) and then refined still some more with a daily chart, to arrive at an entry decision - For purposes of timing trade entry it’s valuable to use other technical analysis “signals” such as a bullish moving average and oscillator crossover and/or a breakout above the dominant down trendline. I We can often have higher confidence in the technical indicators such as the ones above when there is also a fairly “clear” well- defined wave pattern. Having confidence in your trading decision is very important early in a trend – it is the hardest to sit tight in the early stages of a trend, as the business and economic news, for the most part, rarely “supports” the side of the market chosen. If I expect that a corrective a-b-c pattern of a corrective wave has ended, I have a reasonable expectation that the next move is an impulse wave that will take the index or stock in question well above where it went on the highest peak during the correction. As Dow said, early in any major bull market up swing there is little bullish enthusiasm – in fact, the public is decidedly un- enthusiastic about whichever market has been in a significant decline. Of course, it is not enough to be early, as prices could always be heading into a multiyear sideways pattern, such as seen with precious metals for most of the 80’s and 90’s. In stocks, this was the case for much of the 60’s and 70’s. However, if early in the trend even if it doesn’t carry all that far and with an exit strategy, most of what move there is can be captured. With the interest in stocks of recent decades it seems less likely that this market will be in the doldrums for years – but never say never either. WAVE CHARACTURISTICS - R.N. Elliott, like Dow, saw that there is progression of human emotions in the marketplace from pessimism to optimism and back again – this pattern tends to repeat in a cyclical fashion such that the characteristics and price pattern of the predictable part of the “cycle” we are in can be recognized. The “impulse” waves - the 3 up moves of waves 1-5, that make up a typical bull market - behave differently than the 2 corrective downside moves of waves 1-5 of a bull market, or the larger corrective bear market waves that follow a bull market (wave 5) completion, known or labeled A, B and C. In fact all the wave patterns from 1 through 5, and A through C have their characteristic “flavor” or personality as highlighted in the 3 charts that are included in the explanations that follow: 1. First Waves – Many of these are the part of the basing process and so, the second wave that follows, will often retrace much if not all of wave one. This explains a “double bottom” in Elliott wave terms. If wave one follows a “big base” pattern, than its rise can be far stronger than the former case. 2. Second waves – With this corrective pattern, prices often retrace much of the first advance or wave. This corrective wave pattern will often produce bullish divergences as prices, a key average or indicators don’t decline as much as prior lows. 3. Third waves – As discussed previously, this advance is what makes “believers” out of many investors, as it is a strong rally and often prolonged. In the stock market, this up move will have see broad participation of stocks. 4. Forth waves – This is another corrective wave. If the second wave, also corrective in nature, was relatively simple and short- lived, this wave will tend to be more complex and prolonged, according to Elliott’s rule of “alternation”. Stocks that lagged the advance in wave three, will dip the most and start to build tops. 5. Fifth waves - This advance will most often be less powerful and prolonged as up wave three. Sometimes, this wave will extend, in time and price, relative to wave three, especially if the third wave was relatively short-lived and carried prices less far. If so, wave five may look more like wave one – if wave one was a good-sized advance, then this final (wave five) rally may be also. This advance completes the bull market trend. A-B-C (or, a-b-c) CORRECTIONS – “A” waves – This is the first decline of a bear market trend. As in the 2000 top of Nasdaq, investors tend to be convinced that this down move will be a short-lived decline. This wave is characterized, in terms of the psychology of investors, by continued faith in a longer-term “buy and hold” philosophy. “B” waves – A rally phase that typically that less volume and, in the stock market, fewer stocks that rebound strongly. Being a move contrary (up) to the dominant down trend, it typically has three parts – an “a-b-c” correction, but this pattern starts with a rally and therefore usually follows an up-down-up sequence, which is the reverse start and finish of the a-b-c (down-up-down) correction of the corrective waves two and four. A “B” wave advance may carry to as high as the levels previously achieved by the market, but technical and volume indicators will tend not to “confirm” as much strength as previously. A double top, relative to the top of wave five, is a possibility. It is during this rebound, that “non-confirmations” will occur in the two Dow averages and/or in key bellwethers, such as related market averages or key market segments. “C” waves – This decline, in the reverse direction but with similar intensity to wave three on the upside, carries the market sharply lower. The C wave decline will often be of longer duration and carry prices significantly lower – a fibonacci relationship to the first decline or A wave, suggests that this decline could carry 1.38, 1.5 or 1.62 times or more farther than the first downswing. In stocks there are few sectors that offer much “shelter” to investors when there is major and broad decline. Fear and gloom tends to build – at the bottom of this move, investor “sentiment” has become very bearish and, as discussed by Dow, previous stock market investors don’t want to own equities, no longer maintain much interest in the market and are disillusioned with it. Any correction (to an uptrend) will tend to break down into a smaller a-b-c pattern - SUMMARY OF ELLIOTT WAVE THEORY - As with the theories of Charles Dow, the Elliott wave principles cannot be “proven” according to any statistical proofs that I know of. There are too many variables and interpretations to facilitate this effort. Unlike Dow’s simple rule that holds that the averages much confirm each other to maintain trend validity, Elliott wave analysis can be complex and an unfolding price pattern can be open to differing, but valid wave interpretations, according to Elliott wave principles. And, like Dow’s “non-confirmations”, understanding of the wave pattern may occur only after a formation completes itself and too late to take defensive or appropriate action. That said, in its simplest terms and used only when a wave pattern is well-defined and “obvious”, Elliott’s rules of market behavior can lead to some very profitable investments – and, to the avoidance of key mistakes like staying fully invested in the market long past the end of a bull market. Use of Elliott wave principles has given me a useful identifier for the “structure” or how to recognize the unfolding pattern of a bull market, particularly the nature of wave 3 or the “2nd. impulse” wave – when you know it is coming as part of the natural unfolding of a bullish trend, it can greatly increases the possibility of being invested when it gets underway. Conversely, when you start to notice the number of times that a correction, in an advancing trend, takes the threefold down-up- down pattern, it allows an understanding of where the market is in terms of this corrective cycle. Cycles are trends that have a repetitive sequence depending on the type of cycle. Because the markets tend to repeat similar patterns in a similar sequence, recognition of the current point in this sequence will often have predictive and hence, profitable, value. *********** OPTIONS 101 *********** More On Gold Buzz Lynn buzz@OptionInvestor.com Did somebody say, "moron"? While they didn't really say it, that's what central bankers of the world - mostly the U.S. Federal Reserve want us to accept as wisdom about those who believe that gold is an outdated relic of the past. Oh wait, that's "More On", as in additional subject matter. But gold, as a relic of the past? Sure. . .only if we block out five thousand years of history and focus specifically on the monetary system since 1973 when the U.S. effectively devalued it's currency by eliminating gold reserves as the backing for dollar- denominated currency. In short, block all rational thought in order to accept modern economists' and the Federal Reserves' belief in gold's lack of importance. If we can't do that - and rational people shouldn't - we must accept that gold, like it or not, is the only "true currency" of any enduring value. Literal paper money creation and electronic fund creation conjured up by all central banks is by definition, "fiat" money. No that's not an indictment of Italian automobiles or Lira, the Italian currency. The dictionary defines it as, 1) a decree; order; 2) a sanction. In other words, "because we said so". Federal Reserve notes, aka paper money isn't real. It's government-sanctioned counterfeiting whose attempt to legitimize is based on an immutable rule of law. When the law becomes mutable, and where "full faith and trust in the government" becomes debatable in minds of people whose survival depends on it, you can be sure that some will do everything in their power to convert the fake currency into real currency. Translation: The Fed is increasing the supply of money with the unintended result that the monetarily-informed recognize the Fed's action for what it is - counterfeiting - and who have taken steps to preserve the value of what they still own. Increasing the money supply is, by definition, inflation. It should be no surprise then that gold demand is rising as people seek to protect their wealth and keep it from eroding against an onslaught of fake dollars. Take my word for it, the Fed hates this and would love nothing more to see gold banished from the kingdom. No wonder they call it a relic - they'd like us to believe that. Facts suggest otherwise when the dollar is eroding and people seek the protection of gold. Hence, the dollar falls in relation to other currencies and especially gold. People who steward their capital well are merely "stewarding capital well" when they exit dollars in favor of real money. Don't get me wrong, I'm not talking about anarchy in the morning, or shopping with wheelbarrows of cash for a carton of milk. We're a long way from that. But flight from fiat money into gold cannot be ignored. It is a trend in motion born of a bigger cycle from financial assets into tangible assets. If you doubt that, go back in time and re-read an article penned earlier this year on the subject. You can find it here: http://www.OptionInvestor.com/traderscorner/tc_050202_1.asp That's the big picture. Now follow me into the current conditions of the gold market. I'll keep this short and sweet. The Fed's printing presses are turning out money at an annualized growth rate of 17.4% in order to keep consumers spending. Their hope is that the country will not fall into deflation - "inflate or die' being the secret battle call of the Fed. Furthermore, there are now 125,000 short commercial gold contracts out there, at least as of December 10th. We won't know the new number until late tomorrow. Anyway, that is a heavy bet by commercials (aka big money institutions) who WANT the price of gold to fall so they can cover at a cheaper price. Still, gold struggles to fall against its primary bullish trend. For the moment it isn't working. As noted in last week's article, (http://members.OptionInvestor.com/options101/opt_121202_1.asp) gold confirmed its primary trend by breaking out of its neutral wedge formed over the last nine months. $330 was the magic resistance level. With 125K contracts short on gold by the commercials, you might think that gold would be turned back from that level after a mild gain - you know, to test the $330 level as a new point of support. Oops! Those short at $330 pressed their luck, and gold has not come back. Why is that? Well, in my sometimes never to be humble opinion, there are obvious signs, like tire tracks or footprints, that can be nothing but short covering. That's exactly what I think happened. My evidence is as follows. Look at this chart from the February 2003 gold futures contract late last night. As a note for reference, at 4:00 p.m. ET, the gold futures contracts begin trading with the next trading day's date stamp. In other words, "after hours" trades such as those following December 18th's close will show up as December 19th. So anyway, the chart. . . February 2003 Gold Futures Chart - GC03G (weekly/daily): Wow, look at that! The weekly chart has gone vertical, and look at that huge volume, which all took place between 4:00 p.m. ET and roughly 1:00 a.m. ET last night. The major contract purchases were all at the highs of the day where gold actually reached nearly $356, far surpassing the $344 resistance that occurred last June. I had figured $344 would turn the bulls back and shorts would short more at that level, but it didn't happen that way. No, shorts went nuts in covering, which we can tell from the circled area of the volume chart 7500+ contracts purchased overnight. The norm from the chart appears to be roughly 1000- 2000 per day. There were over 10,000 contracts purchased by the time the clock rolled at today's 4:00 p.m. close. What I take away from this is that commercials are scared and have, for once, been caught on the wrong side of the trade - a real rarity. They have not been able to repress the power of gold's primary bullish trend. Look for that to continue, but not for long before taking a breather. While I remain bullish on gold as a long-term investment (and an integral part of Fundamentals Guy's financial ark), I sense there is a short-trading opportunity at hand. Gold has come along way in a hurry and has "gravity play" written all over it. While covering shorts has been the name of the game, shorts may take a more aggressive approach now that price targets have been met. How so? Take a look at this chart done earlier today in the Market Monitor by John Seckinger. Nice work, John! February 2003 Gold price target - GC03G (daily): If the theory holds, the near-term trading top is between $356.60 and $356.80. Gold hit $355.70, which is close enough in my book. On a trading basis, it's nearly topped out and time for a little backtracking. I'd be a long-term buyer again at $330. I'd cover my short with any signs of support at $344. Already based on tonight's action, price is up after today's close. The point is to trade it right now. Otherwise, this is in my opinion, the wrong time to make a gold investment, as we'd be buying at a temporary top. Patience - let it come to us. But be willing to bet on the primary trend - bullish. Until next time, and at the risk of offending those who would take the following wish out of the context in which it's intended, make the Merriest Christmas ever for yourselves and your families. It's why we trade. See you next week! Buzz ************** FUTURES CORNER ************** Playing Failures By John Seckinger jseckinger@OptionInvestor.com Things look good, but then all of a sudden the contract begins to fall back towards support. Traders then wonder, “Is this a normal correction, or has something happened and I should go short instead? Have you ever told yourself, “If the ES contract breaks about 902, I will go long without question.” Then, after contract goes to 902.25, still no trade and then you sit and watch it go to 907 and wonder how you let a winning trade get away? Now the contract starts to fall. 905, 903, 902; do you buy? Staying with the ES example, as the contract begins to fall from 907, theory states that the first pullback from a breakout has high odds of bouncing back and testing the 907 area once more. The key is watching the depth of the correction. If the pullback breaks below several minor support levels before reversing, sellers will likely emerge when price tests the short term high. The market does have a natural tendency of pulling back, bouncing, and then pullback again until support is found. But, once again, it has to deal with the depth. Even if the corrective move is slight, traders will often go long on the first bounce, rather than waiting for the corrective move to take form. And then, if the corrective move is too great, going long is the wrong course of action. Yes, this gets tricky. So, I am sure you are asking yourself “How do we gauge depth in order to know if the move lower is significant?” As usual, there is some art involved, a few oscillators, and some patience thrown into the mix. As far as oscillators are concerned, a popular one I use with this strategy is stochastics, which measures an intra-day rally's duration. Oscillators measure the depth of this overbought condition and provide early warning when a pullback lasts too long and “depth” becomes too great. As in the example below, the oscillator appeared overbought and had some distance to fall before recovering. Another oscillator that is important to use is Bollinger Bands. I must preface by saying that Leigh Stevens did a nice article on Bollinger Bands, found here: http://www.OptionInvestor.com/traderscorner/tc_071102_1.asp Bollinger Bands (BB), as defined by Leigh, combines a centered moving average that is part of the indicator but usually NOT shown. Since each Bollinger bands is placed at a fluctuating line that is equal to two standard deviations, 95% of all price action will theoretically occur within the upper and lower lines. With that said, resistance could be found at the top of the band, while support would be at the lower region. Additionally, if prices do break, they should stay under or over the outside band. Ok, time for some illustrations. Heading into trading on Thursday, the pivot in the ES03H contract was established at 893.50 and the market started at 9:30 with the contract under the pivot and on the bottom of the Bollinger Bands. There was a move above prior resistance, which corresponded nicely to the pivot listed. Resistance higher, as outlined in the futures wrap, came in at 901. There was also a daily trend that fell at the 897.50 area. For the purpose of this article, we are debating whether it makes sense to buy a natural’ pullback, as well as understanding when the “depth” of the pullback becomes a little too deep. The first thing I notice: Prices are outside the Bollinger Bands and now in the “5 percent zone”. Additionally, the daily trend line and 901 begins to come into play (high at 900.25). Then prices began to show lower highs and a few higher lows as a small pennant was formed near 895. Is that pull back fine? I would say so, since still above the pivot and not under the mid-point of the regression channel. Of course, I just answered the depth question for this contract. Without touching on Stochastics, which comes into play last. When the ES contract falls under the mid-part of the Regression Channel and under the pivot (which nicely corresponds with each other), time to look at stochastics to see if a good downdraft is possible. Since stochastics got relatively overbought (as prices were near 900), initiating a short position makes sense. Stop: I like to use 5-points above, so 898 (if short at 893.50). A part of the art’ comes into reading the stochastics. I understand that there is a lot of noise on stochastics on a five- minute chart (and in hindsight I should have used MACD); however, just make sure to look at stochastics in order to make sure they are not buried and signaling a possible rise in the contract in the near term (read: buried). It stochastics were buried, then it would make sense to look for a bounce and then a fall from higher levels. If MACD was used, the oscillator crossed from relatively high levels at the same time stochastics broke lower; however, MACD appears to be a little more polished. The point with stochastics is to make sure there is some momentum left in the contract. How do we know there is momentum left? Here is a great rule-of- thumb: If the bottom of the Bollinger Bands is equal to or greater than your objective, go for it. If equal or less than your objective, start worrying about risk/reward scenarios. In the lesson below, we had a little bit more than 5-points to the downside; therefore, meets the objective. Chart of ES03H, 5-minute The next chart is an example without the use of a pivot and when a correction can be viewed as a normal pullback. The NQ03H contract forms a wedge pattern and looks to break out higher. However, the market does come back and test the bottom of the wedge before really rocketing to the upside. The purpose of the article is to look for a reverse trend scenario, so lets do that. We do have a significant contraction from 1055 to near 1040 and the bottom of the wedge again, which makes me wonder why this article isn’t on buying dips. Just kidding. Ok, since prices went outside the Bollinger Bands and (here is part of the key) increased volatility to allow for the lower band to fall and give more reward, a collapse back under the mid-part and a previous relative high allowed for the strong possibility that “ sellers will likely emerge when price tests the short term high.” In order to find a place to start a short, since 1055 will most likely not be tested, use the top of the Bollinger Band. We already established that we wanted to go short, and a stop can be easily placed above the 1055 high. If the contract then falls back under the mid-part of the channel, look to add to the short position. The difference between the two examples is that the first one didn’t have obvious support below like seen at 1040, and there were better odds getting a five-point move out of the ES from under the pivot then getting a 10-point move from near 1047 in the second example. Therefore, it made more sense to look for a rally and then sell into strength and near the old high. Chart of NQ03H, 5-minute Good Luck. Questions are welcomed, John Seckinger jseckinger@OptionInvestor.com ************************************************************** Annual Renewal Special ************************************************************** The annual special this year is far too large to put into an email. The highlights include two option expiration mousepads to which we have added the FOMC meeting dates this year. There are also two videos with Jim, Jeff and Buzz and seven books by leading market professionals like John Murphy and and Jim Rodgers. We even brought back the Trading Strategies CD from last year for all the new subscribers who have been asking for it. Click here for the full details: https://secure.sungrp.com/03renewal/#m ************************************************************** ********** 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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