The Option Investor Newsletter Thursday 12-26-2002 Copyright 2002, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Holiday Ends Early Futures Markets: When Will History Repeat? Index Trader Wrap: Another late session fade Market Sentiment: Head Scratcher Weekly Manager Microscope: G. Paul Matthews: Matthews Asian Growth & Income Fund (MACSX) Updated on the site tonight: Swing Trader Game Plan: Where Is Everybody? Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 12-26-2002 High Low Volume Advance/Decline DJIA 8432.61 - 15.50 8565.01 8408.71 .87 bln 1781/1371 NASDAQ 1367.89 - 4.60 1392.58 1363.61 .80 bln 1744/1575 S&P 100 450.60 - 2.67 458.57 449.48 Totals 3525/2946 S&P 500 889.66 - 2.81 903.89 887.48 RUS 2000 389.40 + 1.27 392.21 388.12 DJ TRANS 2316.44 + 8.50 2344.45 2307.17 VIX 31.08 + 1.07 31.61 30.10 VXN 45.36 + 0.23 47.17 45.36 Total Vol 1,781M Total UpVol 858M Total DnVol 869M 52wk Highs 145 52wk Lows 116 TRIN 1.05 PUT/CALL 0.71 ************************************************************ Holiday Ends Early Traders who were looking for a post holiday rally missed it if they slept late. The triple digit bounce to 8565 failed just before 11:AM and a -141 point drop followed. The Dow closed below critical support at 8450 and is threatening to retrace back to the 8328 levels from last week. Dow Chart – Daily Nasdaq Chart – Daily The markets shot up at the open on the strength of the new Jobless Claims, which came in at 378,000. This was significantly below the consensus of 410,000 but as we have seen over the last few weeks holiday reporting has been sketchy at best. With last weeks number revised up +5,000 the odds are very good this number will be revised up as well. Even if it isn't that number in a holiday shortened week is significant. Many workers would likely have postponed filing for benefits and job hunting until after the holidays. The jobless claims will not return to normal reporting until the Jan-9th release, which should be critical for investor sentiment. Another number that was under reported was the drop in mortgage applications. That number fell in the week ended Dec-20th by -8% and indicates a continued weakening in housing. Over the last five weeks only one week has shown growth in applications. Refi applications also fell -9%. The overall mortgage application level is still high but the decline has definitely begun. Once the Fed starts raising rates the decline should be dramatic. The impact on the US in 2003 should be mild but we can no longer count on the boom to hold up the economy. Also failing to do their part in holding up the economy were the consumers. According to the Wall Street Journal this holiday posted the weakest growth in sales over the last 30 years. TGT, WMT, JCP and FD were among the top retailers that have already warned that sales would be at the low end of estimates. WMT announced on Thursday that same store sales growth would now be in the 2-3% range for December which is below their previous guidance of +3-5%. Even Amazon got pounded for a -1.58 loss on Thursday despite news that they sold over 56 million items since Nov-1st. This included 62,000 gift certificates purchased on Dec-24th by shoppers out of delivery options. Analysts were worried that the huge number of sales were done at a loss in order to gain market share. With free shipping offered until Dec-12th this additional transaction cost on 30 million items could have accelerated those losses. I discussed AMZN on the Market Monitor last week and the possibility for a coming sell off. It appears that has begun. With holiday sales weaker than non-OIN readers expected there is likely to be a new round of earnings warnings next week. Historically the trend is for the warnings to be delayed until the first full week of the new year. The fourth quarter earning announcements begin in earnest until the week of Jan-13th. This leaves only two weeks for the majority of earnings warnings to occur. Considering the economic reports over the last couple of weeks this could be a very busy two week period. Corporate earnings for 2003 are dropping faster than pine needles this week. In July the earnings estimates for 2003 were for 20% growth for S&P companies. In October that was cut to +17.8% and in December they were cut to 14.2%. First Call is now saying they anticipate an additional cut to 11% once the January warnings begin. Other analysts are expecting only 8-9% for all of 2003. This is exactly the same scenario we saw for 2002. Remember the anticipated second half rebound for 2002? Now those same forecasters are repeating their bullish forecasts for 2003. "Strong second half rebound in corporate spending will lead to strong profits." Time will tell but a survey of 65 analysts was released this week and only two were expecting the markets to close lower in 2003. The bullishness is rampant for the long term but for the near term it is looking grim. The volume today was the lightest full day of the year with the NYSE only trading 716 million shares during regular trading. Volume is never high the day after Christmas but there is normally a sellers strike as well. Sellers were not on strike on Thursday and showed up in force when the Dow rose to 8550 just after the open. Besides the reasons mentioned earlier there were continued geopolitical concerns. Oil rose to $32.65 a barrel and gold hit a new high as the US and Britain attacked Iraq in retaliation for shooting down the observation plane. The very light volume makes it difficult to apply too much credibility to the sell off but the trend has not changed. For a normally bullish week we have seen three down days for a -80 point total drop. There were strong rallies on Monday and Thursday but both failed completely after hitting 8550. The lack of follow through in a bullish holiday week has prompted me to change my outlook. I had been expecting the Dow to retest 8750 before January 1st but now I think that is not going to happen. I am concerned now that the lack of follow through is an indication that we could retest the 8328 low from last week or even lower. We are obviously entering a very volatile period and there is nothing on the immediate horizon to provide the bulls with the hope needed to power a rally. There will be additional tax selling and portfolio balancing over the next three trading days and the outcome is far from certain. Be very careful with short term positions over the next couple weeks. 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. 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 History Repeat? By John Seckinger jseckinger@OptionInvestor.com Normally, this is a pretty bullish time of the year for equities. Is this simply softness due to weak retail sales on light volume, or are significant levels being taken out to the downside? Thursday, December 26th at 3:15 P.M. Contract Last Net Change High Low Volume Dow Jones.. 8432.61 -15.50 8565.01 8408.71 YM03H 8434.00 +4.00 8545 8385 10,477 Nasdaq-100 1016.46 -6.83 1041.49 1013.30 NQ03H 1020.00 -4.00 1045.50 1015.50 115,267 S&P 500 889.66 -2.81 903.89 887.48 ES03H 890.75 -0.75 903.25 885.75 193,489 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. Fundamental News: Wal-Mart (WMT) reported on Thursday that same store sales will rise only 2-3% in December instead of the previous forecast of 3-5%. Other news included the possibility that North Korea would restart its nuclear arms program, giving bids to bonds and getting some traders nervous. Additionally, crude oil rose to a two-year high on speculation of war and the lingering strike in Venezuela. There was also a WSJ article that indicated that Motorola could catch Nokia for the leader in market share within North America by the end of the year. Both company shares rose on the session. NOK was higher by 1% to 15.93, while MOT gained 2.4% to 8.95. Technical News: As both the Dow and Nasdaq failed to attract volume of over 1 billion shares, it is hard to draw too many conclusions from Thursday’s session. Nevertheless, Bonds did rally in price and the Sox index rose to 310 before failing dramatically and closing at 300.29 and near its session low (299.16). Weakness under 295 should have negative implications on equities in general. The XAU index also rose by 4.3% to 79.27 as the dollar unexpectedly fell. A follow-through in the Gold And Silver Index on Friday should be bearish for stocks, since it will most likely mean more weakness in the Greenback. ================================================================= The March Mini-sized Dow Contract (YM03H) With the Dow under 8464, the next level that should be tested on the downside is 8372 and then the 38.2% retracement area of 8338. Stochastics are slightly oversold; however, there is certainly more room to the downside. If the blue chips do find a bid, look for resistance at 8525 and then higher at 8625. A close above the 8525 level would be viewed as a positive. Chart of Dow Jones, Daily Dow Jones Support Resistance Pivot 8372.54 8528.84 8468.78 8312.47 8625.07 The YM contract failed to break out above its regression channel on Thursday, but did fine support at the mid-part of the channel near 8370. Least resistance appears to be lower, but waiting until 8364 is taken out does seem appropriate. The pivot on Friday comes in at 8484.75 and will come in just below the contract’s 50 PMA (exp) on a 120-minute chart. Look for an extended move outside the first levels of support/resistance, but be careful about hoping for a follow-through below 8294 or above 8614. These levels should be played responsively (buy low, sell high). Chart of YM03H, 120-minute YM03H Support Resistance Pivot 8364.25 8524.25 8454.75 8294.75 8614.75 Bold signifies levels based on Pivot Analysis (Globex included). The March E-mini Nasdaq 100 Contract (NQ03H) Looking at the NDX contract on a 120-minute chart, Thursday’s close puts the contract underneath the 22, 50, and 200 Period Moving Averages. The pivot in the NDX is at 1023.75 on Friday and just underneath the closest PMA at 1024.50. With that said, least resistance should be lower unless prices can get above these averages and begin using them as support. Support should be found below at 1006 and 995, with 995 most likely a level buyers will aggressively get involved. If bids do enter, we could see a rise towards 1034 before solid selling takes over. Chart of NDX, 120 Minute Nasdaq-100 Support Resistance Pivot 1006.01 1034.20 1023.75 995.56 1051.94 The Mini-Nasdaq contract closed right on its 50 DMA (exp), but underneath the 38.2% retracement of December’s decline (1024.54). Friday’s pivot comes in at 1027 and just above this retracement level. If the 50 PMA turns into resistance, look for support at 1008.50 and 997, with the latter being more important. There is the appearance of a “b” distribution, and there is a good chance the apex comes in at 1024.54; therefore, aggressive traders can use levels just above as an area to place stops. Since it basically corresponds with the pivot, I would give more weight to Friday’s pivot. Chart of NQ03H, Daily NQ03H Support Resistance Pivot 1008.50 1038.50 1027.00 997.00 1057.00 Bold signifies levels based on Pivot Analysis (Globex included). The March E-mini S&P 500 Contract (ES03H) A broken record: Prices rise above both the 22 and 50 DMA’s only to fail and close underneath both. Does this signal an oversold market? It evidently did the last two times this happened; however, I would wait until a solid move above 894.50 before looking at things even in a neutral light. Support should be found at 883. A close below 883 would be bearish heading into Monday; however, a close above 900 would only take on a slightly bullish spin. I would like to see a close above 910. Chart of S&P 500 Index, Daily S&P 500 Support Resistance Pivot 883.46 899.87 893.67 877.26 910.09 The ES contract once again failed to close above the 900 level; however, since their isn’t much technical damage to the upside, it is hard to get too bearish (especially will low volume). Support should be found at 883.25 and 875.75, while resistance is seen at 900.75 and above the 200 PMA at 910. The pivot for Friday comes in at 893.25, which correlates to levels just under the 22 and 50 PMA. Chart of ES03H, 60-minute ES03H Support Resistance Pivot 883.25 900.75 893.25 875.75 910.75 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 ******************** Another late session fade For a second straight session, bulls saw early session gains fade to marginal losses on one of this year's lightest volume sessions. NYSE volume was just barely above the 709 million-share mark, while NASDAQ volume was anemic at just over 814 million shares traded. Today's volume leader on the NYSE (over $5) had shares of Pfizer (NYSE:PFE) $30.02 -4.33% turning 17.9 million shares after the New England Journal of Medicine reported that patients taking the company's Celebrex drug had a 5% greater chance of bleeding ulcers when taking the medication. Considering a June 10th article in the Wall Street Journal, which reported that federal drug regulators concluded that Celebrex (co-marketed by Pfizer and Pharmacia (PHA) $40.98 -4.69%) was no more effective than ibuprofen, sent both stocks reeling and had the Pharmaceutical Index (DRG.X) 297.23 -1.98% in the red for the bulk of the session and today's 2nd leading decliner. Market breadth was positive, but surely hints that larger caps are under selling pressure. The reason I say this is that today's positive breadth came while the OEX and SPX, both large cap indexes had the OEX down 0.58% compared to the SPX's -0.31%. This combined with positive breadth has the trader observing that the larger weighted stocks are having greater downside impact on the indexes. The smaller-capped Russell 2000 Index (RUT.X) 389.40 +0.32% was the only major market index to show a gain. While we don't discuss the Amex Composite (XAX.X) 830.91 +0.17% that much, its noted that this index is heavily concentrated in energy, gold and drug stocks and not necessarily as "diverse" with respect to various industry groups. If I had to make a guess as to why the larger caps are under such pressure, its because institutions are taking a "sell side" approach to things. While I don't believe there's a lot of institutional activity right now (noting very light volume) what activity there might be would most likely be focused on the larger and more liquid stocks, when liquidity may be limited during the holiday season. Perhaps the last couple of trading sessions where we've seen a early half of bullish trading quickly turn to the downside could depict the artificial rally that then finds some downside room for institutional selling into strength. Continued weakness in the U.S. dollar against major foreign currencies as depicted by the U.S. Dollar Index (dx00y) 102.82 -0.41%, found the greenback index at new 52-week lows. Gold stocks rallied strong and had the Gold/Silver Index (XAU.X) 79.27 +4.3% taking today's top-performing sector position. February Gold futures (gc03g) closed at a contract high of $349.40 as it added $3.80/ounce, or +1.09%. As gold futures roll to tomorrow's trading, the contract built gains to as high as $351.00. On December 19th, the February gold futures contract spiked to a high of $355.60 and with dollar weakness, traders are most likely looking for further upside action as sector shorts feel the heat. The major notable technicals are that the Dow Industrials, S&P 500 Index, S&P 100 Index, NASDAQ Composite, NYSE Composite and NASDAQ-100 Index are all finding some daily resistance at their still trending higher 50-day SMA's. Only the Russell-2000 Index (RUT.X) 389.40 +0.32% is holding above its 50-day SMA, which resides at 384.70. NASDAQ-100 Index Chart - Daily Interval While an old trader's axiom is to never short a dull market, the NDX's rallies haven't seemed to have much "umph" behind them in recent sessions and this "index of momentum" has the shorter-term 21-day and longer-term 200-day SMA's barreling down. With the longer-term 200-day now at the 1,080 "pivot" where we saw some volume breakdown in the QQQ's, I'm looking for bears to begin getting a little braver and aggressive with shorting. I'd continue lean toward the bearish side in the indexes and since volume is light, I still suggest that traders keep positions rather light in order to withstand some of the intra- day volatility we've seen during a light volume session. While on a daily basis, breadth was positive for the NASDAQ, the NASDAQ-100 Bullish % ($BPNDX) was no net change and still remains "bear alert" at 63%. In our Monday Index Trader Wrap, the bullish % stood at 62% bullish. Still, a reading of 68% is needed to have this index reversing back up to "bull confirmed" status. S&P 100 Index Chart - $2.5 box scale In today's market monitor, I made note of a large block of stock that looked to have been crossed in Intl. Business Machines (NYSE:IBM) $78.50 -1.57% near the $80.50 level, which was just off of IBM's session high. Weakness then prevailed as IBM sunk into the red and that did appear to have a negative trade begin to unfold in the Dow, SPX and OEX when all three were just off their highs. With the OEX reversing back into O's from a lower rally under 460, traders are on the alert for an OEX trade at 445, which would be a break of significant support dating back to mid-November. A break lower at OEX 445 has bears leveraging from the lower 460 resistance. I've placed 3 "?" to the OEX 442.50 level as to envision how the OEX had tended to violate my "mid-point" of what I think could become a longer-term bearish channel by just one-box in recent declines. Should we see a break at 445, I'd keep an eye on market volume and a bearish trader would like to see some volume come in at 445 to begin thinking a more sustainable move lower is underway. Since I can't "predict" with certainty time of day of such a break, a shorter-term OEX trader needs a "key stock" to follow where volume there can be observed. I like IBM as a bearish trader's "key stock" as it's point and figure chart is somewhat correlative to the Dow, OEX and SPX as a "large cap" stock and has correlative buy/sell signal levels with the OEX. It's notable that the 442.50 OEX level was also reversal points to the upside dating back to mid-to-late October, but as we've noted, the bullish % chart for the OEX was reversing up from very oversold levels at that time. In recent weeks, we've seen the OEX Bullish % ($BPOEX) reverse lower from more "overbought" level, thus the more defensive view toward the OEX since December 4th, when the OEX reversed to "bear alert" status. Today's action saw no net change in the S&P 100 Bullish % ($BPOEX). Status remains "bear alert" at 58%, which is just 1% higher than Monday's reading of 57%. S&P 500 Index Chart - Daily Interval Things were looking better for the SPX late this morning as a move above the 900 level found a session high of 903.89. But another reversal and close near the lows weighs on a bull as another day of bullishness turns red by session's end. With light market volume, stocks are being "pushed" around rather easily and makes for some sudden intra-day swings. However, sellers seem to be winning out. With the holiday shopping season just about "wrapped up," the news out of retailers has the market beginning to question the strength of the consumer, or at least its willingness to spend and hold the economy together. With the SPX below its shorter-term 21-day SMA, momentum traders may be turning more bearish. I'm not looking for any type of sharp decline in the SPX and would trade for profits on any type of quick drop to the 860 level. Today's action did see a net loss of 1 stock to a p/f chart sell signal as the S&P 500 Bullish % (%BPSPX) slipped 0.2% to 59.80%. Status remains "bull correction" and would still take a reversal to 66% to have this group of stocks reversing back into "bull confirmed" status. Dow Industrials Chart - Daily Interval With a weaker U.S. Dollar, it should be the larger caps and multi-national type stocks of the Dow Industrials, SPX and OEX that should benefit as their products become "less expensive" on a dollar versus foreign currency translation, but that certainly doesn't seem to hold a rally together. The Dow looks as technically weak as the other indexes and near-term vulnerable to the lower end of its Bollinger Band at 8,278. I did make a trading comparison in the Dow as it relates to this September when the Dow tested lower Bollinger Band, rallied to its 21-day SMA then failed and headed lower. Still looking for a rebound test of the 21-day SMA and today would have been as good a day a day to have gotten it on the better-than-expected weekly jobless claims. However, we didn't see that today and hints to me that bulls may simply have lost any type of conviction. Today's action saw no net change in the Dow Industrials Bullish % ($BPINDU). Status remains "bear alert" at 56.67%. 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 **************** Head Scratcher by Steven Price This morning's economic data showed that Santa dropped a few jobs down the chimney this year, with last week's initial unemployment claims number dropping by 60,000 to 378,000. However, the four- week moving average edged up slightly to 404,500. The 400,000 mark is usually the gauge as to whether the jobs market is improving or declining. The markets reacted positively to the data, starting the day strong with a gain in the Dow of 116.90 points. That gain came in spite of disappointing retail data that showed the last minute Christmas shopping rush did little to reverse a trend of disappointing retail sales leading into the holiday season. Wal-Mart cut its December sales estimate this morning, saying it now expects growth of only 2-3%, instead of previously indicated 3-5% growth. This is now fully half of its traditional growth rate of 4-6% during most months the previous few years and that reduction came during the holiday months. I can only imagine what we are in store for after the holiday sales have ended. I was beginning to think all of the doomsayers (myself included) had overestimated just how poor a Christmas season the retailers would have, as the comments about poor sales traffic seemed almost too negative, but after this morning's warning, I'm wondering if we may have underestimated just how poor a season it was. Investors who were expecting even worse numbers did dip their toes back in the water, with the Retail Index (RLX.X) finishing up slightly on the day. This was most likely a relief rally, with traders who sold off the group last week buying in positions after numbers were not as bad as those shorts had hoped. However, I think the already poor sales numbers that have been released were done on lower margins, as a result of aggressive markdowns, and we may be getting some disappointing earnings when those numbers come out in a couple of months. There has been some debate over whether this season's sales will show a gain as low as 1.5% (which would be the lowest in 30 years), or as much as 4% (which would be the lowest in 5 years). Either number would still be a disappointment, and if the trend of lowering estimates continues, it may be closer to the former. The morning rally certainly made it appear as though the Santa Claus rally had finally arrived. However, by late afternoon, it had faded all the way into the red for a few brief moments. What is most disturbing about the fade is that after taking out significant resistance levels, none of those levels served as support on the way down. The SPX fought the 900 level on the way up, but the bears were able to overcome support there this afternoon and leave us scratching our heads in search of a pivotal level. Dow 8500-8525 served a similar purpose. What we did see, however, was the growing importance of using the OEX for confirmation of action in the Dow and SPX. While the Dow and SPX have both turned up and given point and figure buy signals, the OEX has lagged, establishing itself as the fly in the ointment. It was also the only index not to cross its 50-dma today, before the rally faded. We are seeing a definite lack of continued trend right now, and confirmation is becoming more important for traders looking to capture a move. The Santa Claus rally had been remarkably consistent for the last 34 years, however we are also seeing one of the worst years for consumer and business spending in recent history. All trends eventually come to an end and given the recent downtrend since we topped out in most major indices on December 2, we may be looking at the inevitable end of this one. It will still take an awful lot of selling pressure to break down below those late October, early November lows, which we re- visited last Thursday. The highest percentage plays may currently be playing bounces from those lows, with a tight stop. While I'd also like to short the failed rallies, it is becoming increasingly difficult to pick the tops, as there has been no consistent rollover level. We are most likely in for a period of range bound activity until we hit the next earnings cycle in February and we need to trade what we see. Right now what we see are repeated bounces from the Dow 8300-8400 range. The Semiconductor Index (SOX), which has, been leading the broader indices recently, also finished the day in the red, but managed to hold above the pivotal 300 level. The failure of the big rally that took the SOX up to 310.84, which is a previous resistance point, is certainly bearish. However, it did hold above support and currently suggests that investors are fighting closely over recent upturns in demand, coupled with warnings from some of the largest chipmakers that we are not yet out of the woods when it comes to IT spending. Another gauge that has been somewhat reliable, if not an exact correlation, is the oil market. I have pointed out in a graph in my December 18 Market Wrap that the increase/decrease in the price of oil has had an inverse relationship to the stock market in recent months. This reflects not only added costs to almost all businesses, but also the fear of war, which directly affects investor confidence. Oil finished up once again today, with Crude Oil Futures (Feb 2003) breaking the $32 level for the first time this year. The factor that makes today's action difficult to gauge is the extremely low-volume across both major exchanges. Volume on the NYSE was only 709 million shares, by far the lowest volume of the year for a full trading day. The Nasdaq saw extremely light volume, as well, with only 811 million shares. That means that none of the moves today came with much conviction. It becomes harder to gauge just what the moves mean when many traders are gone for the holidays. However, the aforementioned support levels were solid and based on higher trading volumes earlier in the year. For now, traders can rely on those levels and look for the high percentage play at those points. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 8432 Moving Averages: (Simple) 10-dma: 8480 50-dma: 8538 200-dma: 9027 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 889 Moving Averages: (Simple) 10-dma: 895 50-dma: 901 200-dma: 962 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 1016 Moving Averages: (Simple) 10-dma: 1023 50-dma: 1029 200-dma: 1084 ----------------------------------------------------------------- The Retail Index (RLX.X): The Retail Index (RLX.X) eked out a gain today, in spite of Wal-Mart's announcement that sales once again came in below previous estimates. The trend disappointing sales results has continued since the summer and there is little reason to believe that trend will reverse itself anytime soon. This morning's jobs data was encouraging and a decline in unemployment claims certainly bodes well for the economy and for post-holiday shopping trends. However, those numbers are very unreliable this time of year and what we are left with are the hard sales results - which have been less than mediocre. The bounce today was likely a relief bounce, as some traders were expecting even worse results, but the downward trend for the RLX is still in tact. If the best expectations are for the worst holiday shopping season in five years, then traders should probably be leaning to the short side in the retail sector 52-week High: n/a 52-week Low : 244 Current : 263 Moving Averages: (Simple) 10-dma: 270 50-dma: 282 200-dma: 308 ----------------------------------------------------------------- Market Volatility The VIX was the first clue today that the morning rally may not have been for real. In spite of a triple digit gain in the Dow, the VIX actually posted a gain and held above support at 30. We usually see the VIX drop on rallies, but in this case we saw the opposite, indicating there were still put buyers out there who did not believe in the early gains. Sure enough, the broader markets gave up the entire gain and finished the day in the red. Traders should keep an eye on this index, as it measures activity in the OEX options market. If it fails to drop on a market gain, then there are still enough institutional bears supporting put premiums to put traders on alert that someone is planning on there being some downside in the near future. CBOE Market Volatility Index (VIX) = 31.09 +1.07 Nasdaq-100 Volatility Index (VXN) = 45.36 +0.23 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.71 256,440 182,962 Equity Only 0.68 212,140 143,690 OEX 1.66 4,469 7,430 QQQ 1.25 8,992 11,231 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 49 - 0 Bull Confirmed NASDAQ-100 63 + 1 Bear Alert Dow Indust. 57 - 1 Bear Alert S&P 500 60 - 0 Bull Correction S&P 100 58 - 0 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 1.44 10-Day Arms Index 1.35 21-Day Arms Index 1.39 55-Day Arms Index 1.15 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 1611 1177 NASDAQ 1689 1467 New Highs New Lows NYSE 65 37 NASDAQ 61 35 Volume (in millions) NYSE 862 NASDAQ 798 ----------------------------------------------------------------- Commitments Of Traders Report: 12/17/02 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 significantly to both long and short positions, however added 7,000 more short contracts. Small traders took a similar approach in adding to both sides, but came out decidedly longer, by about 13,000 contracts. Commercials Long Short Net % Of OI 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%) 12/17/02 465,361 528,896 (63,535) (6.4%) Most bearish reading of the year: (111,956) - 3/6/02 Most bullish reading of the year: ( 16,472) - 10/01/02 Small Traders Long Short Net % of OI 11/26/02 155,975 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% 12/17/02 194,740 90,803 103,937 36.4% 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 reduced the net short position by about 5,000 contracts, while small traders left positions relatively unchanged, with a net reduction in the long position of about 800 contracts. Commercials Long Short Net % of OI 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%) 12/17/02 51,999 54,383 ( 2,384) ( 2.2%) 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 11/26/02 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% 12/17/02 23,027 18,027 5,000 12.2% 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 added to both sides of the position in approximately equal numbers, while small traders cut down on the short position by about 400 contracts. Commercials Long Short Net % of OI 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% 12/17/02 23,782 20,605 3,177 7.2% 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 11/26/02 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%) 12/17/02 5,498 9,045 (3,547) (24.4%) 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 ************************* G. Paul Matthews: Matthews Asian Growth & Income Fund (MACSX) This little Pacific/Asia ex-Japan stock fund deserves recognition for its outstanding performances in 2000, 2001 and again in 2002, where it is up 11.2% through December 20, 2002. G. Paul Matthews is both chief executive officer and chief investment officer with Matthews International Capital Management, the firm he founded in April 1991, which serves as investment adviser to the Morningstar 5-star rated Matthews Asian Growth & Income Fund (MACSX). Previously, Mr. Matthews was president with G.T. Capital Holdings from 1988 to 1989 and managing director with G.T. Management Asia in Hong Kong from 1986 to 1988. He founded his own advisory firm in 1991 on the belief that Asia will be the most dynamic "growth" region of the 21st century. Matthews' firm invests solely in the markets of Asia and currently manages six no-load Asian funds for shareholders. As an Asian specialist, Matthews combines intensive "fundamental research" and "bottom-up" stock picking, an approach he feels is best suited to capturing the investment opportunities offered by the dynamic Asian markets. Each of the six Matthews Asian funds focuses on a different area within the Asian investment universe, the website states. The "no-load" Matthews Asian Funds were launched in 1994. Prior to that, Matthews's firm managed Asian investment portfolios for high net worth individuals. The fund we want to focus on herein (Matthews Asian Growth & Income Fund) opened to new investors on September 12, 1994 along with the firm's flagship product called Matthews Pacific Tiger Fund (MAPTX). Matthews has since started four more funds: Korea (MAKOX), China (MCHFX), Japan (MJFOX) and Asian Technology (MATFX). The Matthews Asian Funds website (www.matthewsasianfunds.com) is a good source of additional fund information. They cite some of the additional risks that are associated with single country and sector funds that make them subject to a higher degree of market risk than diversified funds (because of their concentration in a specific area or sector). However, in the Matthews Asian Growth and Income Fund, Matthews invests mainly in convertible bond and preferred stock securities, hybrids instruments that are usually less volatile than the issuer's equity securities. Matthews' conservative approach in managing the Asian Growth and Income portfolio has resulted in a low risk level in relation to his Asia/Pacific ex-Japan stock fund peers. The fund's trailing 3-year standard deviation of 11.9% is very low compared to 19.7% for the average international stock fund and 23.1% for the Asia- Pacific ex-Japan stock fund average, using Morningstar's numbers. Standard deviation measures a fund's volatility of returns. Investment Performance Investors of the Matthews Asian Growth & Income Fund have earned an 11.2% return on their investment this year (as of December 20, 2002). In addition to ranking in the top 10% of the Asia/Pacific ex-Japan stock category in 2002, Matthews has produced "positive" investment results in a poor market environment that has seen the MSCI EAFE index fall by more than 17 percent and MSCI AC Far East Ex-Japan Free index move 4.6% lower. The 3-year chart above gives a graphical depiction of the fund's NAV movements over the past three years. During this period, Mr. Matthews produced an average annual total return of 9.9% for his shareholders, ranking in the top 1% of the Asia/Pacific ex-Japan stock category per Morningstar. The fund's trailing 5-year performance is equally impressive. In the last five years, Matthews Asian Growth & Income Fund has seen its value increase by an average 14.6% a year, beating respective indices and fund category peers by big margins. The best part is Matthews did it with considerably less risk than comparable funds have exhibited, producing an exceptional risk-reward tradeoff for investors. Conclusion Matthews Asian Growth & Income Fund isn't tax-efficient nor does it have low operating expenses, but it is offered on a "no-load" cost basis through leading fund supermarkets and sports terrific absolute and relative performance numbers. The fund is a Lipper Leader for Total Return, Consistent Return and Preservation, and is an appropriate choice for long-term investors seeking dynamic growth potential offered by Asia/Pacific (ex-Japan) securities. Steve Wagner Editor, Mutual Investor email@example.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 ************************************************************** *********************** SWING TRADER GAME PLANS *********************** Where Is Everybody? Schizophrenia Rules! At least it did today. This morning's big rally on light volume found little support as the day wore on and we eventually ended the day in the red. To read the rest of the Swing Trader Game Plan Click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** 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 12-26-2002 Copyright 2002, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Three: Traders Corner: Born Again Option Traders Welcome Traders Corner: Reversals: “Key” versus other short-term reversal patterns Futures Corner: Matter of Importance ************** TRADERS CORNER ************** Born Again Option Traders Welcome By Mike Parnos, Investing With Attitude I spent some time on the OI Market Monitor this past week. We may soon have some CPTI converts. There are OI subscribers who weren’t aware of the “other” way to trade – the profitable way – with the percentages and with minimal risk. They were only using OI as a tout sheet. They have been introduced to the Couch Potato Trading Institute. It’s like born again option trading. Once they’ve seen the light . . . We won’t put the Jehovah Witnesses out of business quite yet. The day you find me on your doorstep in a suit with pamphlets is the day I turn in my remote control, unplug the refrigerator, become a vegetarian, and sign up for an aerobics class. In other words, don’t hold your breath. Born again option traders are always welcome at the CPTI. We meet every Thursdays and Sundays. The only requirements are an open mind and a willingness to learn. Amen and pass the Doritos. _____________________________________________________________ I hope all members of our CPTI family had a wonderful Christmas. The best present you can give to anyone is the gift of knowledge. And it’s still here to give. OptionInvestor.com is an unparalleled resource for the kind of knowledge that can potentially change a person’s life. Jim Brown currently has a terrific subscription renewal offer along with a great price for new subscribers. Remember what Yogi Berra said, “When you come to a fork in the road, pick it up.” This may be your fork. _____________________________________________________________ Mike, Do you think the reasons more people don’t use the trading techniques you use are because they need to have that feeling of always having to do something each day in terms of trading? Having the adrenaline rush of waking up each day and figuring out what to do? To be honest, that was me in the past, but not anymore. I choose to get my rush on the golf course while your simple, low risk trades make money! Hoping to have enough money made in two years, to quit working full time, and retiring to the golf course at age 36! Response: I think it's a combination of things. Many traders don't consider themselves traders unless they're buying and selling all the time -- making multiple decisions. That's to our benefit because they're wrong most of the time. Then, there are other retail traders who are too lazy or are intimidated by the strategies we use at the CPTI. It's the path of least resistance for them is to just buy and sell puts and calls. Bless their hearts, we love them too because they're also wrong most of the time. I’m very proud of our CPTI students. Our strategies require a more than superficial understanding of how options work -- both separately and in conjunction with one another. That takes thought. That takes effort. And that takes a reshuffling of one's priorities, which, in turn, requires change. People are afraid to change. They're afraid of the "unknown" – so much so that they're willing to continue a particular behavior simply because there's a comfort level. The outcome, good or bad, is predictable. It's something they can rely on. That's why many abused women remain with their husbands. They're afraid to be alone or that their next husbands may be even worse. It takes courage to change -- and, unfortunately, courage is too often in short supply. ____________________________________________________________ Hi Mike, I saw your comments on the Market Monitor and really appreciate your writing and attitude towards trading. You must really enjoy life as CPTI chief. Your strategies are very interesting. The idea of low maintenance is very appealing. I find that I have less and less time to follow closely (hours/day) the markets and swing trades. I've recently become interested in spreads as a more conservative approach, although I have yet to really get my feet wet. Do you have any other strategies left under your sleeve that you can share with us? Can you elaborate more on spread related techniques? Response: Actually, almost all the strategies that we've discussed are considered "spread" strategies. Options are a wonderful tool. There are strategies for almost every scenario. We've covered most of the best ones. Look back in the OI archives under "Traders Corner" in the “Education” category. That's where you'll find previous CPTI articles dating back to July 2002. They’re under my byline. I'm in the process of going back over, and re-discussing, the best strategies and including checklists that will help in assessing the validity of using certain strategies at various times. If you need any of the checklists, don't hesitate to request them. Or, if any other questions come to mind, please send them along. I will continue to write about spreads, and, hopefully, come up with something new from time to time. _____________________________________________________________ Mike, I am curious what your opinion is of legging into the positions that you recommend in the CPTI. Are there benefits? What are the dangers? Or is it too much like work? Response: There's nothing wrong with legging into positions if you have the ability to direct your order to the appropriate exchange. With Preferred Trade I can see the best bid and ask. When I put in the number of contracts and hit "send," the order is filled usually in less than 5 seconds. Then I do the same thing with the other side of the spread. Unless it's a fast moving stock (or index), the real time prices you see should be available for the 15-20 seconds that it takes to place and fill the two orders. That's why it's best to take control of your trading by using that type of broker. It's one less variable. This, however, is tougher if you are placing orders by phone or through a site where it takes minutes to get a confirmation. A lot can happen to a stock in minutes. Sometimes it's good and other times it's not. The prices I include in my column are based on Friday's closing prices. The best prices are rarely on the same exchange. Also, by Monday, they will vary a little depending on the opening price of the underlying plus two more days of premium erosion. _____________________________________________________________ Hi Mike, Your articles have been great -- instructive and profitable. Thanks for taking the time to share your knowledge. If no one else has pointed this out yet, you might want to check the risk for the January BBH condor. I do a lot of spreads and my take is a risk of $8.50, not $3.50 since we're doing two spreads. Return goes from 42% to 17%. There’s nothing wrong with that for 30 days, but understanding risk I feel is critical. Response: On a condor, you can only be wrong in one direction. In a catastrophic situation, you can only lose the difference between the strike prices ($5,000) less the credit taken in ($1,500) = $3,500. So, $1,500 is a 42% return on a risk of $3,500. Actually, there is a remote chance that a stock could spike so far in one direction that the short option could be assigned and then reverse and spike so far in the other direction that the other short option would be exercised. But there’s a better chance of the UN finding Iraq’s nuclear weapons, so I wouldn’t sweat it. If you can figure out a way to lose more than $3,500 on this condor, be sure to let me know. I can always learn something new. ____________________________________________________________ CPTI PORTFOLIO UPDATE – As Of Thursday’s Close BBH Iron Condor – Currently trading at $88.93. We want BBH to finish the January option cycle anywhere between $80 and $95. We’re still looking good – still in mid-range. XAU Calendar Spread – Currently trading at $79.27 We bought the June $80 call for $7.20 and sold the January $80 call for $2.20. Our debit (or cost basis) is $5.00. We want XAU (Gold & Silver Index) to move up slowly and finish as close as possible to $80. This is a longer term cash flow generating strategy in which we sell against the June $80 call as many times as we can. It’s a neutral to bullish strategy on gold. Gold is moving up, perhaps a little too rapidly. We’ll keep an eye on it. QQQ ITM Strangle – Currently trading at $25.28. This is another long-term position to generate a monthly cash flow. We own the January 2005 $21 LEAPS call and the January 2005 $29 LEAPS puts. We’ve sold the February $29 calls and February $21 puts. Now, it’s just a matter of being patient. ____________________________________________________________ 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 ************************************************************** 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 ************** Reversals: “Key” versus other short-term reversal patterns By Leigh Stevens lstevens@OptionInvestor.com Some reversal patterns are formed in only 1-2 sessions of whatever time duration (e.g., hourly, daily, weekly) being watched and you may hear the term “key” upside or downside reversals used for these situations. Sometimes a price spike, where the high or low is noticeably above or below the close, warns of a trend reversal. Certain candlestick patterns that form in one session are anticipated to mark a trend reversal; e.g., the “hanging man” or “hammer”. At the opposite extreme are patterns that form over an extended duration such as are described in technical analysis as “broadening” tops or bottoms. I will use this Trader’s Corner to talk about key reversals and some other types of short-term reversals as would be seen on bar charts; i.e., a bar measures the High, Low and Close (HLC) and often the Open as well (OHLC charts). What may be the “strongest” short-term trend reversal pattern and which is sometimes the start of a significant change or turnaround in the dominant trend, is contained in the formation of what are called 1 and 2-day key reversals. What has to happen to fulfill the conditions that are part of short-term reversal patterns? And, I might add, the definitions of a key reversal is typically only loosely defined in technical analysis. The following is the definition for what is usually called a reversal up day or reversal down day and also sometimes called a “’key’ reversal up” or “’key’ reversal down” day: 1. Reversal up day – a day where there is a lower intraday low than the prior day, followed by a close above the prior day’s CLOSE. Such days are fairly common and I resist calling this set of conditions, a “key” reversal – actually there is no agreed upon “textbook” definition of what exactly makes a reversal a “key” reversal. I learned it one way, others another way. 2. Reversal down day – a day where there is higher high than the prior day, followed by close that is below the prior day’s close. There is a limitation to also adding the descriptive term “key” to this concept of a downside reversal as its too “common” an event. What I consider to be a more significant event is where the reversal conditions are more restrictive. What makes a reversal closer to a KEY reversal event, either up or down, is a different definition: 1. Upside “key reversal” day (or week, if the weekly range is used) – a day where there is a lower intraday low than the prior day or past 2 days – this is the same as the above “reversal up” definition - AND the close is above the high of the prior day (a “1-day key reversal” up) or, of the prior 2-days (a “2-day key reversal” up). 2. Downside key reversal day (or week, if the weekly range is used) – a day where there is a higher intraday high than the prior day (same as the above “reversal down” definition) OR prior 2-days AND the close is below the prior day’s LOW (a “1-day key reversal” down) or, of the prior 2-days (a “2-day key reversal” down). The preceding descriptions would also apply to intraday periods where each bar was 15, 30 or 60 minutes, etc. only we would not of course call it a 1/2-DAY “key reversal”; on a 60-min chart, such a reversal would be a key hourly reversal for example. The key reversal term does tend to be applied most often to a daily time frame or daily chart however. My more restrictive definition for a “key” reversal involving not only a move to new high (or low), followed by a reversal that is above (or below) the prior 1-2 bar’s LOW (or HIGH) and not just the prior bar’s close, is for the simple reason that this pattern is a more definitive reversal type pattern generally. This criteria relating to exceeding the prior high or low of the preceding day is similar to an up/down “thrust day” definition – where there is move beyond the prior day’s price range. However, a thrust day definition implies nothing about first making a new high or low, but does mean that the close is also above or well above; or, below or well below the prior day’s high or low. A 2-day key reversal tends to be a stronger “signal” than a 1-day “key” reversal or a simple 1-day upside reversal. The same is true for a 2-week, versus a 1-week, key reversal. To eliminate a tendency to think only in terms of a daily or weekly time period or whatever specific time period is measured, you’ll notice that I often use the non period-specific word “bar” rather than hour, day or week; e.g., a downside key reversal is a move to a new high, followed by a close below the prior bar’s (or 2-bars’) low. To rank reversal criteria a bit more, we can bring in one other aspects relevant to potential trend reversals that occur over 1-2 “bars” (whatever time duration – day, week, etc. -- being measured). Besides the concept of a “spike” high or low followed by an upside or downside reversal, it’s useful to look at whether we are also seeing an ALL-TIME high or low, such as seen in the “simple” 1-day upside reversal in Microsoft’s chart above. The fact that a move to a new low for the move, followed by a close so substantially above the prior close (even though not above the prior bar’s high) AND with the bullish spike in volume or jump in trading activity, makes for a “stronger” signal so to speak – than if it was simply a move to a new low (e.g., for the past 1-5 days), followed by a move to above the prior close and without much jump in trading volume. This aspect of whether there is a new all-time high or low or a new high or low for the intermediate-term move or trend that has been ongoing, can help define a type of “ranking” scheme useful for determining the “degree” of likelihood that reversals also mark FINAL tops or bottoms of a secondary or primary trend; e.g., such as one taking the form of a “V” bottom or top. Repeated examples of types of reversals or I should say differing characteristics of the reversals seen on bar charts will help give you a feeling about what potential short-term reversal patterns look like. To this end I pull in some examples from my book (Essential Technical Analysis) and list some different possible aspects to short-term reversal patterns. Trends tend to end in similar ways and the types of short-term reversal patterns demonstrated are useful alerts for that possibility. HIGHEST PROBABILITY FOR A REVERSAL (#1): DOWNSIDE – A key reversal where prices go to a new SUBSTANTIALLY above the prior bar’s high (a “spike”) and this high is either an ALL-TIME new high or a new high for the secondary trend, followed by a close that is BELOW the prior 1 or 2-bars’ low. A similar jump in volume would be a good secondary confirmation. UPSIDE - A key upside reversal that first went to a new low substantially below the prior bar’s low (a spike) where this low was also an ALL-TIME new low or a new low for the secondary trend, but which is then followed by a close that was above the prior 1 or 2-bars’ high. A jump in volume helps confirm the turning point. In stocks the chance of hitting a low or high that is truly a record peak or record low is slim – whereas, it is more likely in a futures contract for example. With stocks we are usually looking at new low or new high for the dominant trend; e.g., for the past several weeks or months. We can seek evidence of 1-2 week reversal patterns by use of the longer-term weekly charts. The next two charts demonstrate the pattern described (#1) here. AND ......... HIGH PROBABILITY FOR A REVERSAL (#2): The same as the above conditions where the new high or low in question is both a “spike” and a new ALL-TIME high or low (or, a new high or low within a secondary trend), except the criteria regarding the close is that it is below/above the CLOSE of the prior bar or prior 2 bars – not the low or high of the prior bar. The next two charts from a prior period – what, Apple at $70! – illustrate the pattern described (#2) – AND ......... A SUBSTANTIAL PROBABILITY FOR A REVERSAL (#3): A spike to a new all-time high or a new high in ongoing or the intermediate trend, followed by a close that is nearer the low of that bar than to the high OR a spike to new all-time low or new low in the secondary trend, followed by a close nearer the high of the bar than to the low. The following two historical charts below are examples of this pattern (#3) – AND ......... A GOOD PROBABILITY FOR A REVERSAL (#4): The last type of short-term reversal pattern is where a new high or low is made and this price is substantially above or below the bar that preceded it (i.e., it’s a price “spike”) – but this new high or low is NOT a new high or low for the move, but the close of the bar is below the prior close or prior 2 consecutive closes. There are more examples of market reversals seen with this set of criteria, especially at bottoms, than the first 3 cases described. Tops are more likely to see both a spike up and a resulting new high that is an all-time peak – this due to the emotional excesses of major price peaks made after a bull market is mature. Bottoms will see downward spikes, but a new low is less likely to be a new all-time low. The next 2 charts are examples of the facets described in this set of conditions (#4) – AND ........ And last but not least – LOWEST PROBABILITY FOR A SHORT-TERM REVERSAL AS A START OF A REVERSAL TO THE DOMINENT TREND: A new high is followed by a close below the prior day’s close or a new low is followed by a close above the prior day’s close. This pattern is the simple reversal up or reversal down day or week but does not constitute a “key” 1 or 2-bar reversals according to the criteria I have suggested. This pattern occurs fairly frequently as can be seen in our last charts but is correlated with a significant top or bottom only infrequently as can be determined from these chart examples which are typical. I can set up my TradeStation application to “show me” (such as by marking a large dot on the bottom of the bar) all the times that the above described reversal situation happens on any given chart – AND ......... I hope that all the sample charts will give you the flavor and feeling for what is likely to constitute a trend reversal. Getting in early in a trend is the “position” that you want to be in, especially if you trade stock or index options. Timing is, as they say, EVERYTHING! ************** FUTURES CORNER ************** Matter of Importance By John Seckinger jseckinger@OptionInvestor.com With all the possible trading tools, it is time to rank the ones that I believe should be watched most closely. I have made it fairly well known that the Dow, to me, holds a great influence when trading futures, especially the YM contract. Watching the Dow for guidance and then trading the YM contract for leverage makes a lot of sense. Note: The below patterns can also be performed on the SPX, NDX, NQ or ES contract; however, it is very nice that the Dow doesn’t leave a gap and provides a clear candle during the first five minutes of trading (since I use this for short-term pattern recognition). Let us start with a weekly chart of the Dow and work our way towards shorter time frames. The very first thing I do is look for either a “b” (long liquidation pattern) or “P” (short covering pattern) and try to figure out the apex and relative lows and highs. Looking below, there is the chance the Dow is forming a massive “b” formation with an apex at either 8000 or 7500. I see that the there is a popular retracement at 8525 while the middle of the Bollinger Band sits at 8431. Ok, now I can start to get a bias if a few things happen. A close above 8525 gets me a little bullish, while a close under 8431 would be viewed as slightly bearish (note: because it is a moving average, this number will change). If you missed by “From b to P”, here is the link: http://www.OptionInvestor.com/traderscorner/tc_081302_1.asp Chart of Dow Jones Industrial Average, Weekly Seeing the “b” pattern and thinking long liquidation really is the most important, since it allows me to gauge risk and allows for an overall sense of what traders might expect. I believe traders now expect a move back down to 8000 and this should mean some solid short covering on a close back above 8525. Getting to a daily chart, using Bollinger Bands and retracement analysis becomes crucial. Seeing a lot of congestion at current levels is fine for a trader looking to play a range until the dust settles. Based on this chart, I will look for resistance at the 22 DMA (8553) with support most likely holding at the 38.2% area (8338). The 19.1% retracement level can then be pivotal; support if prices above, resistance if prices below. Ok, now we have different levels from a weekly and daily chart. What do we do? Since the weekly overrides the daily, look to take a quarter position if the levels in the weekly chart are taken out. Then use the daily chart as more stop levels or confirmation. If short from a weekly under 8431 and the Dow closes under the 38.2% level of 8338, look to move the trailing stop down near 8338 just in case and add to a current short position. Then, if weekly shows an oversold market, turn to even shorter-term time frames for execution when exiting. Chart of Dow Jones, Daily The next chart to focus on is the 30-minute bar chart. Notice how I try to see everything in either “P” or “b” patterns and try to figure out apexes that will most likely be defended by prior market participants. As seen on the 17th, the Dow formed a “P” pattern and broke lower from near 8583; therefore, I believe shorts will defend this area and try to keep profits. On the other hand, there appears to be a “b” formation on the 19th with an apex at 8446. This level should be protected by longs. For traders looking to tighten levels up, a 30- minute chart works extremely well. Remember to wait until the 30- minute candles closes before jumping to conclusions. When the Dow closed under 8338 on one candle, only to close back above as the next candle ended, thoughts of a bear trap begin to enter one’s minds. It is then the next candle when prices close above 8450 that a trap can be fully seen. Note: Once a relative high and low becomes obvious, start using retracement analysis. Chart of Dow Jones Industrial Average, 30 minute To take things to a more micro level, I look for simple patterns on a five-minute chart. On Monday, December 23rd, the Dow traded in a range during the first five minutes from 8464 to 8510. Remember those two numbers. I then take a 50% retracement of that range and get 8487. Almost as soon as the first five minutes ended, the Dow came back into the 8464-8510 range and traded above the 8487 level. The rule-of-thumb is that once above the 50%, look for a test of 8510 before prices hit 8487 again. When the Dow came back and tested 8487 before hitting 8510, we have a failure. In that case, odds are great that the low during the first five minutes will be hit (8464). This was the case on the 23rd. The next pattern to look for is a break above either 8464 or 8510. I like to use 10-point cushion (8454 or 8520 as confirmation). Once the Dow did rise higher, an objective can be found by doubling the range during the first five minutes – 8556. This should mean that risk going long is starting to increase. So, how can this information be used? Well, if we wait until 8520 to confirm and only have an objective of 8556, maybe it makes sense to wait until a failure (back under 8510)? To answer this, look back at longer-term charts. A weekly had 8525 as good resistance, while a daily used 8553 (22 DMA); therefore, looking at a failure might make sense. If the market does close above 8525, then we can re-evaluate. Chart of Dow Jones Industrial Average, 5-minute Chart of Dow Jones, 5-minute Another way to calculate level is from using pivotal analysis. The below formula can be used on the Dow, YM, SPX, ES, NDX, and NQ for any time frame. In the futures wrap, I use the Daily highs, lows, and closes (all trading sessions included). I strongly encourage traders to do these calculations and use the levels as confirmation when looking at a 30-minute chart. If it matches up with a 30-minute or longer, I give it more weight. The calculation is listed below: Pivot point (P) = (H + L + C) / 3 First resistance level (R1) = (2 * P) – L First support level (S1) = (2 * P) – H Second resistance level (R2) = P + (R1 - S1) Second support level (S2) = P - (R1 - S1) Note: H, L, C are the previous day's high, low and close, respectively: 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 ************************************************************** 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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