The Option Investor Newsletter Tuesday 01-21-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Running Out of Time Futures Markets: The Red Storm Continues Index Trader Wrap: Looking for a "drop" then a "pop" Market Sentiment: Insatiable Weekly Manager Microscope: Top YTD 2003 Performers Updated on the site tonight: Swing Trader Game Plan: Something Stinks Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 01-21-2003 High Low Volume Advance/Decline DJIA 8442.90 -143.80 8623.49 8438.18 1.59 bln 1007/2266 NASDAQ 1364.25 - 11.90 1380.43 1364.25 1.32 bln 1262/2073 S&P 100 450.35 - 7.01 459.68 450.30 Totals 2269/4339 S&P 500 887.62 - 14.16 906.00 887.62 W5000 8400.48 -129.80 8565.12 8400.45 RUS 2000 383.17 - 4.93 389.04 383.08 DJ TRANS 2281.23 - 63.30 2351.83 2279.42 VIX 30.53 + 1.85 31.18 29.22 VXN 43.24 + 0.40 44.78 42.17 Total Volume 3,083M Total UpVol 738M Total DnVol 2,278M 52wk Highs 234 52wk Lows 93 TRIN 2.33 PUT/CALL .53 ************************************************************ Running Out of Time That was the term President Bush used when discussing Saddam in a press conference today but it applies to the markets as well. Earnings are flying at a furious pace but guidance is not. The guidance given is not encouraging and "no guidance" comments due to lack of visibility are just as bad. With the majority of major earnings releases already history the market is running out of time to find a reason to buy. Dow Chart Nasdaq Chart The morning started off so well with Housing Starts soaring to a 16 year high of 1.835 million units. Builders must not believe there is any bubble and they are rushing to complete homes in the spring to capitalize on the current low interest rates. Once those rates start back up it may be a different story. The number one reason for buying a new home now is because interest rates are so cheap according to surveys. Other factors remain very weak as most needs based buying has already been done. Major earnings announcements out this morning included MMM which beat estimates but disappointed investors with guidance that was good but not exciting. They estimated sales would only grow +3% to +7% for the year. That may be good for this economy but not good enough for investors expecting +10% or better gains. The stock gapped open to $127.25 but sold off to $125.50 at the close. Citigroup earned less than expected but still managed to take home +$15.28 billion in 2002. They took charges for loan write offs due to high profile bankruptcies like Enron but still managed to do well. They also forecast double-digit growth for 2003. Sounds like good news but C finished lower on the day. JNJ also beat estimates by a penny but the stock closed down for the day on fears of competition from BSX. This should not be a factor despite BSX grabbing $1.4 billion of the JNJ stent market. The new JNJ stent is expected to reap $3.4 billion in 2003. BSX guided higher at the open and gapped up to $50 but sold off to $44 by the close with a -1.71 loss. They announced they had been given EU approval for their Taxus stent. Sell the news became the direction as this had been expected for a week. Ford reported a smaller 4Q loss and predicted a first quarter profit of 20 cents a share. Ford expects to earn 70 cents for all of 2003 but analysts claim the prediction is based on an "overly rosy" projection of the economy. Ford finished flat for the day. Charles Schwab missed estimates by a penny on revenues that fell -5.9% and produced the second consecutive quarterly loss. Schwab revenue from customer trades fell -14% with average daily trades dropping to 126,700 in Dec 2002 from 159,900 in Dec 2001. Schwab has been raising fees and adding additional charges to previously free services to try and pull out of the dive. The company has cut 10,000 of 26,700 employees in the last year. HDI hit a slick spot when it affirmed guidance today. Analysts had expected them to raise guidance instead. The stock lost nearly -$4 on the news. Could this be a sign of consumer weakness ahead? Very high dollar motorcycles have been available on back order for years and a termination of that trend could be a problem. This was the first time in 16 quarters that HDI did not raise guidance. After the bell today Motorola beat estimates by three cents and said sales of its mobile phones were stronger than expected and margins were also better. Will wonders never cease? Handset shipments were up +27% over the Dec-2001 quarter. MOT was up +35 cents in after hours. Other stocks making news in after hours were RFMD who beat estimates but guided down . CDN also lowered guidance for the first quarter. SANM guided inline to slightly lower. However there were many more companies that beat, affirmed or upgraded guidance tonight. UIS, CFO, VISG, PCLE, PSEM, JDAS, HTCH, OPWV, SGI, OAKT, AV, LM, MXO, CKFR, ELON, MCK, MVSN, PXLW. It would almost seem that the tech sector had miraculously revived and the MOT earnings are going to be the rally cry. Also after the bell tonight the December Semiconductor Book-to- Bill report came in much stronger than expected at .98. This was up from .80 last month. While it is too early to see this as a revival of the semiconductor sector it is encouraging. The orders are about flat with shipments and that could be seen as a stabilization of the sector. Tech bulls are sure to grab on to this like a lifeboat from the Titanic and proclaim salvation from the rooftops. Then again maybe not. The BTB report does not come out until 6:PM ET and many times it is completely overlooked by the major news outlets and therefore by traders as well. It would not take much bullish tech sentiment to rescue the Nasdaq. The index put in a remarkable display of strength and traded in positive territory most of the day. This was no small feat with the Dow doing the Titanic imitation and slipping beneath the 8600 and then 8500 waves. Reviving the Nasdaq would take traders willing to commit money in the face of a four day Dow sell off. Lipper reported today that $10 billion in cash was withdrawn from stock funds in 2002 and the first year with a net withdrawal since 1988. They also reported that $130 billion was deposited into bond funds for the same period. That was also a record. This was repeated numerous times during he day along with the threats about Iraq and the result was all 30 Dow stocks finishing in the red. The continued bad news from Venezuela is also depressing the markets. American companies are closing locations and shutting doors to protect employees from the increasing rioting. Today Bush sent two more aircraft carrier battle groups and 100,000 more troops to the gulf. With the Monday deadline at the UN there is a very good possibility the rhetoric is going to increase. We are setting up for a sentiment tug of war between tech bulls acting on perceived good news tonight and economic bears acting on oil, war and economic fears. The Dow at 8443 is about 100 points away from strong support at 8350. The Nasdaq at 1364 is only a few ticks away from support at 1361. Stronger support is about -30 points below that. While I do not think the economy has changed much in the last week the selling has been too much too fast and I expect a rebound before eventually breaking that 8350/1331 support. I expect any bounce to fail in the 8600/1400 range as the UN deadline gets closer. Traders should realize that the next week could be very volatile and they should only be in the market if they are willing to take the risk. After the 28th the war direction/timing should be known and the market should be done with earnings. Will a new trend begin then? Nobody knows but there will be much less uncertainty in the market place. Until then be cautious traders and be prepared for big swings in prices. The 2.33 TRIN at the close plus the MOT news should be good for a few points at the open but don't expect them to last forever. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** The Red Storm Continues By John Seckinger jseckinger@OptionInvestor.com All three futures contracts continue to sink in a sea of red; however, there are some important areas of support underneath that institutional traders are most likely waiting for. Tuesday, January 21st at 4:15 P.M. Contract Last Net Change High Low Volume Dow Jones 8442.90 -143.50 8623.49 8438.18 YM03H 8432.00 -151.00 8610.00 8413.00 26,077 Nasdaq-100 1008.93 -8.65 1028.32 1008.93 NQ03H 1009.00 -11.00 1029.50 1008.00 249,753 S&P 500 887.62 -14.16 906.00 887.62 ES03H 888.50 -14.50 907.25 886.00 548,159 Contract S2 S1 Pivot R1 R2 Dow Jones 8316.21 8379.55 8501.52 8564.86 8686.83 YM03H 8288.00 8360.00 8485.00 8557.00 8682.00 Nasdaq-100 996.00 1002.46 1015.39 1021.85 1034.78 NQ03H 994.00 1001.50 1015.50 1023.00 1037.00 S&P 500 875.37 881.50 893.75 899.88 912.13 ES03H 872.75 880.50 894.00 901.75 915.25 Weekly Levels Contract S2 S1 Pivot R1 R2 YM03H 8336.00 8459.00 8662.00 8785.00 8988.00 NQ03H 958.25 989.25 1048.75 1079.50 1139.25 ES03H 873.25 888.25 912.50 927.50 951.75 Monthly Levels (December's High, Low, and Close) Contract S2 S1 Pivot R1 R2 YM03H 7726.00 8028.00 8524.00 8826.00 9322.00 NQ03H 861.75 924.25 1041.75 1104.25 1221.75 ES03H 814.75 846.75 900.25 932.50 985.75 YM03H = E-mini Dow $5 futures NQ03H = E-mini NDX 100 futures ES03H = E-mini SP500 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. ================================================================= Jim Brown had another fantastic day in the Futures Monitor. Let us recap his signals: Short 899.25, exit 894.75, gain +5.00 Short 896.50, exit 893.00, gain +3.50 Short 897.00, exit 894.00, gain +3.00 Short 890.75, exit 888.00, gain +2.75 Total for the day = + 14.25 points (Every point equals $50) For more information on Jim's posts for Tuesday, please go to the following link and download the current market monitor. If you already have the most recent version, simply go to the Futures Monitor Post on the upper left hand portion of the applet. http://www.OptionInvestor.com/itrader/marketbuzz/download.asp The March E-mini S&P 500 Contract (ES03H) Using the levels outlined above, let us look for some correlations within the ES contract. Support 2 (S2) for Wednesday comes in at 872.75, while S2 for the WEEK is at 873.25. Therefore, this area should have strong psychological meaning going forward. Note: The last relative low was set on December 31st at 868. I would actually put more weight around the 873 area, but it will depend on how the market is trading at any particular time. On the way down to the 873 area, support should also be seen at 880.50. As far as resistance is concerned, note that the ES contract closed almost exactly on S1 for the WEEK (888.25). If the weekly S1 area is material support and the ES contract rises from current areas, resistance is seen at the 61.8% retracement area taken from the rise seen at the beginning of 2003 (894.25). Note that the 894.25 level is almost exactly the daily pivot for Wednesday. Coincidence? I think not. If the pivot does give way to bulls, more resistance should be felt near 900 (900 is the monthly pivot, while 901.75 is R1 for Wednesday. Moreover, the 902.50 area is 50% of the move higher in January). As always, more aggressive traders can use the retracement levels between S2 and R2. Chart of ES03H, Daily Going to a 15-minute chart of the ES contract, notice that the index did close under the pivot for Wednesday. This means that bears should be somewhat comfortable heading into the night session. As far as the regression channel is concerned (shown below and pretty aggressive), it should continue to work until proved otherwise. For those looking at P&F charts, there is a bullish trend line that comes in at current levels; however, this trend is VERY SHORT in nature. Staying with the P&F chart, there is now Nine O's in a row without a column of X's. This gives a bearish price objective of 840. The last time this pattern existed, there was a column of 10 O's before the contract found a bid. The "10th O" would come in at 885. Just remember, least resistance in P&F is still lower; however, we should begin to watch this more carefully. More important for intermediate traders. Chart of ES Contract, 15-minute Bullish Percent of SPX: 60.40% and still in column of O’s (Recent High at 66%, Low of current column at 58%). On Tuesday, the Bullish Percent fell one percent. The March E-mini Nasdaq 100 Contract (NQ03H) Well, we did experience weakness on Tuesday in the NQ contract; however, this futures contract never fell under the 1000 level as the blue chips came under pressure. Looking at a daily chart, notice how the 38.2% retracement of the move from October to December comes in at 1024.50. This level should be protected by bearish traders, especially since it matches up with R1 for Wednesday. The intermediate objective remains lower at 983, but look for support around the 989.25 to 994 range. Chart of NQ03H, Daily A five-minute chart of the NQ contract shows the retracement area between S2 and R2 for Wednesday, and a strong move lower on the open could test both the 1002 area and the descending trend line (blue). I like how the pivot is at 1015.50, since I can visualize bears getting squeezed once above. Possibly it will act as the catalyst for a move to 1024.50 or perhaps the 1029 area (seen below via red horizontal line). Chart of NQ03H, 5-minute Bullish Percent for NDX: Fell by two percent again on Tuesday to 61% and still in a column of X's (Recent High at 82%, last Significant Low at 14%). A sell signal would be given if 58% is reached. Until that happens, a P&F chart shows risk down to 950 and resistance at current levels. The March Mini-sized Dow Contract (YM03H) The mini-sized Dow contract (YM03H) fell rather aggressively on Tuesday, and the next intermediate support area remains below from 8362 to 8373 (see chart below). The pivot for Wednesday is higher at 8484, but more important resistance lies above from 8600 to 8620. Least resistance has to be lower during the time of this writing, especially with the last period hitting resistance at the 8437 area (resistance for Wednesday). The Bullish Percent for the Dow did not change on Tuesday; however, a P&F figure pattern of the Dow went into a negative pattern as 8550 has hit in the blue chips. The Bearish objective for the Dow, via P&F analysis, is 8000 exactly. Chart of YM03H, 90-minute Bullish Percent of Dow Jones: 60.00% and in column of X’s. A move to 50% would cancel out the recent bullishness. The last significant high comes in at 72%. On Friday, despite the decline, the Bullish Percent remained unchanged. On a normal P&F chart of the Dow, a sell signal would be given at 8550. Good Luck. Questions are welcomed, John Seckinger jseckinger@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** Looking for a "drop" then a "pop" Despite some modest upside earnings reports before the opening bell from Dow components 3M Company (NYSE:MMM) 125.64 -0.53%, Citigroup (NYSE:C) $36.14 -1.79% and Johnson & Johnson (NYSE:JNJ) $53.99 -1.46%, along with stronger than expected December housing starts numbers and building permits, traders returned from a 3-day weekend to sell the Dow Industrials (INDU) 8,442.90 -1.67%, S&P 500 Index (SPX.X) 887.62 -1.57% and S&P 100 Index (OEX.X) 450.35 -1.53% right down to their daily S2 support levels from our pivot analysis. A quick pulse of the Dow Jones Home Construction Index (DJUSHB) 326.63 -0.7%, which can be heavily influenced by the monthly housing starts and building permits was unable to break above its longer-term 200-day SMA of 331.20, which has been serving as resistance in recent weeks. This may bee a good sector away from technology sectors for traders to monitor for any type of prolonged strength above a longer-term moving average. In recent weeks, the group has found components handily beating estimates, but the broader negativity from the major indexes has kept things in check. As it relates to daily pivot analysis, the more tech-heavy NASDAQ-100 Index (NDX.X) 1,008.93 -0.85% and NASDAQ-100 Index Tracking Stock (AMEX:QQQ) 25.03 -1.10% held up rather well until their close, and settled just below their daily S1 levels of support. Trade volume at both the NYSE and NASDAQ were slightly below last week's average volume levels with the NYSE turning 1.31 billion shares, while NASDAQ volume of 1.37 billion shares was light compared to last week's lowest volume session of 1.57 billion shares. Decliners easily outnumbered advancers by a 2:1 margin at the NYSE, but traders still managed to get 100 stocks on the big board to trade a new 52-week high compared to just 32 stocks hitting fresh 52-week lows. This indicator for the NYSE has the look of "anchoring" near the 100 new highs level, while slight growth in new lows has the "rubber band" slowly stretching to the downside. This type of breadth shows some remaining type of leadership trying to take hold, while weaker stocks that may have seen some early January benefit from lack of tax-loss selling begin resuming longer-term trend from last year. NASDAQ breadth was not as negative as NYSE, but decliners still outnumbered by a 5 to 3 margin with 89 stocks trading a new 52- week high compared to a growing 43 stocks hitting new lows. A quick comparison to last week had the NASDAQ's best 52-week high total coming on Monday (100 stocks achieving a new 52-week high), while Friday's new lows total of 31 grew to the downside today. Here's a quick look at tomorrow's daily pivot analysis and levels. Again, the daily section has been adjusted for today's high, low and closes, while the weekly levels are based off of last week's high, low and close and the monthly are left at December's high, low and close. In this weekend's "Ask the Analyst" column, I noted some correlation at various levels in the Dow, SPX and OEX. After today's calculations for the daily, we once again see correlative resistance at SPX 912 and OEX 463 on daily and weekly basis, but correlative support after today's action only shows up at SPX 875 and OEX 444. Pivot Analysis Matrix Correlations that hold over to tomorrow between the weekly and daily levels are now only found between the SPX and OEX. Levels of resistance are the same as found in this weekend's "Ask the Analyst" column at SPX =912 and OEX = 463 and these are levels of resistance that I'm beginning to feel become more formidable this week. My observation of tomorrow potentially seeing a "drop, then a pop" is that today's close below SPX 890, which was today's S2 level carries some bearishness into tomorrow's trade, but the major indexes are looking short-term oversold and a decline in the first half of trading to SPX 875 and OEX 444 should see some type of short covering take place, with bearish traders looking to sell a rally back near this week's Pivot levels. I'm also keeping a close eye on the bullish % charts and readings there. The narrow and more volatile NASDAQ-100 Bullish % ($BPNDX) saw a net loss of 2 stocks to reversing point and figure sell signals as the bullish % declines to 61% and now just 1% away from reversing back lower into "bull correction" status. The also narrow S&P 100 Bullish % ($BPOEX) saw now net change today and remains "bull confirmed" at 61% and at this point, not close to the 54% reversal reading to turn back lower to "bull correction" status. S&P 500 Index Chart - Daily Interval The SPX closed below bar chart support trend of 890 and what was today's S2 support from pivot analysis (note anchor point of trend was from low, NOT closing low). This sets the stage for a test of weekly S2 and tomorrow's S2 of pivot analysis support of 875-876. One technical note and word of near-term caution for bears is that the $5-box scale of the SPX p/f chart has bullish support trend at 885. While this bullish support trend is "young," understand that it is nearby. Bearish traders should be able to protect current gains with a stop above the 889.75 from the above retracement, or tomorrow's daily pivot of 894. Those able to watch things on an hourly basis should be able to use some of the retracement techniques we've been using in the market monitor to fine tune things during market hours. Today's action saw a net loss of 4 stocks to reversing point and figure sell signals and has the S&P 500 Bullish % ($BPSPX) slipping to 61.12% bullish and still "bear alert" status. It would currently take a reading of 64% to reverse higher into "bull confirmed" status, which I would associate with the SPX above 935. The recent high reading for the SPX bullish % was 68% in early December. January's high bullish % reading has been 62.8%, from last Monday. S&P 100 Index Chart - Daily Interval In past commentary, we've discussed "conservative" trend, whereby the technician anchors trend at a relative high or low CLOSE and not the extreme intra-day low or high (for downward trend) that was traded. In the SPX chart, I anchored at the extreme low, but in the above OEX chart I anchored at the closing low, and attached to the recent relative low. This gives a bearish trader the observation that current upward trend on the bar chart has not been violated and perhaps keeps a bearish trader from getting overly aggressive to the downside. This may not be a bad idea with the S&P 100 Bullish % ($BPOEX) unchanged for a third straight session. The downward action in the OEX chart itself with little change in the bullish % for a third straight session tells us that damage or weakness is being seen in some of the HEAVIER WEIGHTED components, but not necessarily to the internals themselves where reversing p/f chart sell signals would be generated. Dow Industrials Chart - Daily Interval I view today's close below "conservative" trend and the correlative levels of support from this weekends "pivot analysis matrix" of 8,477 and 8,474 from daily and weekly support levels as a negative. Tomorrow's daily S1 of 8,532 should serve resistance, with daily pivot of 8,614 along with both the 21-day and 50-day SMA's being formidable resistance. As "crazy" at is seems that the Dow can trade the range of the Bollinger bands, that sure seems to be the range found in the past month and I'd be looking for support in the Dow from lower Bollinger of 8,232 and weekly S2 of 8,361. NASDAQ-100 Index Chart - Daily Interval The NASDAQ-100 Index Tracking stock (QQQ) trades just above our fitted retracement's 50% level of $25.00. Tonight's after-hours trade below that level and rather quick recovery back to $25.08 is suspicious. I "hate" trading the QQQ in after-hours and is a good time to get sucked into trades that aren't really there. I've noted in the above chart how our "fitted" retracement level of $23.82 lines up with the weekly S2 pivot analysis of $23.82 and may well be a weekly bearish target. If the QQQ breaks below this evening's after-hours low of $24.97, I like the QQQ as a bearish trade tomorrow with a target of $23.86. Note today's low of $25.02, just 2-cents above the $25.00 level of retracement. We've discussed this type of "garbage trade" in the past where a market maker will bid/off the QQQ just above or below these retracement levels. We will note that the NASDAQ-100 Bullish % ($BPNDX) is just 1 net loss of a point/figure sell signal to reversing back into "bull correction" status and I would correlate that with a break below $25. Should we see further deterioration in the bullish % to a "bear confirmed" status at 58%, then I think the QQQ has downside to $23.82 and $21.91 if the Bullish % were to reach levels below 30%. Jeff Bailey ------------------------- Advertisement ------------------------- WINNER of Forbes Best of the Web Award • optionsXpress voted Favorite Options Site by Forbes • Easy screens for spreads, collars, or covered calls • Free streaming quotes • Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oinvest21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ----------------------------------------------------------------- **************** MARKET SENTIMENT **************** Insatiable by Steven Price That sentiment change I talked about last week has so far continued through earnings season. Positive results have been met with selling, as investors take a "that's all" approach. It is no coincidence that we reached a top around Dow 8800, which was strong resistance over the last several months. We did tick over that level on a closing basis for a day, but it appears that it was nothing but an ideal shorting opportunity. We got upside earnings surprises from three Dow components this morning: Citigroup, 3M and Johnson and Johnson, as well as Ford, which is not a Dow component, but is still one of the NYSE's largest stocks. None of the results were enough to boost the markets. We did get a brief run in the morning, but that run eventually sold off to levels not seen since the beginning of the January rally. On top of the positive earnings results, we also got housing data that indicated the housing market remains strong. New home construction continued its upward trend, reaching a 16-year high in December. Building permits for single-family homes also set a record. New starts rose 5% to an annual rate of 1.8 million, while single family starts rose a similar amount to 1.47 million, the most in 24 years. The numbers certainly sound impressive, however, the Dow Jones Home Construction Index (DJUSHB) showed a very lukewarm reaction, losing 2.31 points on the day. That reaction would seem to mirror the results of an informal survey I took among our readers. After seeing home prices drop in what is considered one of the hotter markets in the Denver area, I asked readers to email in their observations of what they saw around them. While there were several readers that reported strong sales and firm prices, the overwhelming majority reported homes that took longer to sale and a lack of appreciation in value over the last several months. The responses came from just about every part of the country, including Northeast, West Coast, Midwest, Southwest, Southeast and South. The strongest sales were in central California and New York, while everyone else expressed concerns. The point and figure charts are confirming what we are seeing across the daily charts. We got PnF sell signals last week in the SPX (905) and OEX (457.50), which were confirmed with a sell signal in the Dow (8550) today. Bears should beware, however, of adding to short positions at this level. In fact, the Dow and SPX have fallen so far (currently 8442 and 887.62) that they are now sitting right on bullish support lines, which sit at Dow 8400 and SPX 885. If we are going to get an oversold bounce, these are the levels it is likely to come from. The one sector that did not participate in today's sell-off was the tech sector. The Nasdaq Composite and NDX both spent much of the day in the green after Friday's big drop. However, after an intraday rebound of 10 points in the COMP, the techs eventually rolled over into the red, registering a loss of 12 points in the COMP and 8.65 in the NDX. While it was not a big percentage loss and much less than the Dow, the fact that the bounce could not hold after a drop of almost 50 points on Friday spells more bearishness in the near future. Even IBM could not hold a bounce after losing almost $5 on Friday and ended in the red by $0.76. While IBM is not a Nasdaq stock, it does reflect general sentiment for the tech sector and right now that sentiment is anything but positive. The Market Volatility Index (VIX) seems to have been a reliable indicator, recently bottoming out at 26. A drop in the VIX usually results from a rally in the equities and vice-versa. That 26 level is the same support reached in late November, just before the December swoon, indicating the end of that rally. The drop to 26 seemed to indicate the rally rubber band had stretched to its full length again last week and has now begun to pull back decisively. The recent resistance comes at 35 and with a current reading of 30.53, and the VIX on the way up, the indication is that the sell-off has some room to run. The 30 level had provided support on recent drops, but downside fear took over and there were no apparent premium sellers there today to replace support with resistance. The true test now that we broke back above 30 is to look for support there if we get a market bounce tomorrow. With the broad market indices sitting at bullish support, following a drop of 400 Dow points and 44 SPX points, traders can look for some type of bounce. However, given the recent market reaction to positive news, the most prudent action may be shorting the bounce if it runs out of steam around previous resistance levels. Look for resistance in the SPX at 900/905/910, in the Dow at 8550/8600/8700, and in the COMP at 1400/1426. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 8443 Moving Averages: (Simple) 10-dma: 8731 50-dma: 8598 200-dma: 8696 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 887 Moving Averages: (Simple) 10-dma: 916 50-dma: 906 200-dma: 943 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 1008 Moving Averages: (Simple) 10-dma: 1061 50-dma: 1047 200-dma: 1052 ----------------------------------------------------------------- The Dow Jones Home Construction Index (DJUSHB The home-builders got some good news this morning, with housing starts setting multi-year highs. Single-family home permits reached their highest levels in more than twenty years. However, with the economy still weak, investors are growing weary of these stocks and a market that seems to be looking a little "toppy." After an impressive gain over the last few weeks, as well as a breakout over resistance at 330 on Thursday, the news was not enough to prevent losses in the sector. Certainly, part of the problem was a sinking broader market that brought down all boats, but the DJUSHB is approaching additional significant resistance at 340 and traders should be careful about getting too excited over the results. 52-week High: 397 52-week Low : 260 Current : 328 Moving Averages: (Simple) 21-dma: 318 50-dma: 308 200-dma: 331 ----------------------------------------------------------------- Market Volatility The VIX bounce from support at 26 was one of the more reliable indicators that the market was ready to rollover. With a move over resistance at 30, and the next level of resistance at 35, we could still have another leg down in the equities if history repeats itself. Traders looking for an edge in predicting the VIX can look at the exp. 100-dma, which has capped the last 5 VIX rallies and sits at 32.83. I suggested long straddles a week ago for traders looking to get in at the VIX support level, with the market up against resistance at 8800. Those straddles should have performed nicely by now, with a 400-point Dow sell-off and the VIX back over 30. Traders who are long both calls and puts from that suggestion may want to think about either selling the position, or buying long shares of the underlying product (DIA or SPY) on a 1 for 1 basis against the long puts, in order to lock in some profits ahead of a market bounce. CBOE Market Volatility Index (VIX) = 30.53 +1.85 Nasdaq-100 Volatility Index (VXN) = 43.24 +0.40 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.53 707,333 375,386 Equity Only 0.43 610,583 261,619 OEX 0.71 17,188 12,180 QQQ 1.18 22,178 26,183 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 52.2 + 0 Bull Confirmed NASDAQ-100 61.0 - 2 Bull Confirmed Dow Indust. 60.0 + 0 Bull Confirmed S&P 500 61.1 + 0 Bull Correction S&P 100 61.0 + 0 Bull Confirmed 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 1.65 10-Day Arms Index 1.30 21-Day Arms Index 1.36 55-Day Arms Index 1.28 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 835 2057 NASDAQ 1163 2008 New Highs New Lows NYSE 85 36 NASDAQ 74 35 Volume (in millions) NYSE 1,564 NASDAQ 1,343 ----------------------------------------------------------------- Commitments Of Traders Report: 01/14/02 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 left positions mostly unchanged with a small reduction to the short side. Small traders reduced the long side by 1,000 contracts, while adding 9,000 contracts to the short side. Commercials Long Short Net % Of OI 12/23/02 408,592 467,259 (58,667) (6.7%) 12/31/02 410,968 462,782 (51,814) (5.9%) 01/07/03 411,542 455,538 (43,996) (5.1%) 01/14/03 411,052 453,164 (42,112) (4.9%) 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 12/23/02 138,756 58,236 80,520 40.9% 12/31/02 139,383 75,640 63,743 30.0% 01/07/03 143,169 83,895 59,274 26.1% 01/14/03 144,182 92,358 51,824 21.9% 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 added slightly to the long side, while reducing short positions by 3,000 contracts. Small traders added 1,000 to the long side and left shorts virtually unchanged. Commercials Long Short Net % of OI 12/23/02 32,067 44,451 (12,384) (16.2%) 12/31/02 31,399 44,387 (12,988) (17.1%) 01/07/03 37,966 48,156 (10,190) (11.8%) 01/14/03 38,057 45,060 ( 7,003) ( 8.4%) 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 12/23/02 17,009 5,865 11,144 49.0% 12/31/02 19,841 5,009 14,832 60.1% 01/07/03 19,708 8,453 11,255 40.1% 01/14/03 20,757 8,320 12,437 42.8% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 14,832 - 12/31/02 DOW JONES INDUSTRIAL Commercials added slightly to both sides, with a net 500 contract ncrease on the long side. Small traders reduced long and short positions slightly. Commercials Long Short Net % of OI 12/23/02 14,991 11,103 3,888 14.9% 12/31/02 15,940 11,253 4,687 17.2% 01/07/03 16,210 11,333 4,877 17.7% 01/14/03 17,804 12,427 5,377 17.8% 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 12/23/02 4,584 6,296 (1,712) (15.7%) 12/31/02 4,997 6,553 (1,556) (13.5%) 01/07/03 4,963 8,334 (3,371) (25.4%) 01/14/03 4,552 7,697 (3,145) (25.7%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ------------------------- Advertisement ------------------------- VOTED one of "Best Online Brokers" (4 stars)--Barron's • optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's • 8 different online tools for options pricing, strategy, and charting • Access to options specialists via email, phone or live chat online • Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oinvest22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ----------------------------------------------------------------- ****************** WEEKLY FUND SCREEN ****************** Top YTD 2003 Performers About a dozen mutual funds are up 10 percent or more in 2003, but are any of them worth considering for investment? This week, our report will go in search of the answer, using online screen tools from Morningstar, Lipper and other mutual fund trackers. A look at these top dozen YTD performers offers some interesting mutual funds to consider, mostly tech-related. We'll compare the funds based on return, risk and cost, as well as other factors, to see which ones we'd pick if we had to choose from among them. We began our search process by screening all mutual funds for YTD 2003 performance, and then ranking them. Twelve funds have year- to-date total returns of 10 percent or higher through January 17, 2003, as follows: +42.9% American Heritage Fund (AHERX) +18.1% Bhirud Funds: Apex Mid Cap Growth Fund (BMCGX) +12.7% New York Equity Fund (NYSAX) +11.9% Van Wagoner Post-Venture Fund (VWPVX) +11.8% Van Wagoner Emerging Growth Fund (VWEGX) +11.6% Van Wagoner Technology Fund (VWTKX) +11.2% ProFunds Internet UltraSector Fund (INPIX) +10.7% ProFunds Wireless Communications UltraSector Fund (WCPIX) +10.3% Fifth Third Technology Fund A Class (FTTAX) +10.1% GenomicsFund (GENEX) +10.1% RS Information Age Fund (RSIFX) +10.0% Jacob Internet Fund (JAMFX) As you can see, most of them are technology-related mutual funds, or emerging growth-oriented funds, which often invest heavily in technology. In spite of last week's slide, technology funds are up 3.8 percent on average in 2003, according to Lipper, the best performing fund category since December 31. That compares to an increase of 2.5 percent for the broad S&P 500 index. So, the 12 funds on our list have all outperformed the broad market as well as other mutual funds by a wide margin thus far in 2003. In the following sections we'll compare these funds on the basis of return, risk, portfolio characteristics, and cost and expense, using Morningstar's Fund Compare tool (www.morningstar.com). Performance View From the numbers above you can see that American Heritage Fund's 42.9 percent return this year is by far the highest return among mutual funds. But, before you get too excited, realize that the fund has nearly all its eggs in one basket - that being, Senetek ADR (SNTK) which recently comprised nearly 89 percent of assets. Shares of the U.K. healthcare company are up 18.2 percent so far this year; hence, the fund's fine YTD performance. However, the fund's long-term record is poor on both an absolute and relative basis. As a result, fund has only about a million dollars today in net assets, and a whopping 12.61% expense ratio along with it. Jacob Internet Fund has had an interesting ride since it started operations on December 13, 1999. The fund came on board just in time to lose 79 percent in 2000 and 56 percent in 2001, but last year limited its annual loss to just 13 percent, and now in 2003 is up 10 percent. According to Morningstar's report, Ryan Jacob has become a "bottom-fisher" for stocks, but he still churns the portfolio. At 1081 percent, the fund's turnover is high, adding to fund expense. The fund's 4.60% current expense ratio is more than twice the tech-fund category average. Fifth Third Technology Fund has done a decent job of controlling its losses over the past year relative to other technology funds, and is up 10.3 percent since December 31. Nearly all assets are invested in hardware or software stocks per Morningstar's latest report, for a mid-cap growth style overall. Note, however, that this fund does not sport a 3-year or 5-year record, so it's hard to know how it may perform over the long term. So far, the fund has done relatively well versus peers in an otherwise tough time. The other fund worth mentioning in terms of performance is the RS Information Age Fund, which got a new management team in 2001 and has performed relatively well since that time compared with other tech sector funds. The fund is up 28 percent over the past three months, including a 10.1 percent YTD return. The fund's trailing 5-year return of 0.5 percent through January 17, 2003 ranks it in the top 29 percent of the tech fund group, per Morningstar. Some of that is attributable to the new management team. Risk View Of the eight funds on the list with Morningstar risk ratings, one has average risk, two have above average risk, and five have high risk ratings compared to their respective peer groups. The other four funds are not yet rated by Morningstar. Of the rated funds, RS Information Age Fund has exhibited average risk compared with other technology sector funds. Jacob Internet Fund has had above average risk compared to its tech sector peers while New York Equity Fund has had above average risk relative to its mid-cap growth peers. The five funds with high relative risk include American Heritage Fund, Apex Mid Cap Growth Fund, and the three Van Wagoner funds. All three Van Wagoner funds are similarly managed; hence the risk levels are comparably high. The average standard deviations over the past three years for all three Van Wagoner funds are above 50 percent, ranking them among the most volatile funds in the equity fund class. That more than twice the 20 percent average standard deviation for all mutual funds in Morningstar's system. American Heritage Fund, up nearly 43 percent in 2003, has an eye- popping 87.8 percent standard deviation over the past three years using Morningstar numbers. The 3-year chart below shows how weak the fund's performance has been and looks more like a penny stock than a stock mutual fund. The least volatile funds on our list over the past three years have been the New York Equity Fund and RS Information Age Fund, with standard deviations of 36.8% and 37.5%, respectively, per Morningstar. So, if you're looking not to take excessive risk, then you may want to focus on these two offerings. Portfolio View In terms of portfolio characteristics, two funds with a current blend style are New York Equity Fund and ProFunds Ultra Wireless Fund. I tend to favor funds with core styles because they blend value and growth characteristics, helping to smooth returns over time (since "value" and "growth" outperform at different times). New York Equity Fund has a $4 billion average market cap, which lands it in the mid-cap sector per Morningstar. This portfolio mingles mega-cap stocks with micro-cap names so it goes wherever it can to find growth stocks at attractive prices. Although the fund currently lands in Morningstar's mid-blend style box, it is rated against mid-cap growth funds, its average style during the last three years. ProFunds Ultra Wireless Fund has a $15 billion median market cap and currently lands in the Morningstar large-cap blend style box. This communications sector fund is highly concentrated, however, investing in just 11 telecom stocks. Top fund holdings include Alltel (27.2% of assets), AT&T Wireless (18.9% of assets), and Nextel Communications (13.7% of assets). All of the funds have a yield of 0.00% according to Morningstar. In other words, income isn't a consideration in stock selection. Nuts & Bolts View Except for the two ProFunds funds, all of the funds on our list are managed by individual portfolio managers. Heiko Thieme has run American Heritage Fund for 13 years while Suresh Bhirud has run the Apex Mid Cap Growth Fund for 10 years now. Garrett Von Wagon has managed Van Wagoner Emerging Growth Fund for the past seven years; Gregg Kidd has six years with New York Equity Fund. The rest of the managers have tenures of three years or less per Morningstar. Three funds on the list - Apex Mid Cap Growth Fund, Fifth Third Technology Fund and New York Equity Fund - have front-end sales loads of between 4.50 percent and 5.75 percent. The others are no-load. Fund expense ratios range from a low of 1.67% for the RS Information Age Fund to a ultra high 12.61% for the American Heritage Fund. Five funds have what we would say are reasonable expense ratios of below 2.00% of assets. They include the GenomicsFund, the RS Information Age Fund, and the three Van Wagoner funds. Conclusion If we had to pick a couple funds from this group, it would have to be the New York Equity Fund managed by Gregg Kidd and the RS Information Age Fund, which has done better since getting a new management team in mid-2001. If you're looking for exposure to hardware and software stocks, Kidd has nearly all of the fund's assets invested in the two industry sectors. The new Robertson Stephens (RS) team favors smaller-cap names, and keeps the fund more diversified across issues, according to Morningstar's fund report. Both funds have maintained reasonable risk levels when compared to similar funds, and have the lowest standard deviations among the funds on our list. If avoiding excessive risk is important to you, then these funds may be better suited but remember that they are still much more volatile than the average stock mutual fund. Accordingly, these funds are for risk-tolerant investors only who seek the greater return potential that generally comes with assuming greater risk. Taking risk does not guarantee high return. Riskier strategies usually deliver on the risk (volatility), but don't necessarily deliver on the "higher return" part, so buyer beware, as always. For more information on the New York Equity Fund, go to the New York Opportunity Funds website at www.nysfunds.com. Additional information on the RS Information Age Fund is located at the RS Investments website at www.rsfunds.com. Steve Wagner Editor, Mutual Investor firstname.lastname@example.org ------------------------- Advertisement ------------------------- We got trailing stops! • Trade online with trailing stops at optionsXpress, at no extra cost • Trailing stops based on the option price or the stock price • Also place Contingent, Stop Loss, and "One Cancels Other" orders • $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oinvest23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ----------------------------------------------------------------- *********************** SWING TRADER GAME PLANS *********************** Something Stinks Once again, we got decent news about the fourth quarter that investors turned their noses up at, wondering instead what's to come in 2003. Actually, held their noses is a more accurate depiction, as the sell-off continued en masse today in the broader market indices. 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. 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The Option Investor Newsletter Tuesday 01-21-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: None Dropped Puts: None Daily Results Call Play Updates: CI, RJR, OCR New Calls Plays: None Put Play Updates: ERTS, CTAS, ASD, CTSH, KSS New Put Plays: GS **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** None PUTS: ***** None *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu Week CI 45.17 0.00 -1.06 Support over $45 OCR 25.96 0.00 -0.34 Minor Pullback RJR 46.55 0.00 -0.38 Holding the breakout PUTS ASD 66.22 0.00 -0.80 Still breaking down CTSH 59.17 0.00 -0.97 Trigger point ERTS 49.67 0.00 1.72 $50 failure entry point GS 71.00 0.00 -1.58 New, Try it again KSS 54.30 0.00 -2.30 Big start CTAS 42.63 0.00 -0.63 Approaching target ------------------------- Advertisement ------------------------- Quit paying fees for limit orders or minimum equity • No hidden fees for limit orders or balances • $1.50 /contract (10+ contracts) or $14.95 minimum. • Zero minimum deposit required to open an account • Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oinvest24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ----------------------------------------------------------------- ******************** PLAY UPDATES - CALLS ******************** CI - 45.17: -1.06 (-1.06 for the week) Shareholders of CI came back from the extended weekend in a decidedly bearish mood. The stock moved sharply lower during the first 90 minutes of trading and quickly tested short-term support near $42.30. There was no company-specific news to explain the early weakness. CI firmed up after the initial decline and headed higher during the middle of the session, despite a steady drift lower in the Dow Jones. Unfortunately the sinking broader market eventually eroded away at the mid-day gains, ultimately dragging the stock to a 2.2% loss. Pulling back to a daily chart, $45.00 continues to be the key level to watch. We'll be looking for this area, which previously acted as resistance, to now provide support. We think CI will be well-positioned to reach new relative highs as long as it remains above $45.00. At this time conservative traders may want to place their stops slightly below last week's low of $44.13. We are raising our stop to $42.40, just below the last resistance breakout prior to $45. Speculative traders could consider entering long positions on a rally from current levels. --- RJR - 46.55: -0.38 (-0.38 for the week) First things first...On Friday we mentioned that RJR appeared to have moved their earnings to January 28th. This information was confirmed today - RJ Reynolds will announce their quarterly results before the market opens next Tuesday. We believe this is good news for our long play. RJR has been marching steadily higher, and with another week before earnings we may have a better shot at achieving our upside objective of $49.94. Shares traced a higher high for the seventh consecutive session on Tuesday morning before moving lower with the overall market in late-afternoon trading. Bulls can be encouraged by the fact that RJR outperformed both the Dow Jones and its arch-enemy MO, which finished with a more substantial 1.4% loss. Shares closed above very short-term support at $46.15, well within range of new multi-month highs. Of course after several days of gains it also wouldn't be surprising to see more profit-takers come out of the woodwork. If this is the case, short-term traders can continue to watch for a pullback to the $45.00 area to provide an entry point. --- OCR $25.96 -0.34 (-0.34) After pushing to new multi-month highs last week, OCR was due for a bit of profit taking, and given the broad market weakness on Tuesday, the stock held up fairly well, ending just fractionally below the $26 level. The 10-dma ($25.31) has been providing support throughout the rise since late December, and should continue to do so if this rally is to continue. The only fly in the ointment is the fact that Tuesday's mild price decline was accompanied by heavy volume (triple the ADV), which is on par with the strong buying that propelled the stock up to new recent highs last week. That 10-dma lines up nicely with intraday support at $25.30, backed up by stronger support at $25 (also the site of the rising month-long trendline. Look for a rebound from that area to provide the next solid entry point into the play, but make sure to keep an eye on the volume pattern. If this is just a normal pullback before another push higher, then volume should taper off as we approach support, followed by expanding volume on the rebound. A failure of volume to confirm any rebound will be an early warning that the heavy volume last Thursday and then again today represents an end to the bullish move. More conservative traders may want to wait for a volume-backed move through $26.75 (just above last week's intraday highs) before playing. Keep stops tight at $25. ************** NEW CALL PLAYS ************** None ------------------------- Advertisement ------------------------- optionsXpress has "...a lot of bang for the buck."--Barron's • $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees • Easy screens for spreads, collars, or covered calls! • Contingent, Stop Loss, Trailing stop, or OCO • 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oinvest25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ----------------------------------------------------------------- ******************* PLAY UPDATES - PUTS ******************* ERTS 49.67 +1.72 (+1.72 for the week) Just as ERTS looked ready to sink to fresh 52-week lows, a pair of positive brokerage comments gave the bulls a lifeline this morning. Shares were buoyed by an upgrade from Piper Jaffray (who cited a 7% increase in December videogame sales) and a note out of Lehman Brothers that suggested ERTS is undervalued at current levels. Interesting timing, isn't it? A slightly cynical trader might think that the firms are looking to protect long positions following Friday's breakdown below critical long-term support at the 200-week moving average. While we don't believe their actions were driven by anything but pure fundamental analysis, the comments were enough to put the bears on the defensive for the entire session. Shares gapped higher and ERTS cleared psychological resistance at $50.00, but wasn't able to hold above that level while the broader market slid steadily lower. The multi-week downtrend is still intact and the $50.00 area should continue to challenge the bulls. However, we may alter our strategy if ERTS rallies a little higher and rolls over from the 21-dma at $51.00. Shares have not closed above this moving average since early-December. We identified a failed rally at $50 as a possible entry point for conservative traders and a move back below today's low of $48.50 would be evidence of that rollover. --- CTAS - 42.63 -0.63 (-0.63 for the week) There was zero news to report on for CTAS over the long weekend and today. Given the broader market's weak performance, shares of CTAS were left to fend for themselves and the prevailing trend took over. The stock has reached an area of potential congestion and we would not be surprised to see a short-term oversold bounce at the $42 mark. An entry point at this time could be somewhat tricky to execute. A failed rally at the $44-$45 level would be the most enticing but we don't believe the stock will have enough strength to get there on its own. Shares of CTAS have bounced just this side of the $40 mark several times since July, and traders can consider taking profits as we approach that level. We are setting our stop at $45.25, just above Friday's high. --- ASD $66.22 -0.80 (-0.80) A bit at a time, ASD is gradually moving lower towards strong support at $66. Each failed rally attempt is leaving behind a string of lower highs and lower lows, as the stock rides the declining lower Bollinger band down the chart. Just as it has several times in the past couple weeks, ASD attempted a weak bounce at the open, which ultimately failed as the sellers piled on throughout the afternoon, breaking decisively below $67 around 2pm ET and then drilling down to close at the lows of the day. Oscillators such as Stochastics and MACD are showing a complete lack of strength and now internal weakness is also showing in the On Balance Volume, which is now pushing to its lowest levels since the middle of November. All of the moving averages are now going to act as overhead resistance, with the closest, the 10-dma ($68.24) the only one likely to come into play over the near term. A failed rally attempt below that moving average (which hasn't been touched since January 3rd) will present the next attractive entry point into the play. With ASD now resting on $66 support, we could get the oversold bounce that sets up that failed rally any day now. Traders looking to enter on further weakness will want to wait for a break below $65.50, the top of the October 15th gap, before playing. Lower stops to $68.50, just above the 10-dma. --- CTSH $59.12 -1.02 (-1.02) Along with the rest of the market, CTSH tried to stage a rebound from $60 support this morning. But the rebound attempt didn't last long. By the end of the first hour of the day, support had given way and the trade below $59.75 triggered the play to active status. That breakdown was the best entry point of the day, as the stock quickly dropped below the $59 level and then spent the remainder of the day trading in a tight range on both sides of that price level. More importantly, the trade at $59 broke the bullish support line on the PnF chart, removing that potential support from the equation and allowing bears to focus on the HUGE Sell signal on the PnF chart, which is giving us a bearish price target of $41. We shouldn't expect that level to be hit this week though, as CTSH is likely to find support either at the 200-dma ($57.90) or the ascending support line ($56). Traders looking for an entry into the play will want to watch for the rollover after that bounce, which ought to come below the $60 resistance (prior support) level. For now, we're keeping our stop set at $62.50, just above what should now be major resistance. --- KSS $54.30 -2.30 (-2.30) As the broad markets give back their early January gains, the Retail sector (RLX.X) is looking particularly weak. After rolling over near $275, well below the 50-dma, the RLX slid lower on Tuesday to the tune of -2.48%, closing below the important $260 support level for the first time since October 10th. Clearly, investors are waking up to the fact that the holiday selling season wasn't nearly as robust as many had hoped. While sector weakness was certainly part of the equation on Tuesday, shares of KSS were sliding sharply lower before the RLX got moving in reverse. That much is clear from the intraday chart, which shows that the bulk of the stock's 4% loss took place in the first 2 hours of the day. The weak midday bounce just provided another opportunity to enter new bearish positions as KSS rolled just below $55.50, never quite making it back to the $56 breakdown level. That $56 level should now present solid resistance to any rebound attempts, especially with the RLX now under the $260 level. Another failed rally near $56 with the RLX unable to regain the $267 level (the site of the 20-dma) will be the next high-odds entry. Should a rebound fail to materialize, momentum players can target a breakdown under the December lows ($52.50) for initiating new positions. Following Tuesday's big slide, it seems safe to lower our stop to the $57 level, as failed support should now act as resistance. ************* NEW PUT PLAYS ************* GS – Goldman Sachs Group $71 -1.58 (-1.58 this week) Company Summary: The Goldman Sachs Group is a global investment banking and securities firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high net-worth individuals. The company provides investment banking, which includes financial advisory and underwriting, and trading and principal investments, which includes fixed income, currency and commodities, equities and principal investments. GS recently completed the acquisition of Spear, Leeds & Kellog, which is engaged in securities clearing, execution and market making, both floor-based and off-floor. Why We Like It: The first day of the holiday-shortened trading week didn't get off to a very good start for the bulls, and the bearish tone was helped along by less-than-stellar results from Citigroup before the opening bell. While the company reported earnings a penny ahead of consensus estimates, it was the forward guidance that gave the bulls indigestion and the whole Brokerage group, as measured by the XBD index fell throughout the day in response. The index got slammed for a 3.82% loss, crashing through the 200-dma ($419.17) and came to rest right at pivotal support in the $410-412 area. We've played GS several times over the past few months without success, but this time things look different. Earnings (whether positive or negative) aren't having the positive effect bulls would like to see. Combine that with broad market weakness and technical weakness in the sector (not to mention the looming threat of class action lawsuits), and the XBD index seems destined for a big breakdown. GS most recently rolled over from just above $75 and since then has violated its 200-dma ($74.10), 50-dma ($73.80), 10-dma ($73.21) and then today the 20-dma ($71.54), all of which will present solid resistance on any rebound attempt. With daily Stochastics still in free fall, MACD rolling and back in negative territory and the big SELL signal on the PnF chart still in effect, GS appears to have a confluence of bearish factors lining up in its favor. The big drop in December from the $80 level to $67 generated that PnF Sell signal, along with a bearish price target of $53. Obviously, an entry on this morning's rollover near $73 would have made for a great entry into the play, but with the market near-term oversold, we just might get another shot at that entry level over the next day or two. On a failed rally, we want to target a rollover in the $73-74 area for new entries. We're initiating coverage with our stop at $75, although more conservative traders may want to consider a tighter stop, say just above $74. Those looking to enter on a breakdown will want to wait for a break under the $70 level in conjunction with the XBD index breaking its December lows near $408. BUY PUT FEB-75*GS-NO OI=2912 at $4.50 SL=2.75 BUY PUT FEB-70 GS-NN OI= 663 at $2.05 SL=1.00 Average Daily Volume = 3.82 mln ------------------------- Advertisement ------------------------- WINNER of Forbes Best of the Web Award • optionsXpress voted Favorite Options Site by Forbes • Easy screens for spreads, collars, or covered calls • Free streaming quotes • Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oinvest21 Note: Options involve risk. 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The Option Investor Newsletter Tuesday 01-21-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: PUT - GS Futures Corner: Stacked Retracements ********************* PLAY OF THE DAY - PUT ********************* GS – Goldman Sachs Group $71 -1.58 (-1.58 this week) Company Summary: The Goldman Sachs Group is a global investment banking and securities firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high net-worth individuals. The company provides investment banking, which includes financial advisory and underwriting, and trading and principal investments, which includes fixed income, currency and commodities, equities and principal investments. GS recently completed the acquisition of Spear, Leeds & Kellog, which is engaged in securities clearing, execution and market making, both floor-based and off-floor. Why We Like It: The first day of the holiday-shortened trading week didn't get off to a very good start for the bulls, and the bearish tone was helped along by less-than-stellar results from Citigroup before the opening bell. While the company reported earnings a penny ahead of consensus estimates, it was the forward guidance that gave the bulls indigestion and the whole Brokerage group, as measured by the XBD index fell throughout the day in response. The index got slammed for a 3.82% loss, crashing through the 200-dma ($419.17) and came to rest right at pivotal support in the $410-412 area. We've played GS several times over the past few months without success, but this time things look different. Earnings (whether positive or negative) aren't having the positive effect bulls would like to see. Combine that with broad market weakness and technical weakness in the sector (not to mention the looming threat of class action lawsuits), and the XBD index seems destined for a big breakdown. GS most recently rolled over from just above $75 and since then has violated its 200-dma ($74.10), 50-dma ($73.80), 10-dma ($73.21) and then today the 20-dma ($71.54), all of which will present solid resistance on any rebound attempt. With daily Stochastics still in free fall, MACD rolling and back in negative territory and the big SELL signal on the PnF chart still in effect, GS appears to have a confluence of bearish factors lining up in its favor. The big drop in December from the $80 level to $67 generated that PnF Sell signal, along with a bearish price target of $53. Obviously, an entry on this morning's rollover near $73 would have made for a great entry into the play, but with the market near-term oversold, we just might get another shot at that entry level over the next day or two. On a failed rally, we want to target a rollover in the $73-74 area for new entries. We're initiating coverage with our stop at $75, although more conservative traders may want to consider a tighter stop, say just above $74. Those looking to enter on a breakdown will want to wait for a break under the $70 level in conjunction with the XBD index breaking its December lows near $408. BUY PUT FEB-75*GS-NO OI=2912 at $4.50 SL=2.75 BUY PUT FEB-70 GS-NN OI= 663 at $2.05 SL=1.00 Average Daily Volume = 3.82 mln ------------------------- Advertisement ------------------------- VOTED one of "Best Online Brokers" (4 stars)--Barron's • optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's • 8 different online tools for options pricing, strategy, and charting • Access to options specialists via email, phone or live chat online • Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oinvest22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ----------------------------------------------------------------- ************** FUTURES CORNER ************** Stacked Retracements By John Seckinger It is always nice to have an edge heading into a trading session. One way to do this is via Stacked Retracements and using the "real" opening of the futures session. Before we get to Stacked Retracements, let us quickly go over some basics on this relatively new methodology. First we get Support 2, Support 1, Pivot, Resistance 1, and Resistance 2. Then we do a retracement from R2 to S2. Then, if prices go outside of R2 or S2, we use fitted retracements anchored off the first five minutes of trading. Aggressive traders can use the fitted retracements even if S2 or R2 is not hit; however, try to only use levels that match up well with other recognized areas. All of these topics are covered within the Futures Corner Section: http://www.OptionInvestor.com/indexes/futurescorner.asp Ok, that was quick. Now let us get to Stacked Retracements. As you already know, after Jeff embraced my pivot analysis studies, Mr. Bailey has been helping me define certain parameters. It was Mr. Bailey that really introduced the concept of "Stacked Retracement" Looking at the chart below, notice how the day ends at 16:15 (last five-minute bar is 16:10 to 16:15), and futures trading does not begin again until 16:45. It is this re-opening when traders can start to judge risk for the following session. In order to begin the Stacked Retracements, look at the first 5-minute period below. Higher, right? Since it is higher, anchor (read: 0%) the retracement from the bottom of the period, placing the 19.1% area at the top of the first five minutes. As always, use 0%, 19.1%, 38.2%, 50%, 61.8%, 80.9%, and 100% as retracement levels. Chart of ES03H, 5-minute As the name Stacked Retracement implies, we will then "stack" one retracement below the other - overlapping the 0% and 100% area (see below). This is accomplished by right clicking of the first retracement area and hitting "Clone Line." Then, drag the cloned retracement underneath, getting as close to the 926.50 area as possible. Chart of ES03H contract, 5-minute Now that we have a range, how can a trader use this for practical purposes? The range from 61.8% to 61.8% can be the "normal standard deviation" during overnight trading. Then, by 9:30 a.m. the next morning, a trader can gauge sentiment and see if institutional traders will try to either continue to bid or pressure the contract. Looking at the chart below, the ES contract never traded outside of this range; therefore, the opening is more neutral than anything else. From 9:30 a.m. on, the market sold off and then actually found a bottom at the 0% area near 916. This was not the plan; however, it at least gives more credibility to these levels. If it DOES open above or below the 61.8% area, then there is a good chance of either sell or buy programs on the open. When the market opens higher, the 61.8% to 61.8% range seems to be out of balance to the bearish side (the distance from 0 to 61.8% to the upside is greater than from 0 to 61.8% to the downside); however, this isn't totally the case. The higher opening increases the range to hit the downside objective, and seems to balance out the apparent skew ness. Chart of ES03H, 5-minute For another test, I went back and found a 16:45 bar that was red instead of green. I had no idea what happened the next day, and simply tested this theory. As the chart below shows, a stacked retracement is formed, and a trader can then wait until right before the 9:30 opening. Chart of ES03H contract, 5-minute In this particular night session, the ES03H contract fell under both the 61.8% area and the lowest level given (could be either 0 or 100%, depending on how the chart is constructed). It did seem that the 61.8% area acted pivotal overnight, but our biased is based on the CLOSE of the night session. It would have to be directionally bearish, since it closed UNDERNEATH the 61.8% area. With that said, I would look at S1 and S2 for that session. S1 was at 918.25, and basically the close of the night session. With that said, I would look for a move to S2 (912.50). A stop can be placed five points above the entry (918.50) to 923.50. The pivot is at 924.25, so a trader could look to get an entry near 920 (ideal) and encompass the pivot. What happened? The ES03H contract fell to 913.50, bid to 920.50, and then rolled to 907.25 in an aggressive bearish channel. Therefore, I would say this "Stacked Retracement" theory passed the test. I have back-tested this theory for a significant amount of time; however, it is new; therefore, please be patient. I think it can definitely help traders wondering about how to trade the first explosive hour of trading. I do believe that we are on the cutting edge here, and experienced traders should use this Stacked Retracement theory as one more tool. Chart of ES03H Contract, 5-minute Ask away, John Seckinger ------------------------- Advertisement ------------------------- We got trailing stops! • Trade online with trailing stops at optionsXpress, at no extra cost • Trailing stops based on the option price or the stock price • Also place Contingent, Stop Loss, and "One Cancels Other" orders • $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oinvest23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ----------------------------------------------------------------- ********** 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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