The Option Investor Newsletter Tuesday 01-28-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Not What I Expected Futures Markets: Trading Levels Index Trader Wrap: Gains evenly distributed among the indexes Market Sentiment: What Goes Down Weekly Fund Screen: Two "Capital" Ideas Updated on the site tonight: Swing Trader Game Plan: Anticipation Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 01-28-2002 High Low Volume Adv/Dec DJIA 8088.84 + 99.28 8144.00 7991.07 1438 mln 2091/1189 NASDAQ 1342.18 + 16.91 1346.50 1321.44 1381 mln 2064/1237 S&P 100 434.65 + 5.18 436.15 429.47 totals 4155/2426 S&P 500 858.54 + 11.06 860.76 847.48 RUS 2000 373.17 + 4.59 373.44 366.59 DJ TRANS 2165.44 + 21.43 2172.09 2141.26 VIX 35.74 - 4.03 38.68 35.52 VIXN 46.75 + 0.34 47.52 45.82 Put/Call Ratio 0.62 ************************************************************ Not What I Expected Linda Piazza Good news! The Commerce Department tallied new home sales at an annualized rate of 1.082 million, rising from November's revised rate of 1.045 million. Inventories fell to 3.8 months' worth from November's 3.9 months' worth. The median price rose. Looking beneath the numbers, however, showed flat sales in the South and declining sales in the West and Northeast. Only the Midwest saw increased sales, with that region's surge offsetting the troubling results in other regions. Looking beneath the numbers proved advisable when studying the durable goods number, too. The 0.2% increase in December orders disappointed economists who had expected a 0.8% gain, but the number was even worse than it appeared on the surface. Commercial aircraft accounted for much of the 0.2% increase, but aircraft orders can be volatile. Positive December ISM numbers had led many to expect stronger growth in durable orders, with some forecasting a 1.0% rise. Many look to the non-defense capital goods portion of the durable goods number as a better measure of economic strength. That component showed a 2.85% gain, but commercial aircraft orders contribute to this component, too. With aircraft orders backed out of the non-defense capital goods component, it fell 0.1%. Orders for cars and communication equipment declined. Inventories rose, perhaps indicating that capital goods aren't being shipped as orders slow. The day's release of economic numbers also included the consumer confidence number. That measure slipped to 79 in January from a revised 80.7 in December, meeting forecasts. Again, it proved important to look beneath the headline numbers. While the component that measures current conditions rose from December's 69.6 level to 75.4, the portion that measures expectations for the next six months plummeted to 81.4 from December's 88.1. Some blamed the 6% unemployment rate for the decline in consumer confidence. How did the markets react to these numbers? Markets climbed into the 10:00 ET time period, but began falling toward the day's lows as markets digested the numbers. Most markets then traded in a tight range until late in the session when short-covering drove them up toward new highs. Markets closed slightly off those highs. Moderate volume levels registered 1.45 billion shares on the NYSE and 1.41 billion on the Nasdaq. With markets showing short-term oversold conditions, I expected stronger short-covering today ahead of Bush's State of the Union address. Perhaps shorts were enticed to hold their positions by rumors that Bush will use tonight's forum to unveil evidence that Iraq possesses weapons of mass destruction. Others discount that possibility, saying that Colin Powell will reveal the evidence within the next several days. The U.N. Security Council begins debates on Iraq tomorrow, with France, Germany, Russia, and China urging that the inspectors be given enough time to complete their work. Russia reportedly hinted that it might change its position if evidence of Iraqi duplicity were presented. The outcome of the debates should prove interesting. On Wednesday, Hans Blix surprised many by the frank tone of his address to the U.N. and by his enumeration of instances in which Iraq had failed to be forthcoming. The FOMC meeting concludes tomorrow. While few suggest that interest rates will change, CNBC and Bloomberg guests speculated today that market participants will pay special attention to the bias statement. Currently, the Fed maintains a neutral bias. Ahead of the U.N. Security Council debates and the FOMC statement, the world's attention focuses on Bush's address tonight. Today saw the FTSE 100, the CAC 40, and the DAX post small gains, but markets across the world have plummeted lately as they react to fears that the U.S. will immediately engage Iraq in a war. Powell set out a timetable yesterday, saying that Bush would spend this week conferring with world leaders and that a decision on the appropriate next step would be made the following week. While it's not certain that Bush will reveal his new evidence tonight, he will use his address to convince the U.S. public and potential allies of the need for action sooner, rather than later. Acutely aware of his father's perceived shortcomings when dealing with the U.S. economy, he'll also push his economic agenda. Aides claim that half his speech will be devoted to his economic package, including relief to the elderly facing expensive prescription medication costs. That economic package will assume greater importance as recession talk revives ahead of the expected flat GDP number on Thursday. Recession talk has swirled around Japan and Germany for some time now as the world's second and third-largest economies struggle with grim outlooks. Today, Taiwan Semiconductor (TSM), the world's largest contract microchip maker, reported an unexpectedly sharp fall in Q4 net profit, but insists that it will see a recovery begin by Q2 in 2003. When insurer Assicurazioni Generali announced earnings last week that included write downs of its stock investments, analysts concluded that other insurers could be suffering from disastrous stock investments. Trader talk this week concluded that worldwide, insurers were probably selling equities to preserve funds needed to pay claims. Today, Fujitsu, Japan's number one PC maker, reported losses that it attributed both to slowing sales and to the devaluation of its marketable securities. Why should we be concerned about what's happening in these economies? First, if companies throughout Europe and Asia suffer from devaluations of their marketable securities, that's likely happening in the U.S., too. In addition, insurers and other companies selling securities to maintain their reserves might be selling dollar-denominated assets, as has been theorized of late as foreign investors pull out of the U.S. market. Also, as these other economies weaken, our exporters and multinational companies suffer. What do the charts say about our economy? Since we rarely look at the Wilshire 5000, let's take a look at the broadest of our markets. Because most of us are not as familiar with the Wilshire's chart as we are with others, we can view these charts with a less biased outlook and the other indices will be covered in the Index Trader Wrap. First, let's look at the weekly chart, courtesy of Q-charts. Notice the green descending trendline, a line that has capped the Wilshire since early 2000. Notice that the 21(3)5 stochastics are just now rolling down from overbought levels while MACD rolls down from beneath the zero level. RSI also turns down. While some might argue that the Wilshire made a double bottom in July and August, note that the Wilshire failed in its effort to move above the peak between the double bottoms, failing to confirm that double-bottom pattern. The outlook is bearish. Wilshire 5000 Weekly Chart: Next, let's look at a daily chart. Although it's often possible to argue about the exact location of the neckline of a head-and- shoulder pattern, it's clear that the Wilshire broke through its neckline on Friday. I've marked that neckline in green. Of special interest is the behavior of the RSI and MACD oscillators. Since late summer, these oscillators had been forming a series of higher lows. I've marked those higher highs in red. When the Wilshire broke through its neckline, these oscillators also fell through their ascending lines, confirming the weakness in the Wilshire. With that evidence and with the break of the H&S neckline, the intermediate-term outlook for the broader markets is bearish. Note, however, that the 21(3)3 stochastics are buried at oversold levels and appear to be hinging up. RSI turned up, too, and faces the new resistance at that broken trendline. On the price chart, today's white candle is a harami, completely contained within the bigger red candle that preceded it. A harami indicates indecision, an inside day. It's possible that tomorrow could see an upside break of that inside day or harami, but that upside break should stop short of that broken neckline. Based on this evidence, selling rallies still seems the best policy in the intermediate term. Wilshire 5000 Daily Chart: What about the short-term outlook? For that, I've dialed down to a 60-minute chart. I've included both the 21(3)3 and 5(3)3 stochastics. The shorter-term 5(3)3 stochastics show that today's action relieved much oversold pressure, with the 5(3)3's moving all the way up into overbought levels. The 21(3)3 stochastics are just now moving up out of oversold territory, but note that the last move out of oversold territory brought these stochastics only up to current levels before they turned down again. RSI flattened today at levels near where they last turned down. MACD, however, dipped far into oversold territory and is clearly turning up. What's happening to price while all this occurs? Today saw prices moving up in a regression channel that formed higher highs and higher lows. This regression channel moved counter to the prevailing move, which was sharply down. That's bullish, right? Not necessarily. It fits the classic definition of a bear flag formation. We won't know for sure if it's a bear flag until it breaks out to the upside or breaks down out of that formation. Most often, bear flags tend to break down no later than halfway up the previous movement. I've marked the midpoint of the previous movement in red. The neckline of the H&S formation sits above that, marked in green. Wilshire 5000 60-minute Chart: I can see two scenarios tomorrow for the Wilshire 5000 and therefore for our broader markets. One is that the Wilshire confirms the bear flag formation by falling through the regression channel and then below yesterday's lows. Another scenario sees the Wilshire push through the top of that channel, rising to test the midpoint of the previous decline, at 8230, or perhaps rising to test that broken H&S neckline. I would expect failure at one of those levels, however, with the ultimate direction being the same as that in the previous scenario: down. While the COMPX and NDX charts show that they're outperforming the broader markets, charts of the two S&P's look similar to the Wilshire's. Be careful trading ahead of Thursday's GDP number and geopolitical developments that might change the markets' outlook. Prepare for possible sharp short-covering rallies by determining your stops ahead of the trading day, but don't be fooled into believing that the longer-term outlook has changed. That outlook will change someday. I'll be watching the patterns I've outlined to pinpoint the moment when that outlook changes. Now you'll be watching, too. *************** FUTURES MARKETS *************** Trading Levels By John Seckinger jseckinger@OptionInvestor.com All three futures contract gravitated around their daily pivot levels on Tuesday, but that should drastically change following the President's speech. It will then all come down to trading levels once again. Tuesday, January 28th at 4:15 P.M. Contract Last Net Change High Low Volume Dow Jones 8088.84 +99.28 8114.00 7991.07 YM03H 8051.00 +68.00 8094.00 7964.00 26,839 Nasdaq-100 1001.41 +15.00 1006.51 983.95 NQ03H 998.50 +10.00 1008.50 982.50 226,443 S&P 500 858.54 +11.06 860.76 847.48 ES03H 854.50 +7.25 860.00 845.00 744,265 Contract S2 S1 Pivot R1 R2 Dow Jones 7941.71 8015.28 8064.64 8138.21 8187.57 YM03H 7906.00 7979.00 8036.00 8109.00 8166.00 Nasdaq-100 974.73 988.07 997.29 1010.63 1019.85 NQ03H 970.50 984.50 996.50 1010.50 1022.50 S&P 500 842.31 850.42 855.59 863.70 868.87 ES03H 838.25 846.50 853.25 861.25 868.25 Weekly Levels Contract S2 S1 Pivot R1 R2 YM03H 7748.00 7933.00 8271.00 8456.00 8794.00 NQ03H 962.75 981.25 1011.25 1029.75 1059.75 ES03H 825.25 842.75 875.00 892.50 924.75 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 a number of business meetings on Tuesday; therefore, I filled the Futures Monitor with content during the session. For more information on my posts, 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) We certainly did NOT get a move underneath the 839 level during trading on Tuesday, and bulls should be somewhat excited about a move back inside the daily Bollinger Bands. With the ES contract closing above Wednesday's pivot of 853.25, there is a chance the 200 EMA will be tested in the near term. This moving average is above at 265, and matches up well with the 50% retracement level of the move from October to December. I would expect resistance to be found here. If this area fails to hold buyers, remember that the WEEKLY pivot is above at 875. If bears take over following the President's State of the Union Address, the 842.75 to 846.75 area should become an important area. It is a compilation of the monthly, weekly, and daily S1. Chart of ES03H, Daily Looking at a 60-minute chart of the ES contract, we are dealt a pretty tight range from S2 to R2 for trading on Wednesday. In fact, so tight that we cannot even apply the article I wrote ("Half-life") in the Investors Education Section for Tuesday night. In the chart below, notice the bull trap seen near 886. By closing back inside the regression channel, are prices going to fail here as well? If so, notice how levels line up near 844. This even further increases this area's significance. Remember, if this area is severely penetrated, traders will then use the range as a strong area of resistance. Chart of ES03H, 60-minute chart Bullish Percent of SPX: 48.90% and down one percent on Tuesday. The column of O’s remains at eight (Recent High at 66%, Low of current column at 58). As noted yesterday, one more "O" (will be reached at 48%), should portend a move to the 40% level. Note: In order to really look for a bottom, I would like to see a move under 30%, followed by a row of "X's" that takes the indicator back above this 30 area. The March E-mini Nasdaq 100 Contract (NQ03H) We did get a move higher in the NQ contract; thus re-enforcing the possibility of a "double bottom" pattern. However, we didn't get a test of either the 1023 or 980 area. I expect one of these levels to be tested on Wednesday. If the 980 area is broken, the next intermediate objective will be for a move to the 200 EMA, currently at 960. As the 120-minute chart below shows, both the 1023 and 980 area have "levels lining up" and should be significant going forward. Closing above the pivot is slightly bullish, but most likely traders are flat ahead of the President's speech and will use the opening level as a better gauge of sentiment. I believe that it would be 'easier' to trade a move lower and under 980; however, that usually means we will be faced with the harder choice of dissecting a rally. If the 1022-24 area becomes support, look for tiered resistance at 1030 and the 1040 area. Chart of NQ03H, 120-minute Bullish Percent for NDX: This indicator fell 1% to 50% on Tuesday, and did add another "0's" during the day's trading session. There can still be support at the 50% area, but this indicator continues to portend bears will be selling rallies going forward. Note: The NDX will give a sell signal at 975, according to P&F charts. The March Mini-sized Dow Contract (YM03H) Monday's low was never taken out in the YM contract, so bears really didn't have a reason to get excited during trading on Tuesday. As the daily chart shows, the YM contract traded within the 7948 to 8152 area on Tuesday and paints a mostly neutral picture going forward. However, as bulls will point out, the contract did close back inside the Bollinger Bands and could portend a move higher. With that said, shorts can certainly wait until there is either a failure at 8152 or weakness underneath the 8000 area before getting aggressive. I think that the most bullish scenario would be for a trade back to 8275; however, certainly anything is possible. The mid-point of the Bollinger Band comes in at 8497. Chart of YM03H, Daily A 90-minute chart of the YM contract shows the retracement levels between S2 and R2, and the chart also shows the daily retracement areas on the right-hand side of the illustration. I pointed out the 8000 area above because of how it seems to be the "apex" in the triangle pattern below. It is also just under the 38.2% retracement area at 8005. Moreover, shorts should get aggressive AND longs will most likely exit once we get back into the "7" handle (7999 and lower, versus the "8" handle, or 8000 and above). Trading after Bush's speech should be volatile, so please trade what you see and not what the speech 'should be telling investors.' Chart of YM03H, 90-minute Bullish Percent of Dow Jones: The bullish percent for the Dow fell 3.33% to 36.67%, and the column of O’s is now 11 deep. The Bullish Percent indicator still has intermediate bearish implications. It does indicate that bears will look to sell rallies and be aggressive on weakness as well. Nothing has changed since Thursday, but a close underneath 30% should start to shift risk into the bears' camp. Stay tuned. Note: The DJIA, on a P&F chart, added three more "O's" on Monday and the contract now has a bearish price objective of 7100. Good Luck. Questions are welcomed, John Seckinger jseckinger@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** Gains evenly distributed among the indexes The major indexes traded higher amidst a spattering of economic data, which continues to show a sluggish economic recovery with some bright spots still found in the new home construction market not being enough in itself to boost consumer confidence to levels that might spur spending on durable good. Today's release of economic data had weaker than expected December durable goods orders and a January consumer confidence reading of 79.0, which fell to a 9-year low, being partially offset by an upside surprise from stronger than expected new home sales. At the end of the trading session, the major indexes saw gains evenly distributed basis with gains just above one percent. Tonight's State of the Union address by President Bush will draw some attention, but it will be interesting to see if the current geopolitical concerns and U.S. economy are as important to investors and this weekend's Super Bowl was to sports fans. With several important issues currently at play, President Bush's speech later tonight is expected to not only address his administrations views and plans on how tax-cuts are deemed a key to stimulating job growth and stimulating consumer spending/confidence, but also the need to address issues regarding Iraq on weapons of mass destruction, along with a call for more affordable health care and prescription drug benefits for seniors. Trade volume was on the light side compared to recent sessions with the NYSE turning just over 1.45 billion shares compared to Monday's 1.69 billion, while NASDAQ volume was identical to Monday's 1.41 billion level. If I were to make a statement regarding who did the bulk of the buying between bulls and bears in today's session that had stocks looking to reverse recent week's decline, I'd have to say it was bears looking to lock in some gains ahead of tonight's State of the Union Speech and not to be forgotten conclusion of the FOMC meeting. The reason I think bears did the bulk of the buying was what I mentioned briefly in last week's Index Trader Wrap, in that the NASDAQ-100 Index's (NDX.X) 1.5% gain, was just barely greater than the Dow Industrials (INDU) 1.2% session gain. It was my thought last week that for a truly "bullish" rebound to take place, then the recent relative strength of the NASDAQ-100 Index should show a greater rebound than the more evenly matched percentage gains found in the indexes today. A quick note regarding the FOMC meeting, it does not appear that the market is looking for any type of Fed move on interest rates as the January Fed Funds futures contract (ff03f) 98.765 priced in no change from the current Fed funds rate of 1.25%. Again, trader will take the 100.00 level, subtract the Fed funds futures of 98.765, which results in a 1.23% reading to surmise that the MARKET, which trades the Fed Funds futures expects no change in interest rates at the conclusion of the FOMC meeting. Tonight, I've taken the levels from pivot analysis to define upper and lower ranges for this week's trade. In Friday evening's market monitor I posted the following matrix. Tomorrow's daily S2, S1, P, R1 and R2 levels have been adjusted after today's high, low and close trades. Weekly levels are based on last week's high, low and closing values, while the monthly levels will not be updated until the conclusion of Friday's trade, which marks the end of January. Pivot Analysis Matrix Today's index trading did see all of the major indexes hold above their Tuesday pivot levels and come close to testing their first levels of daily resistance at R1. After tabulating Wednesday's daily levels, the major indexes all closed just above their daily pivot levels. Retracement on tonight's index charts are derived from the weekly S2 and R2 to give traders a perspective of a potential weekly range and we're already starting to see how the various levels from retracement came into play not only yesterday as support, but today's as resistance. As mentioned in Friday evening's market monitor, I've added a column labeled "S2-R2" point range to give traders an idea of point range, which may be helpful when ascertaining various strike and expiration selections in relation to their preferred time horizons. One way I'd look to use this information is as follows. If more of a swing trader, view the S2 and R2 as somewhat of a WEEKLY range with the S2 and R2 levels being this week's length of playing field. While the S2 and R2 levels by NO MEANS are solid levels of range whereby the indexes will be bound, they can serve as somewhat of a "boundary" in which to trade and the various S1, Pivot, and R1 levels become benchmarks that must be broken to begin further assessing a next target level. We will use retracement to further dissect the weekly range, and look to uncover levels that market makers or institutions may be trading as they look to control risk in their stock inventories based on their perception of buy/sell side order flow from institutional clients. Dow Industrials Chart - Daily Intervals Support on Monday came very close to WEEKLY S1 level of 7,955 and correlates with 80.9% retracement at 7,973. This creates a bit of a "confluence" of support at Monday's lows. Please note that the 80.9% level of retracement isn't a default level of weekly pivot analysis with S1. If it were, then weekly R1 of 8,465 would correlate more closely with 19.1% retracement of 8,604, and here we see no correlation of resistance. Today's 99-point gain in the Dow certainly looks as if there just might not be a favorable risk/reward trade in the Dow on a near-term basis and allowed for today's gains. Better entry points for shorting look to be higher back near the weekly pivot of 8,288, which ties in with mid-October and late-December of support that was broken to the downside on Friday. I'm looking bearish a rally in the Dow back near the 8,288 level closer to overhead resistance with a downside target of 7,850 by week's end. Today's action saw the Dow Industrials Bullish % ($BPINDU) fall 3.33%, or lose 1 stock to a reversing p/f sell signal (SBC $24.32 -2.13%). This has the Dow Industrials Bullish % still "bear confirmed" at 36.67%. S&P 500 Index Chart - Daily Interval Similar to correlative support in the Dow at its 80.9% retracement and WEELY S1 support level, its not that surprising that we see similar technicals in the SPX with a confluence of support taking place not only from the WEEKLY S1 of 845 and 80.9% retracement of 846, but lower Bollinger Band of 847. Too much technical support to keep a bear applying pressure today and a nice bounce. Looking for the weekly pivot of 875 to mark a level for resistance, which was violated to the downside with some vigor on Friday with formidable resistance at/near 886. Today's action saw the S&P 500 Bullish % ($BPSPX) see a net loss of 5 stocks, or 1% to reversing lower point and figure sell signals. This has the S&P 500 Bullish % falling to 49.2% and still reading "bull correction" status. As a benchmark to the SPX December 30 and 31 lows of 870, the S&P 500 Bullish % then reading 57.8%. Current internals confirm SPX price action of weakness, so there is no "bullish divergence" being seen from the internals to be overly concerning to bears. S&P 100 Index Chart - Daily Interval In the above chart of the OEX, I'm "counting days" that the Stochastics oscillator has been in "oversold" territory, and found periods in September where the OEX Stochastics were oversold for six sessions, to then see a 2-day rally take hold, only for the OEX to then trade lower the following two sessions. These were also periods when the MACD oscillator was trending lower BELOW zero. Unless Saddam Hussein were to announce he has gone into exile I don't see a catalyst for an OEX much above the 444 level and the WEEKLY pivot. While tonight's State of the Union speech should be closely listened to by traders and investors, important to listen too also is the "Democrat Response" to the President's speech. While the Republicans control the House and Senate, the extent or lack thereof in a potential bounce in the major indexes could come from a Democratic response being "willing to discuss" or "total unwillingness" to work with the President on topics and plans discussed tonight. Don't get me wrong, I'm not saying the Democrats will be "responsible" for how the markets trade, but a more united government on issues discussed would in my view would lend itself to a more near-term bullish response from the equity markets. Today's action saw the S&P 100 Bullish % ($BPOEX) fall 2%, or see a net loss of 2 stocks to reversing p/f sell signals. This has the bullish % falling to 46% and still bear confirmed. On Friday of last week, the OEX Bullish % fell to 50%, which was "bear confirmed" status. NASDAQ-100 Index Tracking Stock (QQQ) - Daily Interval The final 15-minutes of trading in the QQQ (04:00 PM EST to 04:15 PM EST) had the QQQ finishing up just 1% on the session, but for the most part, matched the NASDAQ-100 Index (NDX.X) 1,001.41 +1.52% gains. One thing I wanted to monitor after a "rebound" type of session like we had today was for a "relatively stronger" NASDAQ-100 Index to show larger gains that the weaker Dow, SPX and OEX. While today's percentage gains were larger for the NASDAQ-100 Index than the Dow, SPX and OEX, the gains were not to any type of great degree and has me viewing today's bullishness in stocks as more attributed to some bears locking in gains that bulls buying on thoughts of any type of prolonged rebound. A late session rally back near $25.00 in the QQQ saw $25.05 (close to the WEEKLY pivot of $25.10) but sold into the close. Today's action saw the NASDAQ-100 Bullish % ($BPNDX) fall 1%, or see a net loss of 1 stock to a reversing point and figure sell signal. This has the NASDAQ-100 Bullish % still "bear confirmed" and falling to 50%. It was after Thursday's trade that the NDX bullish % reversed into "bear confirmed" status. Jeff Bailey ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** **************** MARKET SENTIMENT **************** What Goes Down by Steven Price We were bound to get some consolidation at some point and Tuesday was that day. After a sell-off of 800 Dow points in eight sessions, we finally got a bounce back through the 8000 support level that was broken on Monday. With a full slate of economic data for traders to digest this week, as well as a Federal Reserve meeting and plenty of happenings on the Iraq front, the market finally got a bounce ahead of the President's State of the Union address. While we can expect some stumping for his new economic stimulus package, everyone will be looking for clues about what the timetable for an Iraqi invasion will be. There was some tough talk from U.S. officials on Monday, following Hans Blix's report on what he considered to be a lack of substantive cooperation from the Iraqis in regard to weapons inspections and this will be the President's chance to deliver his message personally. A couple of economic reports helped the markets this morning. The Consumer Confidence report, which hit its lowest point in nine years, still came in slightly above expectations. The reading of 79.0 came in above the consensus of 78.5, but the internals of the report still paint a gloomy picture. While it was a positive that the present situation index improved from 69.6% to 75.4%, the expectations index fell from 88.1 in December to 81.4 in January. There was an increase in the percentage of consumers expecting fewer jobs, while there was a decrease in the percentage of those expecting more jobs. According to Lynn Franco, Director of The Conference Board’s Consumer Research Center, “Overall readings continue to reflect the country’s lackluster economic activity. Now, with the threat of war looming, consumers have grown increasingly cautious about the short-term outlook.” The report is one indication of consumers' willingness to spend. Still, since the report was slightly better than expected, one of the big recipients of those consumer dollars, the retail sector, got a boost. The Retail Index (RLX.X), which sunk to a new 52-week closing low on Monday, gained 3.24, to make almost all of Monday's loss. The other positive economic data released today, which was a positive both in its upside surprise and in its basic data, was the new home sales report. New home sales rose 3.5% in December, to an annualized rate of 1.082 million. This helped set a record for 2002, which was mostly due to forty-year low mortgage rates. It also came on the heels of positive home re-sale data released on Monday. The number seems in contrast to the results of may very unofficial reader survey here at OI, which indicated a slowing around the country. However, that survey may not have been so far off, as the gains were concentrated mostly in the Midwest, but were flat or declined for the rest of the country. The increase did, however, cross most pricing plateaus, with homes priced from $150k to $199k accounting for 25% of sales and homes over $300k accounting for 23%. The durable goods report, which reflects demand for high-cost items such as computers, non-defense capital items and automobiles, showed a mild gain of 0.2%. This was below expectations for a gain of 0.8% and followed a downwardly revised 1.5% drop in November. It was not terribly encouraging and underscored the lack of spending in the economy. Still, it was not enough to hold back the rally ahead of the President's address. With the data that was released today confirming that the economy remains in a slump (with the exception of housing), the most likely reason for the broad market rally was a round of short covering ahead of the President's speech. With a steep market drop ahead of tonight's comments, there are undoubtedly many short sellers looking to protect some of their gains in case of a big rally. While the reasons behind any rally remain unclear, one impetus might be talk of an invasion in Iraq being further in the future than anticipated. Bush will be pushing his economic plan, as well, which could also lead to a snap back from oversold conditions after a steep drop in a short period of time. Today's jump in the markets was nice, but it by no means made up a significant portion of recent losses and the overall trend remains down. In any case, the State of the Union address while we are on the verge of war should be considered a possible market-moving news event and shorts were wise to lock up at least some of their recent gains. The bounce actually ran out of steam after cracking the Dow 8100 barrier twice intraday and another late day push was not enough to maintain that level on a closing basis. In fact, any rollover from a bounce below the 8200 breakdown level looks like a short opportunity. I've talked ad nauseam about the head and shoulders pattern I believe we are seeing in the Dow/SPX/OEX and if we get resistance at the neckline break, that should be good for shorts down to the 7500 range. We could see some schizophrenic trading tomorrow, following the President's speech and ahead of the conclusion of the FOMC meeting and the UN meeting on Iraq. Traders can keep an eye on that 8200 level for signs of just how much conviction bulls can muster. Once we're above that level, it's anybody's guess, as we'll be back into serious congestion in the 8200-8300 range. That range could provide more resistance and a move into it would still be less than a 50% retracement of recent losses, however, the picture would become cloudier once we are above previous support. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 8088 Moving Averages: (Simple) 10-dma: 8419 50-dma: 8572 200-dma: 8835 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 858 Moving Averages: (Simple) 10-dma: 888 50-dma: 904 200-dma: 937 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 1001 Moving Averages: (Simple) 10-dma: 1027 50-dma: 1048 200-dma: 1043 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): The Semiconductor Index was actually one of the laggards in today's rally. While it did show a gain after finishing below 280 on Monday, that gain was a mere 2.50 points. More importantly, the intraday rebound attempts found resistance at 284, indicating that the former support level around 281-284 may now be providing resistance to any rebound attempt in the sector. While the Nasdaq Composite tacked on 17 points, chip stocks like Intel (+0.13), QLGC (+0.11) and Texas Instruments (+0.58) showed only minor gains, as did chip equipment maker KLAC (+0.13). After the bell, however, equipment maker CYMI beat estimates by a penny and traded up 0.90 from its close of $32.96. 52-week High: 393 52-week Low : 214 Current : 282 Moving Averages: (Simple) 21-dma: 309 50-dma: 321 200-dma: 358 ----------------------------------------------------------------- Market Volatility The VIX has been very, well, volatile the last few days. After breaking out above resistance at 35 on the breakdown below Dow 8200/OEX 440 last Friday, it soared up to 40 on Monday's continued sell-off. As we rallied today, it dropped hard, all the way back to 35.52. The significance? We just found support at prior resistance (35), indicating the equity bounce to the previous breakdown level may be just an oversold bounce back to its former level of support, which may now act as new resistance. Neatly contrarian, wouldn't you say. CBOE Market Volatility Index (VIX) = 35.52 –4.25 Nasdaq-100 Volatility Index (VXN) = 46.73 +0.14 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.62 531,599 330,219 Equity Only 0.46 419,669 193,988 OEX 1.10 15,078 16,658 QQQ 0.20 75,382 15,769 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 46.7 - 3 Bull Confirmed NASDAQ-100 50.0 - 2 Bear Confirmed Dow Indust. 36.7 - 3 Bear Confirmed S&P 500 49.2 - 5 Bull Correction S&P 100 46.0 - 4 Bear 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 1.35 10-Day Arms Index 1.50 21-Day Arms Index 1.32 55-Day Arms Index 1.31 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 1851 1030 NASDAQ 2003 1175 New Highs New Lows NYSE 75 94 NASDAQ 94 81 Volume (in millions) NYSE 1,698 NASDAQ 1,393 ----------------------------------------------------------------- Commitments Of Traders Report: 01/21/02 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 similar amounts to both sides, ending the period slightly less short, but not by a significant percentage. Small traders also added similar amounts to both sides, finishing the period with an additional 1,000 long contracts overall. Commercials Long Short Net % Of OI 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%) 01/21/03 415,028 456,885 (41,857) (4.8%) 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 12/31/02 139,383 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% 01/23/03 148,227 95,356 52,871 21.7% 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 decreased long positions by 1,000 contracts, while adding almost 5,000 contracts to the short side. Small traders added 5,000 contracts to the long side, while reducing shorts by 1,500. Commercials Long Short Net % of OI 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%) 01/23/03 37,174 49,789 (12,615) (14.5%) 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 12/31/02 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% 01/23/03 25,852 6,764 19,088 58.5% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Commercials added 1,000 contracts to the long side, while reducing shorts by 1,400. Small traders added approximately 600 contracts to both sides, leaving the net virtually unchanged. Commercials Long Short Net % of OI 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% 01/23/03 16,901 11,031 5,870 21.0% 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 12/31/02 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%) 01/23/03 5,120 8,282 (3,162) (23.6%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ****************** WEEKLY FUND SCREEN ****************** Two "Capital" Ideas This week, we profile two "world" funds from the American Funds Group that have different objectives and risk/reward attributes. One is a global equity fund seeking to provide long-term growth and income, while the other is a global bond fund that seeks to provide current income. Both funds have fine long-term records of performance and can be used alone or together to achieve the desired risk/reward potential. We favor these two funds because they're prudently managed and reflect the full range of American Funds' global research capability. There are five reasons why we like The American Funds. They're one of the oldest and most respected mutual fund families, with roots dating back to 1931. They are the largest fund family to be distributed exclusively through financial advisers. They're the nation's third largest mutual fund family with assets under management of over $325 billion and over 15 million shareholder accounts. The American Funds are one of the few firms that can backup their claim that they're truly global focused, with over $70 billion in non-U.S. assets managed. Last but not least the American Funds are part of The Capital Group of Companies - one of the world's largest money management firms. The American Funds: Capital World Growth & Income Fund A (CWGIX) seeks to provide long-term growth of capital with current income by investing in established growing companies worldwide. It can invest anywhere in the world, including the United States. The American Funds: Capital World Bond Fund A (CWBFX) has an income objective and seeks to provide strong long-term total return by investing primarily in quality fixed income securities issued by major world governments and corporations worldwide. It can also invest anywhere in the world, including the United States. This week's screen is more of a validation process. We'll look at the two funds on a variety of factors including return, risk, style, and expense. By the end of the exercise, we hope to have built a strong enough case for investment in the two funds. For our purposes, we'll use the Class A shares, which have front-end load charges but also the lowest expense ratios of the different retail share classes offered. For more information or to obtain a fund prospectus, go to www.americanfunds.com. The website for The Capital Group Companies is www.capgroup.com. Snapshot View In Morningstar's system, diversified international equity funds are divided into three broad groups: world stock, foreign stock and emerging markets. The world stock fund category is home to the American Funds: Capital World Growth & Income Fund. On the other hand, Morningstar does not distinguish between world bond funds and foreign bond funds, putting both in the international bond fund category. That's where American Funds: Capital World Bond Fund is classified. So, keep that in mind since that does affect Morningstar's category risk-return ratings for the fund. The Capital World Growth & Income Fund is down 1.9 percent this year so far, while the Capital World Bond Fund has a YTD return of 2.8 percent. The $9.9 billion Capital World Growth & Income Fund has a low expense ratio of 0.78% of assets compared to the average global fund (1.71%) per Lipper. The Capital World Bond Fund has net assets of nearly $600 million and an expense ratio of 1.12% compared to the average global income fund (1.30%) per Lipper. Key Characteristics As of December 31, 2002, the Capital World Growth & Income Fund had 87.5 percent of assets invested in equities, including 30.1 percent in U.S. equities plus 57.4 percent in non-U.S. equities. Some 10.4 percent of assets were held in cash equivalents, with another 2.1 percent held in U.S. and non-U.S. income securities. The Capital World Bond Fund had no assets invested in stocks; it had 100% of its assets invested in fixed income and money market securities at year-end 2002. At year-end, the fund had 28.9% of assets invested in U.S. bonds; 64.1% in non-U.S. bonds; and 7.0% in cash and equivalents. While the American Funds: Capital World Growth & Income Fund can invest anywhere in the world, it invests primarily in the common stock of blue-chip companies here and abroad, and invests mostly in the world's major developed markets. The fund's style may be described as conservative, focused on established companies that pay dividends. The American Funds: Capital World Bond Fund is a conservatively managed and broadly diversified portfolio of debt obligations denominated in currencies of Japan, Western Europe, Australia, New Zealand, Canada, United States, and multinational currency units such as the EMU. In terms of geographic breakdown, the Capital World G&I Fund had 31.6 percent of assets invested in the United States, with about 30 percent of assets held in Europe. Asia and the Pacific Basin accounted for 16.2 percent of assets, with another 12 percent in Canada and Latin America. The Capital World Bond Fund portfolio had 35.1 percent of assets invested in the United States, and 45 percent of assets in Europe. Asia and the Pacific Basin made up 11.5 percent of assets, with another 8.4 percent in cash & other investments. Ratings and Performance According to Morningstar, the Capital World Growth & Income Fund has consistently had below average risk relative to its category peer group (i.e. world stock funds) while the Capital World Bond Fund's risk level has been on par with other international fixed income funds. For the below average relative risk, the American Funds: Capital World G&I Fund has produced high total returns in its history relative to other world stock funds. American Funds: Capital World Bond Fund's total returns have been slightly above average relative to its category (i.e. international bond funds), though Morningstar calls it average overall. In terms of risk-adjusted return relative to category peers, the Capital World Growth & Income Fund holds Morningstar's highest 5- star rating for performance while the Capital World Bond Fund is 3-star rated by Morningstar, signifying average relative returns adjusted for risk. However, if you look at year-to-year returns for the Capital World Bond Fund, you see that its annual returns have generally landed in the one of the top two quartiles, so we assume that if the fund isn't 4-star rated, it is close. Since the Capital World Growth & Income Fund's inception date on March 26, 1993, the fund has produced an annualized total return through December 31, 2002 of 11.3% (10.7% with the sales charge). In spite of the market's downturn since 2000, the American Funds: Capital World Growth & Income Fund still sports an inception-to- date return that is higher than the 10 percent historic norm for stocks. Since the August 4, 1987 the inception date of the Capital World Bond Fund, it has earned an average annual return as of December 31, 2002 of 7.4% (7.1% with the sales charge). That number is a little more than the 6 percent historic average for bonds, so in each case, the fund's inception-to-date returns are very strong. Below is a performance summary for the two funds through Tuesday, January 27, 2003, including Morningstar's fund category rankings. 1-Year Total Returns: - 8.2% Capital World Growth & Income Fund (CWGIX) 3rd Percentile +20.7% Capital World Bond Fund (CWBFX) 33rd Percentile 3-Year Annualized Total Returns: - 3.4% Capital World Growth & Income Fund (CWGIX) 7th Percentile + 7.8% Capital World Bond Fund (CWBFX) 39th Percentile 5-Year Annualized Total Returns: + 5.2% Capital World Growth & Income Fund (CWGIX) 4th Percentile + 5.7% Capital World Bond Fund (CWBFX) 43rd Percentile 10-Year Annualized Total Returns (December 31, 2002): N/a Capital World Growth & Income Fund (CWGIX) + 6.7% Capital World Bond Fund (CWBFX) 48th Percentile You can see that the Capital World Growth & Income Fund's return performance ranks in the top decile within the Morningstar world stock fund category over all trailing periods, while the Capital World Bond Fund's trailing returns rank in its category's second quartile. Over the last five years, the American Funds: Capital World Growth & Income Fund has beaten its index benchmark (MSCI World index) by an average of 7.9% a year. Over the past decade, the American Funds: Capital World Bond Fund has beaten its index benchmark (Salomon Brothers World Government Bond index) by 0.3% a year on average. So, both Capital World funds have gotten the job done for shareholders relative to their index benchmarks and category peer groups without incurring excessive risk to capital. Conclusion There is more that I wanted to say about the two Capital World products from the American Funds Group, but due to PC problems and other issues today, I have to end this report here. These funds can serve a role in one's long-term financial plan since they seek to provide solid, long-term total returns consistent with prudent management. Capital Guardian Trust Company, Capital Research & Management, and the American Funds are world class operations. These two funds are managed by teams of seasoned portfolio managers who have many years of world investing experience. For more info, visit the American Funds' site at www.americanfunds.com. You will be glad you did. Steve Wagner Editor, Mutual Investor email@example.com ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********************** SWING TRADER GAME PLANS *********************** Anticipation That oversold bounce I've been talking about finally arrived, with the help of some short covering ahead of tonight's State of the Union address. To read the rest of the Swing Trader Game Plan Click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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The Option Investor Newsletter Tuesday 01-28-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: None Dropped Puts: CTAS Daily Results Call Play Updates: FRX, SYMC New Calls Plays: COF Put Play Updates: KO, CTSH, KSS PNRA, TDS New Put Plays: APD **************** 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: ***** CTAS $41.72 +0.03 (+0.32 for the week) Cintas got a bounce today with the broader market, but nothing terribly strong. In fact, considering the strength in the Dow, the $0.03 gain was relatively weak. What has us concerned is the action yesterday, as it bounced from long running support at $41. We listed the play at $44.74 and traders who went long the ITM put should have a nice gain here. The bounce actually did not break the downward trend, but we are going to drop the play due to the fact that we are not recommending new entries so close to support and have not recommended new entries for some time. Traders can target $40 on a break below $41 and should think about harvesting gains if we continue to hold above that level. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu Week COF 31.66 -0.78 1.24 New, Bounce off support FRX 51.40 -0.87 0.37 Filled Gap SYMC 46.10 0.21 1.90 Convincing Bounce PUTS ADP 35.20 -0.25 0.70 New, Breakdown coming CTAS 41.72 -0.59 0.03 Drop, Profits CTSH 56.50 -0.02 0.20 Inside day KO 41.10 -0.56 -0.69 Relative Weakness KSS 52.89 -1.00 0.39 Low Confidence PNRA 31.10 -0.74 0.44 Look for $30 TDS 41.92 -0.75 -0.08 Rally failure ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************** PLAY UPDATES - CALLS ******************** FRX $51.40 +0.37 (-0.61 for the week) When we initially entered this play we knew that further broader market weakness could drag FRX down to the bottom of the January 3rd gap. Our expectation was that buyers would emerge near this level, which coincides with psychological support at $50.00. The bulls did not let us down on Tuesday. Shares rebounded from a morning low of $50.15 before finishing with a small gain. This created a hammer candlestick on the daily chart. That's a possible reversal formation, but we'll need to see some follow-through on Wednesday to confirm the bounce. It's also important to note that FRX traded relatively weak versus the DRG.X pharmaceutical index today. The stock found resistance at its 50-dma ($51.51) and wasn't able to break the short-term pattern of lower lows and lower highs. This trend will need to be broken if shares are going to move back towards the relative high at $53.39. Given the technical uncertainty, we would not advise taking new long entries at this time. --- SYMC $46.10 +1.90 (+2.19) Providing a hint of what was to come, SYMC was impressive yesterday in the way it held onto the $43.50-44.00 support level. A big part of what kept it from falling into the abyss with the rest of the market may have been the Legg Mason upgrade from Hold to Buy. Additionally, the firm issued a $52 price target, citing attractive valuation and outperformance relative to its competition. With a bid appearing under the broad market at the open, SYMC launched higher this morning and quickly moved through the $45, and then $46 resistance levels. That second level is important because it resulted in Friday's gap down being filled. Bullish traders weren't satisfied with that though, as they continued to drive the stock higher until some selling finally materialized near the $46.75 level. That round of selling at the end of the day took the stock right back to the $46 level and now we need to see if it can hold as support for another leg up. A rebound from that level can be used for new entries, although a dip and rebound from the $45 level (possibly on an initially negative reaction to the State of the Union speech tonight) would provide a better risk/reward entry. Given the immediate selling that came in after the intraday breakout today, entering on a breakout move does not appear to be a prudent entry strategy. Raise stops to $43.50, just below yesterday's intraday lows. ************** NEW CALL PLAYS ************** COF – Capital One Financial $31.66 +1.24 (+0.14 this week) Company Summary: As one of the top 10 credit card issuers in the U.S., Capital One's secret weapon is its vast databases. The company uses this data to match a potential Visa or MasterCard customer to any one of its thousands of cards, varying in annual percentage rates, credit limits, finance charges and fees. Ranging from platinum and gold cards for preferred customers to secured and unsecured cards for customers with poor credit histories, the company has a credit card for just about anyone. The company also sells wireless phone services, mortgage services, and consumer lending products. Why We Like It: Financial stocks are the lifeblood of any sustained broad market rally, and despite an encouraging start to the month, this sector of the market isn't looking so hot as the first month of the year draws to a close. But maybe there is yet hope for the bulls, with the Banking index (BKX.X) trying to hold onto the $740 support level. The bulls are going to need to show more conviction than they did during Tuesday's anemic rebound, but the potential is there for a solid move higher from here. The stock that got our attention is COF, which has been building a series of gradually higher lows since early August, when it bottomed near $24. Twice since then, the stock has been rejected at the $40 resistance level, most recently in early January. The continued slide in the broad market yesterday brought the stock right back to that trendline, and it caught a pretty decent rebound today, moving back over $31, but trapped under significant resistance at $32.25. Another factor in favor of the bulls is that the stock is sitting just above its bullish support line ($30) on the PnF chart, which ought to provide support for a move back towards resistance. The first upside target will be the bottom of the post-earnings gap ($34), followed by a closure of that gap ($35) and a move to fairly strong resistance at $36. Right now, it could either continue the rebound, or fail and challenge support again. So we are placing a trigger on the play, where we only want to enter if it can push through resistance. A rollover below $32.25 will keep the play from going active, but a rally through that level looks good for new entries. More conservative traders may want to wait for a move through the 50-dma ($32.71) before entering the play. Once triggered, we'll place our stop at $29.25, just below the late December lows. BUY CALL FEB-30*COF-BF OI=3513 at $3.20 SL=1.50 BUY CALL FEB-32 COF-BZ OI=3676 at $1.70 SL=0.75 BUY CALL MAR-30 COF-CF OI=5682 at $4.20 SL=2.50 BUY CALL MAR-32 COF-CZ OI=3132 at $2.75 SL=1.50 Average Daily Volume = 4.52 mln ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* PLAY UPDATES - PUTS ******************* KO $41.10 -0.69 (-1.73 for the week) Talk about lack of relative strength! KO now has not only given us our PnF breakdown, as well as a trigger down at $41.90, but it added to its six-year low in spite of the Dow gaining 100 points on today's broad market rebound. Part of that was due to Pepsi's earnings release, which beat expectations due to increased prices, in spite of U.S. volume coming in on the low side. Traders focused on the light volume and 2003 forecast from PEP, selling the stock off early, before it bounced to a mild gain with the broader markets. KO was not so lucky, however, falling $0.69 by the end of the day, and closing near its low, after setting an intraday low at $41.00. That low can be seen two ways. Bulls may view it as support at the round number, while bears can point to the bearish "O" on the PnF column. That "O" added to the sell signal at $41 and dropped the stock below its $42 "O" on the PnF back in April 2001. That $42 "O" was actually on a dividend -adjusted basis, but it nevertheless shows up as the last support level of the last couple of years. Now we have moved below it on both the bar and PnF charts. Just to be safe, new entries can target a momentum move below $41.00 for entry to make sure it does not continue to act as support. We are lowering our stop loss on the play to $44.25, just above the 21- dma. More aggressive traders can leave the stop above the 50- dma of $44.89, while more conservative traders can lower stops to $43.10, just above Monday's high. --- CTSH $56.50 +0.20 (-1.34) While it hasn't been an exciting ride, our CTSH put play has certainly been consistent. As the broad market has continued to deteriorate, the stock has steadily moved below one support level after another. Last Friday, the 200-dma finally gave way and that was enough for the bears to press their advantage on Monday, dropping the stock down to the long-term ascending trendline (now at $56). With a broad market rebound on Tuesday, it was encouraging to see how anemic the bounce in CTSH was, with the stock consolidating just above that trendline. Conveniently, we got an inside day on Tuesday, and the break from that pattern should indicate which way the stock is headed next. A breakout above yesterday's high of $57.45 should indicate a more sustained rebound, while a break below the $55.68 low should have bears pressing their advantage again. Now isn't the time to be getting aggressive with new entries, but rather to prudently managing those that are open. Traders looking to enter new positions will want to wait for a break under the $55 level on strong volume. On the other side of the coin, a close over $57.50 will resolve the debate in favor of the bulls and have us moving to the sidelines. Accordingly, we're tightening our stop to $57.50 tonight. --- KSS $52.89 +0.39 (-0.86) The battle continues around the $52.50 level, which is the site of KSS' lows in early January. The stock broke below that level yesterday, but then tried to recover today. That bounce attempt looks pretty anemic tonight, as the stock closed in the lower half of the day's range. Intraday resistance appears to be building just above the $53 level, with much stronger resistance at $54. The next move for KSS is likely to be dictated by the action in the overall Retail index (RLX.X), which continues to look weak with its inability to get back over the $255 resistance level on Tuesday's bullish move. Another failed rally below $54 can be used for initiating new positions, while a breakdown under yesterday's low ($51.79) will be the key to watch for momentum traders. If the recent lows give way, we're looking for a test of the $49-50 level, the site of October's closing low. A drop near that level, followed by anything approaching a bounce would be a good opportunity to harvest gains on open positions. Continue to confirm weakness in KSS by monitoring the RLX index. Keep stops set at $54.50. --- PNRA $31.10 +0.44 (-0.45) Our PNRA play got off to a great start on Monday, gapping below Friday's low and driving lower throughout the day. With the stock off more than 20% from its level of just a couple weeks ago, PNRA was due for a bit of a bounce, and that's just what the market delivered today as the stock staged a mild recovery with the rest of the market. But don't make the mistake of confusing today's rebound with an end to the downtrend. Yesterday's decline solidified the breakdown under the 200-dma (currently $32.18) and today's inside day didn't do much to bolster bullish hopes for a rebound. A failure of this rebound near yesterday's high ($31.40) can be used for opening new positions, while a rollover near the 200-dma would provide an even better entry. Those traders looking to enter the play on further weakness will need to wait for a drop under the $30.50 level (the site of yesterday's intraday low) before playing. With the strong resistance provided by the 200-dma, it seems safe to lower our stop to $33. --- TDS $41.92 -0.08 (-0.83) Most sectors of the market ended with gains on Tuesday, as shorts covered ahead of the State of the Union speech tonight. That wasn't the case with Telecom stocks though, as the North American Telecoms index (XTC.X) slid a bit lower along the declining 200-dma (currently $435.75). Sticking with the program, TDS slid to a fresh 3-year closing low, with the $40 level looking like the next potential level of support. Recall that the Pnf Chart paints an even bleaker picture, with a bearish price target of $30. That's got to be pretty discouraging for investors that bought the stock this morning on the heels of the Legg Mason upgrade from Sell to Hold. TDS gapped up to $43.50 this morning following the upgrade, but sellers quickly erased that early gain, before allowing the stock to essentially trade flat for the remainder of the session. Failed rallies below the $44 level continue to look attractive for new entries, as TDS steadily posts lower lows. If looking to enter on further weakness, wait for a break below $41.25 (just below Monday's intraday low) along with the XTC index taking out its 200-dma. Lower stops to $44.50. ************* NEW PUT PLAYS ************* APD - Air Products - $40.37 +0.40 (-0.65 for the week) Company Description: Air Products serves customers in technology, energy, healthcare and industrial markets worldwide with a unique portfolio of products, services and solutions, providing atmospheric gases, process and specialty gases, performance materials and chemical intermediates. The company is the largest global supplier of electronic materials, hydrogen, helium and select performance chemicals. (source: company website) Why We Like It: Shares of Air Products spent the latter part of 2002 bouncing around between $40 and $46. This range actually tightened in late December and early January, as APD spent several weeks trading in the $42-$44 region. It wasn't until last Wednesday that the stock finally broke to the downside. The catalyst for this decline was the company's earnings report. Air Products showed a boosted profit on increased sales, but missed consensus estimates by once cent. Investors have had a clear bearish bias on APD ever since. Similar selling pressure has been seen in shares of chemical giants DD and DOW. DuPont reported their own quarterly earnings today and rose a paltry 27 cents after it beat estimates by three pennies. The recent action in chemical stocks is a reflection of economic uncertainty on Wall Street. Is a dreaded "double-dip" recession just around the corner? Nobody knows for sure, but as long as economic data remains sluggish (i.e. today's weaker-than-expected durable goods orders), the large institutional buyers will be hesitant to bet on a recovery in the manufacturing sector. Technically, we like APD as a bearish play because the stock is on the verge of breaking through key support in the $40.00 region. Shares rebounded from this level on multiple pullbacks in the second half of 2002. Pulling back to a weekly chart, we see that the next level of possible support is down at the 2001 lows near $32.00. For the purposes of this play we'll target a move to the $33.00 area. Shorter-term traders could aim for a test of the p-n-f bearish vertical count of $36.00. One caveat: The recent losses have pushed the daily stochastics into oversold territory. This indicates that APD might see some short-covering at current levels. However, we think the stock will succumb to another wave of selling once support gives way. We're placing an entry trigger at $39.84 (one cent under yesterday's low) in order to confirm a breakdown. If the play is activated we'll use at stop at $43.02, just above the descending 50-dma. More conservative traders could a stop slightly above Friday's high of $42.15. BUY PUT FEB-45*APD-NI OI=4 at $4.90 SL=2.45 BUY PUT MAR-45 APD-OI OI=15 at $5.20 SL=2.60 Average Daily Volume = 944 K ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Tuesday 01-28-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: PUT - APD Futures Corner: Half-life ********************* PLAY OF THE DAY - PUT ********************* APD - Air Products - $40.37 +0.40 (-0.65 for the week) Company Description: Air Products serves customers in technology, energy, healthcare and industrial markets worldwide with a unique portfolio of products, services and solutions, providing atmospheric gases, process and specialty gases, performance materials and chemical intermediates. The company is the largest global supplier of electronic materials, hydrogen, helium and select performance chemicals. (source: company website) Why We Like It: Shares of Air Products spent the latter part of 2002 bouncing around between $40 and $46. This range actually tightened in late December and early January, as APD spent several weeks trading in the $42-$44 region. It wasn't until last Wednesday that the stock finally broke to the downside. The catalyst for this decline was the company's earnings report. Air Products showed a boosted profit on increased sales, but missed consensus estimates by once cent. Investors have had a clear bearish bias on APD ever since. Similar selling pressure has been seen in shares of chemical giants DD and DOW. DuPont reported their own quarterly earnings today and rose a paltry 27 cents after it beat estimates by three pennies. The recent action in chemical stocks is a reflection of economic uncertainty on Wall Street. Is a dreaded "double-dip" recession just around the corner? Nobody knows for sure, but as long as economic data remains sluggish (i.e. today's weaker-than-expected durable goods orders), the large institutional buyers will be hesitant to bet on a recovery in the manufacturing sector. Technically, we like APD as a bearish play because the stock is on the verge of breaking through key support in the $40.00 region. Shares rebounded from this level on multiple pullbacks in the second half of 2002. Pulling back to a weekly chart, we see that the next level of possible support is down at the 2001 lows near $32.00. For the purposes of this play we'll target a move to the $33.00 area. Shorter-term traders could aim for a test of the p-n-f bearish vertical count of $36.00. One caveat: The recent losses have pushed the daily stochastics into oversold territory. This indicates that APD might see some short-covering at current levels. However, we think the stock will succumb to another wave of selling once support gives way. We're placing an entry trigger at $39.84 (one cent under yesterday's low) in order to confirm a breakdown. If the play is activated we'll use at stop at $43.02, just above the descending 50-dma. More conservative traders could a stop slightly above Friday's high of $42.15. BUY PUT FEB-45*APD-NI OI=4 at $4.90 SL=2.45 BUY PUT MAR-45 APD-OI OI=15 at $5.20 SL=2.60 Average Daily Volume = 944 K ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** FUTURES CORNER ************** Half-life By John Seckinger jseckinger@OptionInvestor.com In the world of futures trading, every minute counts. By cutting certain levels in half, traders can get that much deeper into the mind of an institutional trader. The date in question: Tuesday, January 28, 2003. A rather quiet day with not a whole lot going on. There was resistance at a retracement level in-between S2 and R2 (856 level), and bulls did get their test of R1 as the session neared its end. For the most part, however, the pivot was center stage and wasn't left behind until 1 p.m. Looking at a chart below, it was interesting that the ES neither CLOSED above the 856 area nor even tested the 38.2% level below (blue line). This is certainly not a picture of an ideal trading situation; nevertheless, let us see how we could make it more manageable for aggressive traders. Chart of the ES03H, 5-minute One way to play the ES contract during a session like Tuesday is to split the ranges above in half. By taking 50% of the range from the pivot to the 61.8% area, a trader can then really look to scalp a move like an institutional trader. It all comes down to risk/reward. Using period closes only, if the ES contract closes below one of these retracement areas, then a trader should do an immediate risk assessment. Am I getting better than a 1:1 risk/reward? If Yes, then by all means look for the next retracement area to be hit. Looking at an example below, the top example shows a red candle CLOSING back underneath this new 50% area (853.50) and signaling a move to 851. The low of this candle is 853, and the objective is 851. Two points. The risk? Back above 853.50, so the minimum risk is only 0.50. We have better than a 1:1 ratio risk/reward; therefore, a scalping opportunity exists. On the other hand, the example at the bottom of the chart has the period closing at 849.75. Reward? 851. Risk? 848.25. Note: I always round to the nearest 0.25, since the ES contract only trades in 0.25's. Getting back to this example, the risk is 1.50 and the reward only 1.25. No trade. Counting up all the signals, there were about 16 signals in the chart below and only half were profitable. So, how can a trader better these odds? I would avoid all signals given around the DAILY pivot of 851. Only look at entries from other retracement areas. The odds then increase to roughly 5 winners and 2 bad signals. If you are a trader that loves to be involved, this could definitely help. Chart of ES03H, 5-minute Ok, let us say that a trader didn't want to get that aggressive. How else can a trader use these "new 50%" levels? Well, we did eventually have a test of R1 very late in the session. For the moment, let us imagine that we tested 859 much earlier. Regardless of the time, there didn't seem to be much resistance until near the 865 area. That is some good heat for an aggressive day trader, and let us see if this "new 50%" level could help with risk management. Looking at the chart below, notice how the "new 50%" area could have been used as a stop level if traders decided to sell short at or near R1 (859). I do believe that this tool will end up being a nice addition to futures traders. It is also interesting how the other "new 50%" area at 853.50 acted as support. This confirms the fact that I am not the only trader looking at such a level. Chart of ES03H, 5-minute It is definitely my belief that the 50% retracement area is an extremely valuable tool. I use it every day on the opening five- minutes of the Dow, and I do think that taking 50% of most day's ranges in its entirety can gauge sentiment if the contract is not trading near its daily pivot. The pivot, by definition, is 50% of the range from R2 to S2. Of course no coincidence. Therefore, why not split the retracement levels between R2 and S2 in half as well? Going forward, I will cut the levels in half in which either R1 or S1 resides in and then evaluate risk from there. As long as S1 is above the 50% area, or R1 below this level, a trader should be able to give themselves an edge. This tool may not be relevant every session; however, something to think about when wondering where a stop should be placed. Moreover, if we do get more sessions like the one we had today, using these "new 50%" levels will certainly make it more interesting. Good Luck. Questions are welcomed, John Seckinger ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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