The Option Investor Newsletter Thursday 03-06-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Tug of War Futures Markets: A Cherry in My Jello Index Trader Wrap: (See Note) Market Sentiment: Waiting & Patience Weekly Manager Microscope: Andrew Dudley: Fidelity Short-Term Bond Fund (FSHBX) Updated on the site tonight: Swing Trader Game Plan: Stalemate Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 03-06-2003 High Low Volume Adv/Dcl DJIA 7674.27 -101.30 7777.42 7659.09 1.53 bln 1201/2006 NASDAQ 1302.92 - 11.50 1312.61 1299.81 1.26 bln 1267/1948 S&P 100 416.49 - 3.81 420.79 415.38 Totals 2468/3954 S&P 500 822.10 - 7.75 829.85 819.85 W5000 7799.65 - 65.60 7865.25 7779.27 RUS 2000 353.84 - 2.70 356.54 353.29 DJ TRANS 2017.07 - 19.90 2036.46 2014.91 VIX 36.34 + 2.11 36.88 35.07 VXN 45.65 + 1.31 45.91 45.01 Total Volume 2,965B Total UpVol 898B Total DnVol 1,966M 52wk Highs 165 52wk Lows 356 TRIN 1.17 PUT/CALL 0.93 ************************************************************ Tug of War Investors torn over the potential war scenarios battled over a very limited point range this afternoon. The lack of significant movement in the last hour showed that buyers and sellers had reached an impasse with each controlling their respective areas but unable to penetrate the small demilitarized zone between them. Dow Charts - Daily Nasdaq Chart - Daily I have been preaching for weeks about the jobless claims and they just keep getting worse. Claims came in at 430,000 and grossly over the 405,000 estimate. This was the third week over 400,000 and it brought the four week moving average to 409,000 and in very critical territory. Continuing claims also rose to 3.52 million and their highest level since November. Layoffs remain at a recessionary level and new hiring has failed to increase. This is painting a bleak picture for the economy going forward and sets up a chance for a substantial miss in the Nonfarm payrolls tomorrow. On the flip side the Productivity Report showed a strong gain in productivity in the 4Q with the number revised upward to +0.8%. Obviously higher productivity means fewer workers needed to achieve the same output. Higher productivity is also a result of cutting employees which leaves fewer workers to accomplish the same tasks. This is not a good sign for those workers still unemployed but a minor positive for corporate America. Factory Orders were also up +2.1% compared to estimates of +1.5%. This is a confusing number as it is contrary to most other economic reports and showed a broad increase across all areas. Non-defense investment rose +1.2% which is a good indication of corporate spending. The unfilled orders backlog continues to shrink which means future headline numbers are not likely to continue to grow. Chain Store same store sales were announced and other than standouts WMT, PSUN and GPS the results were ugly. GPS was up +8% and PSUN +14.8% with WMT increasing +2.6%. KSS dropped -4.6%, Sears -9.4% after closing 130 stores during the President's Day blizzard. Pier One fell -5.8%, FD -6.8%, JCP -2.1%, MAY -7.5%. Overall department same store sales fell -5.5%. Weather was blamed in most cases but shoppers have been notably absent since the orange alert was issued. Other notable events was a drop in TSN, Tyson Foods, to a 13 year low on falling consumer sales causing a glut in meat products. Their warning of no expected profits for the current quarter was significantly below the 14 cents expected. IPG, an advertising holding company, missed estimates by a mile with a nickel profit compared to estimates of 18 cents. They lowered their outlook for the year due to falling ad sales and losses of several major accounts. Today was not a day for economic news to move the markets. The Jobless claims and overseas results had the market heading south at a high rate of speed at the open but the rumor mongers jumped in to stop the descent cold. First there was a rumor that North Korea had agreed to let UN inspectors back into their nuclear facilities. That was later denied and attributed to comments from China that "IF" the US would hold face-to-face talks then NK might let inspectors back in. Secondly there was a rumor at 10:AM and started to coincide with the release of the Factory Orders report that Osama had been captured from info received from Khalid Mohammed. This rumor sent the Dow back to positive territory before being denied by the US. It was also announced that Bush had called an unscheduled press conference at 8:PM and the Osama rumor began again. Surely Bush was going to announce his capture to the world. The idea that anybody could keep that type of info secret for 12 hours is amazing. It would be the biggest news event since 9/11 and the capture of the most wanted fugitive in the world would be filling the airwaves. Once the White House denied Bush would announce his capture the rumors turned to what he might be going to say. War, he is going to declare war! Wrong again, but the rumors were so persuasive the White House had to issue an update saying that Bush would be saying nothing new but would touch on terrorism, Khalid Mohammed, Iraq and then take questions. This format calmed trader's nerves somewhat since it is not the format for a major news release. There was also the persistent rumor that Iraq was destroying their own oil fields. This was denied several times by different branches of the government but was still persisting even after the close. The effect of all these rumors was paralysis in the markets. The Dow sank to it's lows for the month at 7659 and only +30 points above its February lows. It hung there from 12:30 through the close and stayed in a very narrow range. The Nasdaq positively refused to break 1300 although it tried several times. With both indexes literally on the edge of the cliff both held their ground. Bears could not over power bargain hunting buyers who would not chase prices but provided plenty of buying power at that last ditch support. It was a stalemate and if there was a winner I would give it to the bulls for not caving in to pressure. Volume was light again as everybody was holding their cash until the events of tonight and tomorrow played out. The first event was a mid-quarter update by Intel. Intel had been expected to affirm or even raise guidance slightly after Dan Niles went public with his thoughts last week. In reality Intel lowered guidance although it was cleverly worded. They had previously guided to $6.5-$7B in revenue. They lowered that range to $6.6-$6.8B. Not a big move but psychological more than material. The big drop came in the estimated profit margin. It fell from 52% to "less than 50%" give or take a point or two. This 2-3% drop equates to a very large number in profits. Something in the $200 million range. For Intel this is not a big number but it showed that things were not really improving in the tech sector despite what people thought. INTC traded down to $16 in after hours. All eyes are focused on the press conference at 8:PM tonight. It is commonly thought that any hope of a multinational attack has faded completely and the US is prepared to go it alone and soon. The speech will probably try to sell the case for attacking Iraq once again but more importantly they expect Bush to violently attack the UN and nations that have elected to go against the US position. He will likely repeat the UN is no longer relevant when two bit dictators can thumb their nose at them and continue to defy their authority. He is not going to win any friends but he will probably put them on notice that business as usual has ceased. Trade deals, troop basing, loans, aid, etc are going to dry up quickly for anybody that votes against the US. Several analysts have predicted a new "cold war" among allies is beginning. Rumsfield has already floated the trial balloon about removing our troops from Germany. Surely it is just a coincidence, right? (grin) Tomorrow Hans Blix delivers another update on Iraq to the UN and he is expected to say cooperation has increased but only grudgingly. Powell is going to reiterate that it is a cat and mouse game with Saddam very experienced at hiding the cheese and years of inspections would not accomplish anything. Next week the resolution issue is expected to come to a vote and there are between 6-8 versions being floated. Most analysts feel this is just a waste of time with only four countries on our side. Most feel the 72-hour warning will be given on Monday and possibly a very short deadline for Saddam to leave or comply of as little as 72 hours after that. The current target date for war is March 17th. This has been calculated by numerous planners and analysts based on the logistics of getting all the troops and equipment to the gulf. There is sufficient equipment in place already to win the war but overwhelming force tends to win overwhelmingly. Another 60-75,000 troops currently in route would fill that bill. Economically we have the Nonfarm payrolls at 8:30AM and the estimate is for an increase of +6,000 jobs. I suspect the number could be significantly lower. All bets are off for market direction on Friday due to the Bush press conference, the Nonfarm payrolls and the Blix report. The best advice would be to take the day off and play golf unless you have a very accurate crystal ball. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** A Cherry in My Jello By Vlada Raicevic Daily Settlement Numbers 4:15pm ET Contract Last Net High Low Dow 7673.99 -101.61 7777.42 7659.09 YM 03H 7673.00 -92 7773 7630 Nas 100 983.96 -6.27 991.69 976.55 NQ 03H 985.50 -7 980.50 977.00 S&P 500 822.10 -7.75 829.56 819.85 ES 03H 822.00 -1.50 830.00 819 Daily Pivots Five-day chart showing the calculated pivot and support/resistance values. o S2 and R2 are green lines. o S1 and R1 are black lines. o Pivot is red-dashed line. Pivot for YM 03H Pivot for NQ 03H Pivot for ES 03H ESO3H March S&P E-Mini The markets opened with a whimper today, gapping down and exciting the bears with the hope that perhaps the big break was upon us. An attempt was immediately made to try and fill the gap, but it failed and we spent the next 15 minutes moving down and breaking S1 at 821.83. While futures traders were anticipating at least a test, and perhaps a break of yesterday’s lows, we instead bounced at 819 horizontal support (and S2 from a couple days ago) and proceeded to head up and fill the gap. This move up had plenty of momentum and it looked, for a moment, that we would have yet another amazing vertical liftoff, but the move ran out of gas at the first real horizontal resistance: yesterday’s end of day highs. A feeble attempt at breaking past 830 was made by the bulls, but heavy selling lead to a quick downdraft, finding support at 824.25, where another attempt was made to move up but that failed as well. This lead to another strong move down for a brief time, and then the dreaded jello-beast took over..the ES made some attempts at rallying and selling, with neither side getting the upper hand. The Pivot Chart above shows that once broken below S1, price could not close much above that level on a 30 minute candle. There was a slight trend upward, as shown by the rising orange regression channel below on the 5 minute chart, but it was sloppy, and it seems that most of the day was spent in hope: The bulls hoping that the higher lows meant we had blunted the bearish leanings, and the bears hoping that the bulls had given up and that we would sell into the close. Neither happened. A note on the charts below: I use three different regression channels on my charts: o 200 period (black lines) o 78 period (blue lines) o 50 period (orange lines) Each outer line (tine) acts as resistance/support, the longer term channel as stronger support/resistance, and the shorter term lines progressively weaker. 5 Minute ES 60 Minute ES Bearish case is still in play. RSI, MACD, and Stochastic are all below their respective centerlines. There is nothing here to show that the trend is changing. Regression channels show that we have plenty of room to move down to the low 800’s, but we have to get below horizontal support at 820-817 first. Breaks above trendlines drawn on MACD and RSI would signal potential reversal, but waiting for the centerline to be broken to the upside would most likely be the safest course. Daily ES NQO3H March Nasdaq E-mini In looking at the NQ, I had to double check that I wasn’t looking at the ES chart by mistakeit was neither much stronger nor much weaker. The only clue that it was actually outperforming the ES can be seen by the pivot chart from above. NQ never closed below S1, although it did pierce it on the initial morning move down. On the reversal move up, it pierced and closed above the Pivot at 987.50, but after falling below the pivot, it never really threatened it again, trading sideways and often closing nearly evenly between S1 and Pivot. So it can be said that the sideways movement had a slight negative bias, but not enough to matter. The 60 minute chart below does show that there is a slightly bullish attitude over the past 200 60-minute bars. NQ 60 min NQ Daily 200 period daily shows regression channel is pointed only slightly down. Means that over the past 200 days, the net movement of the NQ has been, well, flat. With the trendline from the Oct lows will be coming into play around the 966 area, but this line is rising each day. YMO3H March Dow E-Mini ($5) The Dow emini also had a similar day to the ES and NQ. It didn’t diverge much from the general state of the futures movement, although to my eyes, it felt weaker, and the moves upward were quicker to give their gains back. The pivot chart above shows that the YM was a little weaker than ES, with fewer attempts at breaking above S1 at 7693, and much weaker than NQ, trading in the upper third area between S2 and S1. Note how the 200 period regression channel is pointing down on the 60 minute chart with regards to the NQ channel which is essentially flat. YM 60 minute YM Daily Note how steep the down channels are, and how price has pierced the lower channel twice on strong momentum selloffs. There is also a positive divergence on the MACD that might bear watching. Vlada Raicevic ******************** INDEX TRADER SUMMARY ******************** Same range as yesterday, but Dow loses a level The major indexes traded in an almost identical range as was found on Tuesday, with the exception being that the major indexes closed their lows today. Yesterday's range in the Dow Industrials (INDU) was 7,775-7,661 and today's range was 7,777-7,659. This is rather "amazing" considering the market caps of these 30 stocks to see an identical range. Even more "amazing" was how a little thin line from a retracement bracket that had been anchored at from Tuesday's and Wednesday's DAILY S2-R2 served support the past two sessions (shown below). However, today's lower close has that retracement level being "erased" and I'm looking for two-day Dow support to also be erased in tomorrow's session. Of course, I haven't heard what President Bush is going to say in tonight's unscheduled televised speech, but news of this speech seemed to have traders sitting on their hands, with some skittish bulls moving to the sidelines in today's trade. When I was updating our pivot analysis matrix for tomorrow, I thought somebody had beaten me to the punch. Wednesday's S&P 500 Index (SPX.X) range was 829.85-819.00 and not too different from today's 829.87-819.00. To get that kind of match it would take a computer! And that's what I think has been taking place the last two sessions. With the various "levels" moving lower from the DAILY pivot matrix analysis, I'm looking for a lower trade again tomorrow. While Intel (NASDAQ:INTC) $16.70 -1.64% fell during the regular session, then narrowed it targets quarterly revenue range to between $6.6-$6.8 billion from $6.5-$7.0 billion in tonight's mid-quarter conference call, and saw its shares fall to $16.00 in extended hours, the "lack" of any type of upside surprise and no new visibility to have the company making any upward or downward revisions, did add a slightly negative tone to shares in the after-hours session. NASDAQ 100 futures (nd03h) settled at 985 and trade quiet at 981 as tomorrow's session has already begun. Here's a look at tomorrow's pivot analysis matrix. Pivot Analysis Matrix For the second consecutive session, the S&P Banks Index (BIX.X) 268.63 -1.32% holds WEEKLY S1 of 268.34, though it was traded to the decimal today (computers?). I Will set an alert there to alert to weakness, which may spill over toward the major indexes in tomorrow's session. If BIX.X makes a move below that level (268), good correlative support between Dow's DAILY S1 and MONTHLY S1 of 7,692 would be next alert to weakness. While March is still young, MONTHLY S1 levels have not been tested at this point, but as we've noted in recent weeks, it has been the Dow to first test a level of support and drag the other indexes lower. In past two sessions, Dow's been finding support at 7,665 level, which has come from a retracement level from DAILY retracement (shown in market monitor, and will show tonight). However, today's low session close has that DAILY retracement support lowered to 7,636 tomorrow and we now see a "zone of resistance" from DAILY and WEEKLY retracement at 7,686-7,963, and turns out that this was a "zone of resistance" all day today after the Dow reached a session low. From support at 7,629, we could build a "zone of support" further down in Dow at DAILY S2-WEEKLY S2 of 7,578- 7,585. This might be good MAX WEEKLY decline zone for an end of week target and good bearish cover zone. Despite negative after-hours reaction to Intel's mid-quarter update, I'll still mark a correlative resistance for NDX at 997- 999, which would be just below "psychological" 1,000 level. Again, President Bush's speech is still ahead, and with some selling in Treasuries today on what I think was some profit taking in the bond markets after a nice Additional correlative resistance found in OEX at 423. Here's a look at an intra-day chart of the Dow, which shows how a DAILY pivot analysis retracement has been serving up support at the 7,665 level. I showed a very similar chart in Wednesday's market monitor and actually had the 7,665 being a level of support as the WEEKLY S1 of 7,734 was being broken to the downside. Dow Industrials Chart (12:30 PM EST) - 5-minute interval I was actually using this Dow chart today when profiling a QQQ bearish trade for day traders from QQQ $24.46, using a stop at $24.60 and targeting $24.25 to the downside. I was trying to think like a computer and "knew" I needed a Dow break of 7,666 to have the QQQ following the Dow lower. It appeared the QQQ was being traded like a computer as the session high after my bearish profile was $24.60 (to the penny!) and in tonight's after hours trade the Q's traded a low of $24.23, I alerted short-term bears to lock in if still short at $25.27, and the Q's settle at $24.41 (just below WEEKLY S1 of $24.42) as I type. Now, all I really wanted to show from the above chart is a reference of how that 80.9% retracement has been coming into play. If thinking like a "computer" then this is what tomorrow's Dow chart would look like, and why I have a directional bias to the downside tomorrow. Dow Industrials Chart - 10-minute intervals I switched the above chart to 10-minute intervals, so that I can get more historical data on the chart, and to perhaps instill into traders, especially those that may have shorted/put the Dow on Monday on the break below the WEEKLY pivot of 7,877 how far they've come this week. I've "dashed" the 7,666 level to show where the DAILY (brown/gold is DAILY retracement) was at, and how today's lower close in the Dow, has the 80.9% retracement now lower at 7,636. It's interesting that we now get a tight little zone of resistance from 7,680-7,693, which seemed to serve as a "zone of resistance" all afternoon. Don't be surprise tomorrow morning if Dow futures are down 40-points and the Dow opens for trade at 7,636. If the trend is lower tomorrow morning, then a trader that is looking for some downside profits notes 3 levels from 7,567-7,585 where we might expect some computer buying to be taking place. 300 Dow points in a week isn't that bad for a bearish trader to lock in some gains if they're found. Today's action saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU). Status remains "bear confirmed" at 13.3%. NASDAQ-100 Index Chart - Daily Interval I listened to tonight's mid-quarter update from Intel, and I can't say that I heard anything from analyst's questions or Intel's comments that would have me "rushing" to sell or buy technology stocks. This thinking not only applies to bulls, but bearish traders that may have shorted the QQQ or other technology stocks ahead of tonight's mid-quarter update. While the NASDAQ-100 looks "risky" to me from a bullish point of view as it relates to the Dow Industrials challenging its 02/13 relative lows and the NDX still well above that level, a bearish trader will most likely have to honor overlapping support at 970 as a bearish trade target right now. Correlative resistance at the WEEKLY pivot, which sure seems to mark the apex of our triangle of upward and downward trend is near-term resistance. Today's action saw a net gain of 1 stock to a reversing point and figure buy signal in the NASDAQ-100 Bullish % ($BPNDX). This has the bullish % edging back up 1% to 34%. Still "bear confirmed." S&P 500 Index Chart - Daily Interval As I look at the above chart of the SPX, it would be hard for me to put on a full position trade from a bear's perspective. If full position bearish from above 843, I'd be very tempted to protect some gains in at least 1/2 of that position on a move much above 825. I'm just noting now (didn't see it when I was making correlations in the pivot matrix) that tomorrow's DAILY pivot is 823.90, which would tie in with the MONTHLY (red retracement of 61.8%) and the WEEKLY S1 of 823.70. I would think this would provide some type of early session resistance. While I think today's selling in Treasuries was due to some profit taking and the lowering of interest rates by the ECB overseas, I'd still error a bit on the side of caution if full position bearish in SPX options, ESPECIALLY if holding March expiration. Today's action saw the broader S&P 500 Bullish % ($BPSPX) slip lower to 31.6% from 32%, so a net loss of 2 stocks to reversing lower point and figure selling signals. This is a new low reading for this indicator since the December reversal. Still "bull correction" here. S&P-100 Index (OEX.X) - Daily Interval I went back an looked at prior index declines with overlaid Bollinger bands, and there have been days where a "spike" lower did pierce the lower Bollinger band to the downside, but the OEX indexes would close back near the band. This makes it look highly unlikely that we'd see a test of the WEEKLY S2 of 806.3 tomorrow (if we did, I'd definitely lock in some bearish gains). Resistance begins to look more formidable near-term at the MONTHLY pivot of 837.3 and WEEKLY pivot of 835.9. Remember, the WEEKLY pivot matrix will change after tomorrows close as this week's trade will be completed. But now I'm starting to think this. We can see from tonight's comments and DAILY retracement work in the Dow, that a LOWER close in the Dow had tomorrow's DAILY retracement moving lower. Right?... Right! As such, I think an index BEAR would want to see the indexes close BELOW yesterday's (Wednesday's) highs. Why? Because this would at least have the WEEKLY retracement moving lower (like the Dow's DAILY does). Index traders holding FULL position BEARISH trader for CURRENT month expiration may want to think about this. A protective stop just above Wednesday's highs might be a smart idea. Today's action saw a net loss of 1 stock to a reversing point and figure sell signal in the S&P 100 Bullish % ($BPOEX). This has the bullish % falling to 26%, which is a new low reading for this indicator. 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 **************** Waiting & Patience OI Staff Thursday was more a day of rumors than trading. The major indices ended the day in the red and not for lack of any negative rumors floating up and down Wall Street today. Now that the President has held his prime time news conference the last few bits and pieces of the stage are falling into place. The U.S. will have a vote next week and the world will see who is willing to take a stand against Saddam and his own regime of terror and who will not. How does this apply to the markets? As you can see in today's trading, the markets seemed to be placed on hold most of the afternoon as we waited to hear from Bush. Intel's mid-quarter update was an idle news story to pass the time while we waited from word out of the White House. Not that it mattered...Intel's report that is. The semiconductor giant merely narrowed its revenue guidance from $6.5 to 7.0 billion to $6.6 to $6.8 billion. Business may not be bad but it's not good either. Intel was trading down in after hours markets once their report was out. Whether this is enough to pull the $SOX, which has been consolidation sideways, through the 280 support level is another matter. Should the chips cave in, the $NDX is sure to head to its mid-month lows and the Nasdaq Composite will likely surrender the 1300 level (yet again). The Volatility Index (VIX) and the Nasdaq Volatility index (VXN) have been slowly drifting lower, emphasis on slowly. We're certainly not seeing any real fear but investors are definitely not complacent given the significant event risk in our future. Meanwhile, buyers continue to flock to the golden metal and the April gold contracts are back above the $355 mark. Gold could have some resistance at $360 but should the shooting start, odds are an emotional spike will send it higher short-term. Also heading higher are crude oil prices. Previously, oil futures hit a high near $40 a few days ago but have since pulled back into a steady, unwavering march higher. How this commodity will react when the U.S. finally gives the word to invade is a much-debated subject. It appears the President and his allies are growing impatient and Wall Street would like to stop waiting. Next week should be interesting. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10353 52-week Low : 7197 Current : 7674 Moving Averages: (Simple) 10-dma: 7836 50-dma: 8194 200-dma: 8550 S&P 500 ($SPX) 52-week High: 1106 52-week Low : 768 Current : 822 Moving Averages: (Simple) 10-dma: 833 50-dma: 867 200-dma: 905 Nasdaq-100 ($NDX) 52-week High: 1350 52-week Low : 795 Current : 984 Moving Averages: (Simple) 10-dma: 994 50-dma: 1009 200-dma: 1004 ----------------------------------------------------------------- Both volatility indices appear to be resting as they know that once the shooting starts it will be a race higher again. The question seems to be how high? If the U.S. goes it alone the selling pressure is going to be a lot greater than if they can actually swing the security council to our side of the fence. CBOE Market Volatility Index (VIX) = 36.34 +2.11 Nasdaq-100 Volatility Index (VXN) = 45.65 +1.31 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.94 475,474 445,198 Equity Only 0.86 309,870 267,675 OEX 0.93 19,702 18,390 QQQ 1.26 48,081 60,745 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 38.1 - 1 Bull Correction NASDAQ-100 34.0 - 0 Bear Confirmed Dow Indust. 13.3 - 0 Bear Confirmed S&P 500 31.6 - 2 Bull Correction S&P 100 26.0 - 1 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 1.62 10-Day Arms Index 1.39 21-Day Arms Index 1.34 55-Day Arms Index 1.35 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 1033 1796 NASDAQ 1196 1851 New Highs New Lows NYSE 91 180 NASDAQ 56 106 Volume (in millions) NYSE 1,497 NASDAQ 1,245 ----------------------------------------------------------------- Commitments Of Traders Report: 02/25/02 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 made few changes to either side of the equation, resulting in a net change of 200 short contracts. Small traders added 2300 contracts to the long side. Commercials Long Short Net % Of OI 02/04/03 414,543 465,678 (51,135) (5.8%) 02/11/03 412,333 472,156 (59,823) (6.8%) 02/18/03 423,871 481,871 (58,000) (6.4%) 02/25/03 424,276 482,476 (58,200) (6.4%) Most bearish reading of the year: (111,956) - 3/6/02 Most bullish reading of the year: ( 16,472) - 10/01/02 Small Traders Long Short Net % of OI 02/04/03 151,174 93,439 57,735 23.5% 02/11/03 161,126 95,618 65,508 25.5% 02/18/03 155,475 91,102 64,373 26.1% 02/25/03 157,790 91,083 66,707 26.8% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 Commercials added slightly to the long side and added 1,200 short contracts. Small traders left the long side alone and reduced shorts by 2,000 contracts. Commercials Long Short Net % of OI 02/04/03 40,934 50,992 (10,058) (10.9%) 02/11/03 39,412 53,818 (14,406) (15.5%) 02/18/03 38,486 50,501 (12,015) (13.5%) 02/25/03 38,787 51,745 (12,958) (14.3%) Most bearish reading of the year: (15,521) - 3/13/02 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 02/04/03 25,573 8,648 16,925 49.5% 02/11/03 29,667 8,915 20,752 53.8% 02/18/03 25,482 9,425 16,057 46.0% 02/25/03 25,378 7,431 17,947 54.7% 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 increased the long side by 1,000 contracts and left shorts relatively unchanged. Small Traders reduced the long side by 700 contracts and left the short side alone. Commercials Long Short Net % of OI 02/04/03 17,596 11,232 6,364 22.1% 02/11/03 19,826 11,800 8,026 25.4% 02/18/03 18,812 11,939 6,873 22.4% 02/25/03 19,985 11,866 8,119 25.5% 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 02/04/03 4,583 9,424 (4,841) (34.6%) 02/11/03 5,390 9,300 (3,910) (26.6%) 02/18/03 5,561 8,973 (3,412) (23.5%) 02/25/03 4,872 8,723 (3,851) (28.3% 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 MANAGER MICROSCOPE ************************* Andrew Dudley: Fidelity Short-Term Bond Fund (FSHBX) Income-oriented investors concerned that rates have bottomed and may tick up in the second half of 2003 may find the conservative investment strategy that Andrew Dudley follows in the management of the Fidelity Short-Term Bond Fund to their liking. Before he joined Boston-based Fidelity Investments in 1996, Mr. Dudley was a bond portfolio manager at cross-town rival, Putnam Investments from 1991 to 1996. The Yale-grad earned his MBA degree from the University of Chicago in 1991. Dudley became the portfolio manager of the $5.4 billion Fidelity Short-Term Bond Fund in February 1997. At that time, he assumed portfolio management responsibility for Fidelity Advisor: Short- Term Income Fund as well. In August 2002, Dudley took the reins of the Fidelity Ultra-Short Bond Fund. Previous fund management assignments included the Fidelity Advisor Intermediate Bond Fund, Fidelity Institutional Short-Intermediate Government Fund and the Fidelity Intermediate Government Fund. Like in other areas of Fidelity, the best portfolio managers move up the ladder into the large asset-base funds. So, the fact that Fidelity entrusts the $5.4 billion Short-Term Bond Fund to Dudley says a great deal about their confidence in him. The fact he has been the manager since 1996 indicates he has performed relatively well compared with other short-term bond funds during his tenure. As a general rule, Fidelity managers seek to produce returns that rank in their relative category's top two quartiles. The no-load Fidelity Short-Term Bond Fund may be bought directly from Fidelity or through Fidelity's no-load NTF fund network for personal investors. The fund is also available through a number of brokerage fund networks, including Accutrade, Schwab's retail fund program, T. Rowe Price, TD Waterhouse, and Vanguard. There is a minimum initial investment of $2,500 for regular ("taxable") accounts; $500 for IRA ("tax-deferred") accounts. Adding to the fund's appeal is its below-average annual expense ratio of 0.58%. That compares to 0.85% for the average short-term bond fund, per Morningstar. Investment Style/Strategy In managing the Fidelity Short-Term Bond Fund portfolio, Dudley pursues a high level of income, consistent with preservation of capital. He does that by investing at least 80% of fund assets in investment-grade debt securities of all types and repurchase agreements for those securities, while normally maintaining an average maturity of three years or less. To reduce portfolio risk, Dudley allocates assets across fixed income market sectors and maturities, and limits big "duration" bets relative to the index benchmark. Rather, Dudley maintains the fund's duration around that of the Lehman Brothers 1-3 Year Government/Credit Index. Accordingly, the fund's "value added" stems primarily from Fidelity's research, and Dudley's security selection prowess. FMR research will analyze a debt security's structural features, current pricing, trading opportunities and credit quality in determining which issuers to include in fixed income portfolios. According to Morningstar, the Fidelity Short-Term Bond Fund had an average effective duration of 1.9 years at June 30, 2002 and an average credit quality of A. While a "A" average quality is considered to be investment-grade, it is not "high grade" so to speak, and reflects the inclusion of both high-grade and medium- grade issuers. Indeed, at mid-year 2002, the portfolio had 25% of assets invested in BBB-rated issuers. Another 13.2% of fund assets were invested in non-rated debt securities. So Dudley's reach includes all layers of the investment grade market - from high-grade U.S. government securities to medium-grade corporate bonds, wherever the best risk-reward opportunities are located. While Dudley does reach for yield, which can increase portfolio risk compared to high-grade short-term bond funds, he does keep the portfolio average duration near that of the LB 1-3 Gov/Corp index, which usually is shorter than the average short-term U.S. bond fund. The result is a portfolio that thrives on its fixed income research and offers shareholders higher return potential than similar funds, without making big duration bets and taking excessive risk relative to its short-term bond fund peer group. Fund Returns/Ratings According to Morningstar, Dudley's risk-adjusted returns in the last five years earn this fund an above-average, 4-star overall rating within the short-term bond fund group. Since Dudley has managed the portfolio for the last six years, you can attribute the fund's above-average performance and ratings to him as well as his supporting cast of analysts, traders and other portfolio managers. Lipper's rankings support the fund's above average rating, with the fund ranking 8 out of 123 short-term investment-grade funds in the past year, and ranking 11 out of 91 funds for trailing 5- year performance. The 3-year chart below gives you a graphical depiction of the fund's net asset value movements over the past three years. For the trailing 3-year period as of March 5, 2003, Dudley earned a 7.5% average annual total return for investors. That was solid enough to rank in the 28th percentile of the short-term bond fund category (near top quartile). For the trailing 5-year period, he produced a 6.5% average annual total return, ranking in the first quartile (24th percentile) of the category. So, Dudley's returns have been fairly strong and consistent. Since 1999, Dudley's annual returns have ranked in the category's two highest quartiles. In 1999, Dudley returned 3.3%, ranking in the top quartile of the short-term bond category. His returns of 7.9% in 2000 and 7.6% in 2001 ranked in the second quartile those years. In 2002, his 6.7% annual return put him back in the first quartile of the short-term bond fund group. And, so far in 2003, the fund is up 1.2%, better than two out of three short-term bond funds, per Morningstar. Helping the fund to remain competitive is its low expenses, which at 0.58% of assets doesn't take too big a bite out of its return. Conclusion Dudley has managed this fund since early 1997, delivering strong, consistent return for investors without incurring excessive risk. Conservative income investors in search of a top short-term bond fund have all the makings of one in the Fidelity Short-Term Bond Fund managed by Andrew Dudley. For more detail or to download a fund prospectus, log on to www.fidelity.com. 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 *********************** Stalemate Linda Piazza Imagine CNBC taking a poll. Will the markets fulfill the targets of the H&S formations formed from November to late January? Will they instead steady at current levels and then move up to complete the right shoulders of reverse H&S formations? Imagine another poll. Will markets rally once bullets start flying? Will markets tank once the bullets start flying and market participants must focus on the problems facing global economies? 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The Option Investor Newsletter Thursday 03-06-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: None Dropped Puts: SYY Daily Results Call Play Updates: AMGN, BDX, DGX, MME, SLAB, ZMH New Calls Plays: None Put Play Updates: BBOX, MHK, PII, UTX, VZ, XL New Put Plays: TIN **************** 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: ***** SYY $24.60 +0.28 (-2.52) Played out to perfection. As SYY broke below major support at $27.50, we added it to the put list, looking for a decline down to the $22 area. The stock gave us a perfect entry on Monday with a failed bounce at $27.50 and the stock has been under heavy selling pressure all week. This morning saw a big move down, with a low of $22.90 before SYY bounced and bounced hard. Given the strength of the rebound today, it looks like this one is just about played out and we're dropping coverage tonight. Traders still in the play should look to exit on any weakness tomorrow, or at least lower stops to $24.75, just above today's intraday high. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu Week AMGN 55.40 -0.90 0.27 1.42 0.07 New Relative Highs BDX 33.80 -0.23 -0.64 0.27 0.10 Up trend intact DGX 52.36 -0.73 -0.97 0.64 0.17 Intraday Support MME 37.75 -0.15 -0.10 0.82 1.73 Breakout SLAB 27.58 -0.85 0.02 0.46 0.72 A Sector Leader ZMH 44.79 -0.96 -0.05 0.53 0.56 Poised to Move PUTS BBOX 38.69 -1.00 -0.11 -0.29 -0.72 Ready to Drop MHK 45.69 -0.82 -1.18 -0.71 -0.98 Another Relative Low PII 45.80 -0.69 -1.36 0.33 -0.28 Sideways trading SYY 24.60 -0.70 -0.50 -1.19 0.28 Drop, Major low! TIN 39.53 -0.52 -1.43 0.01 -0.81 New, Broke Support VZ 33.40 0.22 -0.40 0.13 -1.23 Another Breakdown XL 68.62 -0.80 -0.45 1.23 -0.63 Still Churning ************************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 ******************** AMGN $55.40 +0.07 (+0.76) Those frisky bulls just can't seem to get enough of our AMGN play, as they drove the stock to a new intraday high of $55.95 on Thursday before relaxing just a bit in the final hour of trade. Despite the weakness in the broad market and the BTK index, AMGN just keeps powering higher. Isn't it amazing what positive guidance and a strong bullish price chart can do? Throughout this play, we have done well by targeting pullbacks to support for new entries and despite the breakout over the past couple days, we're going to stick with that winning formula. The optimum entry zone now looks like $54.00-54.50, as that area defined the congestion/resistance area before the breakout over $55. A pullback into that area ought to provide a solid level for initiating new positions, while more aggressive traders could even target shoot as low as the $53.50 level (the site of the 20-dma). The multi-month ascending trendline has provided consistent support throughout the play, so we'll continue to raise our stop to just below that line. With the trendline currently right at $53, we'll raise our stop to $52.90 tonight. --- BDX $33.80 +0.10 (-0.60 for the week) Unfortunately we have little new to report on BDX from Tuesday. No new news and little change on the price chart. On the other hand, if you're an optimist, BDX has been displaying some relative strength and trading sideways compared to a weak overall market. The upward trend remains intact but we would like to see the stock close above the $34 level again. Very conservative traders could tighten their stop to just under the $33.20 area as the stock has bounced there twice in the last two sessions. Officially, we'll leave our stop at 31.98. Considering the overall market conditions, we would not recommend new positions unless BDX begins to show greater strength. --- DGX $52.36 +0.17 (-0.40) With last week's surge through the $54 level, DGX looked like it was ready to stage a major breakout over the $55 resistance level. But it appears that such a bullish plan was not to be, as the broad market pressured the stock back to major support just above the $51 level earlier this week. That pullback may be just what the Dr. ordered, as we can see the stock confirming support just above the $51 level, continuing to hold above the 20-dma ($51.66) on a closing basis. With the bullish picture being depicted on the PnF chart, this latest pullback is providing an attractive entry point, with risk easy to manage using our $50.50 stop. As long as the stock continues to find intraday support above the $51 level, this recent pullback looks buyable. The anemic volume on this latest pullback helps to confirm that it is a consolidation before moving higher. Traders seeking confirmation before playing will want to see DGX crest the $52.50 or even $53.50 level before entering the play. --- MME $37.75 +1.73 (+2.00) What a difference a couple days makes! When we looked at MME on Tuesday, the stock seemed to be mired in the $35-36 area, unable to build on the push through our entry trigger of $35.25. But things changed for the better yesterday, as the stock managed to push through the $36 level on a closing basis. Although we don't know what the root cause was (there was no news), MME bulls really put on a burst of buying on Thursday, propelling the stock as high as $38 on heavy volume. The price relaxed a bit into the close, but with another X being added on the PnF chart, the fears of a bull trap have been significantly reduced. Next up on the bulls' agenda will be a move through the $38 level, which ought to easily lead to a test of resistance at $40. But we may need to see a bit of profit-taking before that move takes place. A pullback to confirm the $36 level as new-found support looks like it would be the next high-odds entry point. To protect against a sharp pullback, we're raising our stop to $35, as MME shouldn't be able to close below that level if today's rally is for real. --- SLAB $27.58 +0.72 (+0.46 for the week) All eyes were on Intel tonight after the bell, well, at least those eyes not waiting and watching for President Bush's primetime press conference. Bulls and Bears had to meet in the middle over Intel as the chip giant narrowed its range for Q1 revenues. Previously, the company gave guidance of $6.5 to $7.0 billion. Now that range has narrowed to $6.6 to $6.8 billion. Business may not be as bad as it could have been but it's not as good as it could be either. The stock (INTC) was trading down after hours due to the news. What our readers need to be aware of is how the $SOX reacts to Intel's news. If Intel continues to sink tomorrow it could be the catalyst bears need to break through the support at 280 on the SOX. Should the SOX breakdown then we seriously doubt that SLAB, as strong as it has been, will be able to fight the up hill battle alone in the face of a sinking sector. Considering the environment we are pretty encouraged by SLAB's strength. The stock has taken the last two sessions as an opportunity to bounce higher off its rising trend. If SLAB traded in a vacuum we'd consider new longs. Unfortunately it does not. Thus, we're going to make the following strategy changes. Number one, we're upping our stop loss to $25.74. Barring any gap down this should significantly reduce our exposure. Number two, we're going to set an official price target to exit the play for a profit. Should SLAB trade at or above $29.50 we'll close the play. --- ZMH $44.79 +0.56 (+0.40 for the week) We hate to sound like a broken record but it appears to be more of the same for ZMH. Fortunately, this time more of the same means the up trend continues to inch higher. The stock rallied off the bottom of its intraday trading channel and is now starting at the $45.00 level of resistance once again. Option traders should take note that ZMH is not the fastest moving stock out there. The weekly chart is showing the stock at the top end of its weekly channel, which would lead one to believe that upside is limited. Meanwhile we have sort of a conflicting bullish bias on the daily chart as shares creep higher. Considering the market environment today caution is the watch word. We love the relative strength shown by ZMH but any short-term upside target is probably in the $47.50 range. Make your trade adjustments appropriately. Given the state of world affairs and the market's recent performance we are going to raise the stop on ZMH to $42.95, which should reduce our exposure. ************** NEW CALL PLAYS ************** None ************************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 ******************* BBOX $38.69 -0.72 (-1.97) Despite another big downdraft in the broad markets on Thursday, traders are still left wondering whether BBOX is going to break down or if this is just a mild pullback. The daily chart looks like it is predicting a breakdown, but it is interesting how staunchly the bulls are defending the $38.70 level, which happens to be the top of the October 17th gap. We're looking for the stock to fill that gap and then work its way down to the larger gap in the $33-35 area. But first the bears are going to need to break the current support. As has been the case during the stock's most recent decline, entries on failed bounces continue to be the best approach. With today's close under the $39 level, the next likely failed rebound to provide entry into the play is likely to occur in the $39-40 area. Those traders that really want to enter on a breakdown will want to target a drop under $37.75 (the bottom of the gap) for pulling the trigger. Lower stops to $41. --- MHK $45.69 -0.98 (-3.69) It took awhile to get moving in our direction, but the recent declines in housing numbers has finally driven our MHK play below important support. Last week's wedge broke near the $49 level and since then the stock has been falling under increasingly heavy selling volume, 60% above the ADV on Thursday. As well as the plawy is going though, we don't want to get complacent. The stock is coming up on some strong support in the $43-44 area and it is entirely possible that we'll get a rebound from that level. So rather than advocating new entries at this point, we want to focus on maximizing gains from the play. A break under $45 should be used by conservative traders for harvesting gains on the play, not chasing the stock lower. For those traders not wanting to cut the play off prematurely, just trailing stops lower as the stock continues to work lower. We're lowering our stop tonight to $48.10, just above firm resistance from Tuesday. --- PII $45.80 -0.28 (-2.60) Where's the follow through? Yesterday's breakdown below the $46 level at the open certainly looked encouraging, but it is rather curious that even with another sharp loss in the broad market on Thursday, PII is stubbornly hanging onto support above $45.50. Given this resiliency, bear need to be on their guard for a possible oversold bounce. That's a big part of why we continue to avoid entries on breakdowns, preferring to wait for the next failed rally to get into the play. Also note that there is some strong support at the $45 level (from October 2001). There is now some strong overhead resistance at the $47.50-48.00 area (also the site of the 10-dma at $47.56) and a failed bounce near that level looks like our best bet for new entries. On the downside, once below the $44-45 area, PII ought to seek out support first at $42, then $40 and finally $37, near the site of the September 2001 closing lows. Maintain stops at $49. --- UTX $56.28 -0.50 (-2.30) As selling pressure continues to dominate in both the Dow Transports ($TRAN) and the Defense index (DFI.X), shares of UTX just can't seem to catch a break. Since breaking below the $60 level last week, the stock has been consistently marching lower along its lower Bollinger band, with intraday bounce attempts unable to even challenge the 10-dma (currently $58.37). UTX fell into its October 17th gap earlier this week and is getting very close to filling that gap, which will be complete with a trade below $54.60. Looking at the PnF chart, it appears unlikely that level will provide much more than token support on the way down though. The bullish support line has been solidly broken and the bearish price target of $51 ought to be challenged before any significant buying interest materializes. Note that level is just above the October low. The stock has been stepping its way lower, giving ample opportunity to enter on each failed bounce. For new entries, look for a rollover at intraday resistance, first at $57 and then at $58. Leave stops in place at $58.75 --- VZ $33.40 -1.23 (-1.18) What do you know? Our persistence finally paid off. VZ has been flirting with that $34.25 support level for 2 weeks now, but we saw a crack in that fagade yesterday, with a slight intraday dip below that level. The payoff came today with the stock plunging below that level on strong relative volume. After trading down to $33.22, there was a slight rebound into the close, but nothing of consequence. Helping to drive VZ lower today was the action in the North American Telecoms index (XTC.X), which fell to a new recent low of $397 before barely clawing its way back over the $400 level. There's significant support waiting below at $33, both on a historical basis and at the PnF bullish support line. That could generate another bounce, but so long as the XTC remains weak, VZ is likely to continue its trend of lower highs and lower lows. Traders that entered the play on one of the failed bounces of the past couple weeks are in really good shape tonight and should now be tightening stops in case of a strong bounce. We'll continue to use failed rallies as our preferred entry strategy, now targeting a rollover from the vicinity of $34.50. It's time to get a bit more aggressive with stops, so we're lowering our coverage stop to $35, just above the 2-week descending trendline. --- XL $68.62 -0.63 (-2.32 for the week) Shares of XL continue to churn sideways much like the broader markets. Also in accordance with the markets, XL has a bearish bias and the stock has failed twice now at the $70 level. Unfortunately for the bears, XL has also managed to bounce at the $68 level. Earlier we suggested that more conservative traders look for a move under the $68 mark as signs of further weakness. Another alternative would be to tighten your stop down to just over $70 to reduce risk but officially we'll leave our stop $72.06. Despite being drastically oversold the stock still looks weak. ************* NEW PUT PLAYS ************* TIN – Temple-Inland Inc. $39.53 -0.81 (-2.37 last week) Company Summary: Temple-Inland is a holding company that conducts all of its operations through its subsidiaries. Its principal subsidiaries include Inland Paperboard and Packaging, Inc., Temple-Inland Forest Products Corporation, Temple-Inland Financial Services Inc., Guaranty Bank and Guaranty Residential Lending Inc. TIN's business is divided among three groups: the Paper Group, which manufactures corrugated packaging products, the Building Products Group, which manufactures a wide range of building products and manages the company's forest resources of 2.1 million acres of timberland, and the Financial Services Group, which consists of savings bank, mortgage banking, real estate and insurance brokerage activities. Why We Like It: If there was any doubt that the recent housing boom may be running into trouble, last week's sharp drop in New Home Sales coupled with Alan Greenspan's bearish comments on the industry earlier this week ought to have even the bullish traders in the sector sitting up and taking notice. There's another clue to the slowdown in the Housing industry and it can be seen at the commodity level. Lumber futures have plummeted in recent weeks, now trading just above their contract lows. That's a sure sign that there is less demand from the number one customer -- the housing industry. Our new put play on TIN is an attempt to benefit from this same trend, as the company is heavily involved in providing lumber-related products to the home-building industry. After posting a double top near the $49 level in December and January, the stock fell back to consolidate just above the $42 level for much of the month of February. But things changed drastically on Wednesday, with the stock plunging through that support and following it up on Thursday with a drop under the $40 level. The catalyst for this drop seems to be related to the overall decline in Housing stocks, but last week's announcement of layoffs certainly didn't help. This move took out the last historical support since mid-October, except for a couple of gaps that are just begging to be filled. The first is $37-38, and the second is $35.40-36.60. A quick look at the PnF chart says there might be some near-term support at $38 (the site of the bullish support line), but a quick vertical count shows that the eventual downside target could be much lower, with a price target of $30. Overhead resistance now looks formidable at the $42 level and a failed rally near that level would be the ideal entry point into the play. Of course, that strong of a rally may be too much to hope for, so a failed bounce near $41 would be a good way to go as well. Because of the proximity of the bullish support line at $38, we want to avoid entering on further weakness, at least for the time being. In order to give the play room to move, we're initiating coverage with our stop set at $42.50. BUY PUT MAR-40*TIN-OH OI= 16 at $1.40 SL=0.75 BUY PUT APR-40 TIN-PH OI= 0 at $2.15 SL=1.00 Average Daily Volume = 2.02 mln ************************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 Thursday 03-06-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: PUT - VZ Traders Corner: What Do Full Service Brokers and Aliens Have in Common? Traders Corner: Trading with Indicators Options 101: In Defense of Defense ********************* PLAY OF THE DAY - PUT ********************* Verizon - VZ - close: $33.40 change: -1.23 (-1.18 for the week) Company Description: Formed by the merger of Bell Atlantic and GTE, VZ is one of the world's leading providers of communications services. As the largest provider of wireline and wireless communications in the United States, VZ has 95 million access lines and 26 million wireless customers. Outside the United States, Verizon affiliates serve 6 million wireless customers and operate 4 million access lines in 40 countries throughout the Americas, Europe, Asia and the Pacific. Most Recent Write-up What do you know? Our persistence finally paid off. VZ has been flirting with that $34.25 support level for 2 weeks now, but we saw a crack in that fagade yesterday, with a slight intraday dip below that level. The payoff came today with the stock plunging below that level on strong relative volume. After trading down to $33.22, there was a slight rebound into the close, but nothing of consequence. Helping to drive VZ lower today was the action in the North American Telecoms index (XTC.X), which fell to a new recent low of $397 before barely clawing its way back over the $400 level. There's significant support waiting below at $33, both on a historical basis and at the PnF bullish support line. That could generate another bounce, but so long as the XTC remains weak, VZ is likely to continue its trend of lower highs and lower lows. Traders that entered the play on one of the failed bounces of the past couple weeks are in really good shape tonight and should now be tightening stops in case of a strong bounce. We'll continue to use failed rallies as our preferred entry strategy, now targeting a rollover from the vicinity of $34.50. It's time to get a bit more aggressive with stops, so we're lowering our coverage stop to $35, just above the 2-week descending trendline. BUY PUT MAR-35 VZ-OG OI=11448 at $2.05 SL=1.00 BUY PUT APR-35 VZ-PG OI= 3822 at $3.20 SL=1.50 BUY PUT APR-30 VZ-PF OI= 3787 at $0.95 SL= 0 Average daily volume = 7.12 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 ************************************************************** ************** TRADERS CORNER ************** What Do Full Service Brokers and Aliens Have in Common? By Mike Parnos, Investing With Attitude Once upon a time, about three years ago, I was living in a much warmer climate and writing a financial column for the local newspaper. As regular readers and CPTI students know, there isn’t much of a filter between my brain and my mouth – except when there’s a cheeseburger in there. So, occasionally someone is become upset. In a column I once asked one little question. With one little answer I managed to alienate a large segment of the literate financial community in South Florida. The Question: What do quality full service brokers and aliens have in common? The Answer: You always hear about them, but no one has ever met one. ______________________________________________________________ I received written threats. I received verbal threats. I even received physical threats in messages on my answering machine. Neither my answering machine nor I can be intimidated. (If Pizza Hut threatened to cut me off, that would be a different story). Letters were written to the newspaper I was writing for. Brokerages even threatened to pull their advertising from the newspaper unless they shut me up. Fortunately, my editors had some brass. Besides, them shutting me up would have been a lot like using a plunger on the Gulf of Mexico. Why do I feel this way about full service brokers (and financial planners)? Let me pose this question to the universe of OptionInvestor readers. I suspect that, at one time or another, the vast majority of you have dealt with “full service” (and I use the term lightly) brokers or advisors. The question: Before, or after, you made a stock purchase, has anyone EVER had a financial advisor or a full service broker ask you, “Would you like to insure that investment?” I’ve asked hundreds of people over the years and I have yet to get a “yes” answer. Please tell me if you know of a broker who asks, or even suggests as much as a stop loss. If you know of one, I want to talk to him and shout his praises to world. When medical students become doctors, they have to take the Hippocratic Oath, vowing to heal, preserve life, and to live by a code of ethics. Financial professionals have no such oath. They simply have to pass a Series 7 examination, and perhaps another test or two (depending on the state in which they intend to work). While a poor medical professional can dismember you limb by limb, a poor financial professional can dismember your portfolio dollar by dollar. Would You Buy “Investment” Insurance? If someone buys 1,000 shares of a $50 stock, they’re risking $50,000. Would anyone (in their right mind) drive a new $50,000 car off the lot without insurance? Would you walk around without health insurance? Would you live without homeowners insurance? Believe me, I cringe a little every time I write a check to an insurance company, but it’s a no-brainer. You have to protect yourself against catastrophic events. A financial investment in a stock (or even a mutual fund) is no different. Why do you suppose brokers and advisors don’t go that extra mile (or even the first quarter mile)? They had to study the use of options to pass their Series 7 test. Perhaps they have the brains of a Chia Pet and don’t understand the concept of a “married” put or a simple “collar.” I truly hope that’s not the case, because thousands of unsophisticated investors entrust their life savings to these people. It’s a scary thought. One broker explained to me that he knows the strategy, but doesn’t bring them up because of the stigma that’s attached to options. “After all, don’t people lose all their money trading options? That’s what most investors think,” he said. He maintained that, if he got a reputation for using options, people would be reluctant to become clients. An angry broker asked me, “Do you how long it would take to explain those strategies to everyone who wanted to buy stock? Plus, we’d have to get them all approved for option trading. Besides, our brokerage firm discourages option trading.” If Only They Would Have . . . Can you imagine how different things would have worked out had the employees of Enron, WorldCom, Exodus, etc. known about using puts? Don’t you think the administrators of their respective 401K plans know what a put is? Of course they do. Did they bother to, even once, send a note, inside pay envelopes to suggest the employees consider insuring their investments? Long- term puts could have easily been purchased in an outside brokerage account and thousands of lives would have been benefited dramatically. As I hope you know, options were originally created as a hedging tool – not a speculative tool. What triggered my spewing of opinion? I saw an article that estimated investors lost $7.6 trillion in the U.S. stock market since its peak in March, 2002. It said that investors filed 7,704 arbitration claims against brokers in 2002. – a record pace. I’m wondering if full service brokers or financial advisors, who knowingly do not inform their clients of common sense alternatives, can be held responsible – or negligent. I’ve made this comparison before, but on “Law and Order,” I’ve seen this same type of negligence called “depraved indifference.” That means, they could have helped, but just stood by and allowed a death to occur. Is the death of a portfolio any different? Let’s call Judge Judy. She’ll know what to do. Meanwhile, if you want to explore your options, check out NASD Dispute Resolution, which should be on www.NASD.com website. Will you be awarded any money? Of course you will -- the day after Jimmy Hoffa turns up. ______________________________________________________________ NEW CPTI POSITION MMM April Iron Condor with a range of $115 - $130. Sell 10 contracts of the MMM $115 puts (MMMPC) @ $1.80 Buy 10 contracts of the MMM $110 puts (MMMPB) @ $1.20 Sell 10 contracts of the MMM $130 calls (MMMDF) @ $1.65 Buy 10 contracts of the MMM $135 calls (MMMDG) @ $.70 Total credit of $1.55 ($1,550 for a 10 contract position) with about six weeks left to April expiration. Although we anticipate some near-term volatility in the markets, it’s likely the support and resistance levels will hold. ______________________________________________________________ CPTI Portfolio Update Position #1 – OEX Bull Put Spread – Trading at $416.49. Believing the market is not likely to go down to retest its July and October lows near 400, we sold 10 contracts of the OEX March 400 puts and bought 10 contracts of the OEX March 390 puts for a credit of $1,400. If war breaks out, it might be a quickie. The market may spike up. How high? Who knows? That’s why we didn’t put a bear call spread on top to create an Iron Condor. We may put on the bear call spread at a later date. ______________________________________________________________ Position #2 – XAU Iron Condor – Trading at $69,74. An Iron Condor is a credit position consisting of both a bull put spread and a bear call spread. The collected premium will come into your account the very next business day. The objective is for the underlying, at expiration, to finish anywhere within the spread. So we created an Iron Condor with a 15-point range $65 to $80 for March. We were able to place spread orders and increase our credit by $.30 to a total of $1,400 for our 10-contract position. _________________________________________________________________ Position #3 -- OIH -- Diagonal Calendar Spread – Trading at $58.00 It seems that there’s about $8-10 of uncertainty built into the price of a barrel of oil. When, and if, the war is resolved, the price of oil should work its way down, along with the price of oil stocks. We bought 10 contracts of the July OIH $55 puts and sold 10 contracts of the March OIH $50 put at a debit of $3.85. We have five months to sell short-term puts and reduce our cost basis while we’re waiting for oil to fall. ______________________________________________________________ Position #4 -- QQQ ITM Strangle – Currently trading at $24.49. This is a long-term position we created two months ago to generate a monthly cash flow. We own the January 2005 $21 LEAPS call and the January 2005 $29 LEAPS puts. We sold 10 contracts of the QQQ April $28 calls and 10 contracts of the QQQ April $22 puts for a credit of $950. We moved our short sells in by one point because a lot of premium has disappeared from the QQQs in the last two months. Never fear, it will be back. ______________________________________________________________ Happy trading! Remember the CPTI credo: May our remote batteries and self-discipline last forever, but mierde happens. Be prepared! In trading, as in life, it's not the cards we're dealt. It's how we play them. Your questions and comments are always welcome. Mike Parnos CPTI Instructor ************** TRADERS CORNER ************** Trading with Indicators By Larry Wales What I would like to discuss tonight is a terrific indicator that I would not trade without.There are many studies to choose from in any charting software program.We all have our favorites weather it be MACD,Stochastics,RSI etc..All of them give a trader a clue as to if the current trend is overbought/oversold and if the momentum in the current trend has just about run it’s course.Many trader’s I know do not use any indicators at all.Just pure price action dictates their next move. The momentum indicator that I and many trader’s use is The Commodity Channel Index ,the CCI.The CCI is an indicator that measures momentum in the market.It was developed by Donald Lambert to identify cyclical turns in commodities but works great in trading futures.This momentum oscillator can help identify price reversals,price extremes,and trend strength.Now we can focus on the various thresholds that the CCI has. The CCI has a many settings that can speed up the signals you get or slow them down.The theresholds that I prefer are the +200,- 200,+100,-100,+33,-33 and the zero line.The settings that I prefer are 22 bars and 1 for the avg.My main chart for trading the ES is the 210 tick chart with a 5 min chart set with a 14,1 setting.The 14,1 setting speeds up the signals on the 5 min but do not like it as well on the 210 tick.Some day’s it can give great signals but I prefer the 22 bar setting to reduce the number of whipsaws.Sometimes the 5 min can provide confirmation for the setups on the 210 tick chart. To determine the trend on the CCI there are many key points.On the CCI,the zero line is the dividing point between the uptrend and the downtrend .When the cci is below the zero line for at least 5 or more price bars look only for shorts.When the cci is above the zero line for at least 5 or more price bars look for longs.The exceptions would be divergences.The cci zero line is the strongest point of support and resistance.I almost always take the zero line breaks especially if there is a divergence.Here is an example of a 210 tick from Tuesday’s trading. As you can see the move between 13:00 and 13:15 produced a nice regular divergence as indicated by the white lines.You could short on the break of the trendline on price at 829.75 which coincided with the cci going under the +100 threshold or wait for the zero line break.If you waited for the zero line break you would of got in approx 828.75.Many times you can take that trade on the divergence confirmation and not wait for the zero line break.It’s all a matter of personal preferance.The cci can dance above and below the 100 threshold as well dance around the zero line.But one of the strongest setups using the cci is a divergence ,either regular or reverse.Once you are in a trade and the cci get’s below the –100 threshold and possibly to the extreme - 200 level you can manage your short .The way I do is take off half of the position on a –100 line break and let the rest ride until the cci breaks the –33 threshold.From the chart above you would have been short at the very least at 828.75 and rode down half the position to your first get out point at 825.75 on the –100 line break and the balance of the position out at 823.75 when it broke through the –33 line.CCI did go green then for a long signal but by looking at the moving averages plotted on this chart all of them tell me to look for shorts.There is another example of the very same situation at the 15:21 bar and the 15:34 bar. There are many other aspects and ways of trading the CCI that we can discuss at another time but when you use the cci in conjunction with stochastics it makes I think a powerful setup.There is not a holy grail that is the answer to all our trading needs but hopefully this little bit of information can make all of us better traders.I know it has helped me a great deal as we enter battle every day in the futures world. Many people have asked me where they can get the CCI. I presently use E Signal for my data feed and Ensign Software for my charting platform. I know that Tradestation has the indicator and I thought Qcharts had it as well. QCharts had a beta test with this indicator last fall I believe and just assumed it is a part of their package today. I do not use QCharts so if you have this program I suggest you call them and ask them when it is going to be available. Ensign and ESignal has been a rock solid performer for me for over a year now. Ensign is constantly updating their software usually on a weekly basis always adding new studies, and quirks to the program to make it a premier trading platform. Good Trading To You All, *********** OPTIONS 101 *********** In Defense of Defense Buzz Lynn buzz@OptionInvestor.com War is good for defense stocks. Right? So why have defense contractors taken it in the shorts over the last few weeks? Actually, there is a false premise in thinking that war is good for defense stocks. In reality, PRODUCTION and further ANTICIPATED production is good for defense stocks. Hold that thought and we'll get back to it in just a minute after this important housekeeping message. Important housekeeping message: this column today isn't so much about defense stocks as it is about trading and market psychology. It just so happens defense stocks fit the bill very nicely in a contrarian sort of way, which is really what we want to tackle in these few short minutes. OK, back to defense stocks. . .General Dynamics (GD) is down nearly $10 from $64 to $54 since February 20th; Northrop Grumman (NOC) is down nearly $7 from roughly $91 to $84 since February 20th; Lockheed Martin is down roughly $7.50 from $52 to $44.50 since February 5th; and Raytheon (RTN) is down roughly $4.50 from $30 to about $25.50 since February 5th. So what happened given the backdrop that the U.S. is about to enter what is reputed to be a costly, drawn-out, protracted war - aka expensive and long? Shouldn't these be stellar days for defense companies who supposedly are raking in the cash as juicy compensation for increased production? After all, these companies have bullets and missiles to produce, not to mention the support services and equipment production - you know, tanks, airplanes, surveillance equipments, food, plus the men and women who use them - necessary for their delivery to their ultimate targets. If this (almost) war is going to go on for years, shouldn't investors be bidding up the share prices as just appreciation for rising revenues and profits? Sort of. Let me offer my explanation. (I can hear the Homer Simpson-like smacks of the palm against collective foreheads. DOH! I know 'cause I did it too once it was explained to me) Let's start with the general principal that stocks are priced to reflect an anticipated (but discounted) stream of cash flows. Professional investors aren't stupid (usually, but there are exceptions) and they generally buy to hold in anticipation of revenues growing stronger, others recognizing the value and buying into the same argument, and then sell when the shares are "priced to perfection". While in the really long term, like over a period of years, they don't always get the "sell" part right - witness March, 2000 to current day - but they do understand selling into strength after they have made their money from buying on weakness. In the case of defense stocks, smart investors were buying as soon as they heard George Bush talking about an axis of evil, and it really became obvious when the U.S. demanded enforcement of existing U.N. resolutions and pushed that issue hard. At that time, in the last half of 2002, there were only scant reports of a weapons shortages and the need to bolster production. Aha! moment: investors realized that defense contractors would soon see an increased revenue stream and probably increased profits. They started buying. Sure enough, in order to build up munitions in the Middle East, weapons and defense factories had to go into big time production to amass a buildup (stockpile) perceived to be required for a successful wartime effort. And "produce" is exactly what those companies did. Now, there has to be some assumption that there is no free lunch. Accordingly, it is probably reasonable to assume that these manufacturers did, indeed, make money, and make a bit more. But for the most part, and by all accounts, there would be no war until the time that everything, or almost everything, necessary to win a war were already manufactured, shipped, and ready for use. In war, you don't want to be short of critical widgets if they are necessary for success. On the front line, nobody wants to hear, "Sorry soldier, we're a little behind. Your order for 100 cruise missiles is backed up. But we'll have them to you next week once I confirm with the assembly floor foreman." That doesn't work. Thus, I think most of the production has already been done. When the battle begins, I would be pretty comfortable with the idea that there are enough munitions and equipment to finish the job quickly and effectively. And perhaps there are a few more as extras just in case. So is it realistic to expect production to remain at 100% like in the preparation for war? Some may disagree, but I don't think so. Generally, no company produces things without further anticipated demand, an order, and the promise of payment. So when the attack bugles and drum corps. sound, I think it's a safe bet that big munitions production runs are over. As an investor, that would be my cue to sell. The revenue has stabilized; the big orders and big profits are already accounted for and booked. Does this sound like a perfect case of, "buy the rumor, sell the news"? It should. The above helps explain why investors are leaving defense stocks. Buyers have jerked back their bids and sellers have emerged. This may be a chicken/egg thing, and I'm not sure which came first, but while the defense selloff is likely born of the perception of immediate (or darn close) attack, it also, in a political sense, says that investors do not expect the war to last long at all. If they did expect indefinite continuation, it would be reflected in their willingness to hold on to defense stocks in anticipation of replacement orders to those manufacturers. Again, in the political sense, I'd call that good news. But does this signal a great buying opportunity in defense stocks? To my contrarian way of thinking, I think so. Maybe not this moment, but soon if the war looks to end quickly and decisively. Here's why. The market is already telling us to perhaps expect a short, quick war effort. I'd believe it because the market tends to price that in and reflect it. If that is so, it leaves a defense contractor's customer, aka the U.S. government, free to focus on the next threat, and start the whole process over again. Of course, the first thing to happen will be another munitions and equipment buildup. That means orders come in and get filled. The contractor gets paid, and the cycle repeats. Let me add one more thing here. It's always when the last bull bails out of a position that the bottom is reached. I don't know of too many left in the defense sector. Hence we have what would otherwise be called a contrarian play. Any doubters of the notion that bulls are mostly gone need only look at the Defense Index chart (INDEX:DFI.X) Defense Index chart - INDEX:DFI.X (weekly/daily)" OK, let's be clear. I am not recommending that everyone buy this index as soon as they are finished reading the column. In fact, I'm not recommending that anyone buy it now or later. One look at the increasing negative slope of the 200-dma (magenta) and the 50- dma (gray) ought to convince anybody this sector is on a downhill slide. Bears are at the honey pot and bulls have ground off their horns on this one. What a perfect time to be a contrarian! Look at the buried-for-dead oscillators on both the 5 and 10 period stochastics on the weekly and daily charts. This thing has the stink of sun-ripened herring! Yuck! Who'd want to own it? Who wouldn't want to short it? Remember my example of natives in the jungle all turning collectively to face the noise from the yet unseen animals that might eat them? While they may be collectively facing the danger associated with the noise, if nobody is paying attention to anything else, it is really the silent danger behind them, which they do not see and do not focus upon, that will eat them. Does it seem like defense investors are staring collectively at anything else but the prospect of declining profits and revenues? Do the shorts see anything else? Have the longs all run for cover and sold the news? The oscillators certainly say so. Yet it is that, which they do not see - namely a pending resurrection of profits in later months if another "axis" country ends up in U.S. crosshairs, as one surely will - that will surprise them the most. One more thing before we sign off. Take a look at this point and figure chart from Stockcharts: PnF of $DFI: Ouch! I feel the bulls' pain. But can trees really fall further once they appear to have hit ground. Well, yes, to the same extent that they can grow to the sky in a market bubble. However, history suggests that with a long tail down, as $DFI has painted, it's bearish days are likely limited. Hence the green (perhaps, but not guaranteed bullish) Alert sign. To sum it up, we have a "sell the news" event about to take place. Perhaps it already has, which we can see in the buried oscillators and the long tail down on the PnF chart. Is it time to buy? Not in my book, but it's time to watch for signs of bullishness in hopes of getting the jump on a potentially bullish play - a rare find in today's market. Remember, DFI has likely been sold off on a grand scale by investors based on diminishing expectations. If most are already selling their longs or have gone short, there are not many left to drive the price down further. While a rebound may or may not be possible, I think a bottom in defense stocks may be near. Let's watch for the next few days or weeks and see what these players do when war becomes real. Until next time, make a great weekend for yourselves! Buzz ************************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”. 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