The Option Investor Newsletter Sunday 03-16-2003 Copyright 2003, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. Entire newsletter best viewed in COURIER 10 font for alignment In Section One: Wrap: Stalemate Futures Market: Stay Tuned Index Trader Wrap: Trading in a Broad Range Market Editor’s Plays: Failure At Resistance Market Sentiment: My, Aren't We Sensitive These Days? Ask the Analyst: Market, sector, stock, with bullish percent distribution Coming Events: Earnings, Splits, Economic Events Updated on the site tonight: Swing Trade Game Plan: Bulls Cling to Gains Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 3-14 WE 03-07 WE 02-28 WE 02-21 DOW 7859.71 +119.68 7740.03 -151.05 7891.08 -127.03 +109.31 Nasdaq 1340.33 + 35.04 1305.29 - 32.25 1337.54 - 11.48 + 38.85 S&P-100 424.07 + 3.95 420.12 - 5.24 425.36 - 4.51 + 7.30 S&P-500 833.27 + 4.38 828.89 - 12.26 841.15 - 7.02 + 13.28 W5000 7896.49 + 39.17 7857.32 -115.30 7972.62 - 63.35 +139.03 RUT 354.39 + .21 354.18 - 6.34 360.52 - 3.84 + 5.86 TRAN 2027.09 - 15.39 2042.48 - 6.57 2049.05 - 47.36 - 6.19 VIX 36.33 + 0.68 35.65 + 1.50 34.15 + 0.01 - 2.96 VXN 45.80 - 0.59 46.39 + 0.74 45.65 - 0.45 - 2.28 TRIN 1.11 1.29 0.84 0.97 Put/Call 0.70 0.75 0.59 0.85 ****************************************************************** Stalemate by Jim Brown The markets, UN and economy all ended with a stalemate on Friday. The UN is equally divided and hopelessly deadlocked on any new resolution and France called a late meeting of the five permanent members of the Security Council on Friday. They are trying to float a resolution banning the war but obviously the US would take pleasure in a veto of that measure. The economy showed mixed economics on Friday with minor gains but Consumer Sentiment fell to a decade low and stalemated that news. The markets rallied on top of the big Thursday gains but the sellers were waiting at key resistance points to provide a solid stop to the +500 point move. Stalemate all around. Dow Chart - Daily Nasdaq Chart - Daily Wilshire 5000 - Daily There was a flurry of economic reports on Friday with mixed results. The PPI rose +1.0% but the gains were mostly due to inflation from high oil prices. After stripping out energy prices the core rate actually dropped -0.5%. This is good news for the Fed and the consumer that overall inflation is still under control. However, core crude goods are up +14.5% compared to last year. Sounds like a contradiction of terms but most of the difference is in the oil prices. Industrial Production rose only +0.1% and the lack of growth was attributed to lack of demand. With falling output it is very hard to increase production. The fact that any increase was seen should be encouraging. This little to no growth is preferable to negative growth. Business Inventories rose +0.2% but this was near the consensus of +0.1% and was a non-event. Sales rose slightly to push the inventory-to-sales ratio to 1.36 and off record lows. Once demand does pick up the ramp into production to replenish inventories will be strong. The only question is when? The most important report on Friday was the Michigan Consumer Sentiment which came in at 75.0 and a drop from 79.9 in February. This was the lowest level since October 1992. There is no good news in this release. Energy prices, war, terror alerts, the stock market and unemployment were given as reasons for the severe drop in sentiment. This drop is shown in falling retail sales, auto sales and cooling home sales despite record low mortgage rates. Pent up demand is almost nonexistent and even a resolution of the war may not increase spending. The expectations component fell to 67.2 and a nine year low. The sentiment is worse now than at any time after the 9/11 attack. This report continues to add to the prospect that a post war rally may be short and small with attention returning to economic fundamentals that are weakening on a daily basis. As a result of the sagging sales and lack of demand GM and Ford announced manufacturing cuts to avoid stacking up unwanted inventory. Ford is cutting 2Q production -17% and GM -10%. Since automakers book profits when the cars roll off the assembly lines and not when they are sold the prospects for hitting earnings targets are slim. With a massive pension problem twice the size of the company GM does not have room to slow down. Schwab joined the list of companies, which have stopped contributing to employee's 401Ks. They used to match 2:1 up to $5,000 a year and dollar for dollar over that. The company dropped the benefit to try and cut costs instead of cutting more employees. Ameritrade said today that February trading volume dropped -25% and warned that conditions could get worse. Between the two companies they have over 10 million accounts and both are in serious trouble. Some analysts are warning that there could be a roll up in the online broker community that would leave only a couple of survivors. The massive trade volumes that built these companies during the Internet bubble have dropped nearly 80% over the last three years. If we are doomed to another 2-3 years of a protracted bottom there is not sufficient investor interest in trading to feed all the Internet brokers. Many analysts think the majority of traders have gone bust or used the funds for other purposes after losing ground for three years and there will not be a material return of these investors even if the market rebounded. The biggest benefit from a quick war to the economy should be the drop in oil prices. On Friday the prospect of the end of the diplomatic dance at the UN brought a drop in oil to an intraday low of $34. This is a far cry from the $39.99 it reached a few weeks back. The high gas/energy prices are a serious drain on not only consumer sentiment but on everything we touch. Costs and prices are rising daily as the previous high oil works its way through the product life cycle. Knocking oil back down to $25 a bbl would relieve hundreds of billions in excess costs out of the economy over the next twelve months. In four of the last five recessions high oil prices were a major component. If oil does not drop soon it may be five of the last six. The cycle is complete again. In 2.5 days we have gone from very oversold with a TRIN over 6.0 to overbought and a dead stop at very strong resistance. Dow 7900/Nasdaq 1350 slammed shut like a vault door on Friday to put an end to hopes for a pre-war, pre-Fed rally. The prospects for a rate cut were dismissed almost unanimously as too little too late and insignificant compared to the world events currently shaping our markets. Disappointed investors took profits when the Dow was up +110 points today, a +515 point gain since the Wednesday low. There was little or no short covering going into the close as most had already been blown out during the rebound. The Nasdaq top at 1350 had been very strong resistance for several weeks and we could only manage +3 points over that level at the height of optimism Friday. The Nasdaq finished slightly negative. The bullish case for Monday is a market view that the lack of a material sell off after the Dow +515 point gain is a positive sign of bullish sentiment that should produce a follow on rally on Monday with no adverse news events over the weekend. Personally I am surprised there was no material sell off but I think that it is due more to the potential for a positive surprise over the weekend versus a negative surprise. Short of a terrorist attack or a shooting down of a spy plane by North Korea there is not much else that can happen. Any Osama event or Saddam retirement, forced or otherwise, would be a major positive and could produce a strong gap open. For a bull to pin their hopes on a break of 7900/1350 resistance on a potential positive surprise could be foolish. The bearish case for Monday would be a reentry of the shorts into the market. Those that closed positions for a profit on Wed/Thr probably used good judgment on Friday and stayed on the sidelines due to event risk over the weekend. The risk to a short from an Osama/Saddam event would be much higher than other negative events for a long. The normal pattern for the last several weeks was short covering on Friday and new shorting on Monday. That pattern was thrown off by the severe drop and sharp rebound this week. Monday is a new week and there should be plenty of negative news over the weekend. President Bush is meeting with Spain and Britain in the Azores over the weekend and the bet is that he will discuss the chances for a successful vote on Monday and without a majority will pull the resolution, tell them to get out of the way and go on TV Monday night with a declaration of war. This unilateral decision regardless of Britain and Spain along for the ride will not set well with the Europe/Asian markets and they should know the outcome on Sunday night. That means we could drop hard on Monday if the timetable for war is accelerated from April 1st. Remember the market discounts future events and once the outcome of the Azores summit is known on Sunday night it will be discounting quickly. UN inspectors began leaving Iraq on Friday, which should be a clue as to the coming timetable. France and Germany warned all citizens to leave Iraq immediately. France called an emergency meeting of the five permanent members of the Security Council for Friday night at the French Embassy to try and block the war. According to multiple sources the battle readiness orders went out today to the troops to begin actual staging for the attack. I think the outlook is clear. The clock is about the strike midnight on the UN diplomatic dance and all the fence sitters lobbying for concessions and payoffs in exchange for their vote will be left on the sidelines when the show starts. Hopefully they will be left on the sidelines when the contracts for reconstructing Iraq begin also. The show is about to start and the UN's role as the center stage in this drama will end. All of this grandstanding will be over and the fear of the unknown before it starts will impact the markets. Iraq has moved artillery and rockets capable of shooting chemical and biological shells into the massed soldiers in Kuwait and are setting up their weapons. Obviously they will be the first Iraqi positions sacrificed by Saddam but the fear is that they will take a preemptive strike at us once the US issues the 48hr warning. All of these things are very negative to a fragile market. I know as investors we have been preparing for this for weeks, seemingly months, but the time has finally come. With the temperature rising in Iraq and every day waiting is another day Saddam has to prepare the odds are the April 1st date proposed this week may be too late. B1 stealth bombers flew combat missions over Iraq for the first time on Friday and dropped significantly larger loads of bombs on targets than ever before in the pre-war. If Saddam decides the noose is closing he may try to shoot back at the Kuwait staging areas and that could be any day. If he knows we are coming and he is going to lose anyway then he has nothing to lose by starting the war. The fact that we could be a war on Tuesday will not be lost on the market on Monday. Of course as we have seen on a daily basis lately the situation can and does change daily. As investors we need to be aware of the options and be prepared for either market direction. Enter Very Passively, Exit Very Aggressively! Jim Brown ************** FUTURES MARKET ************** Stay Tuned Friday, March 14, 2003 By Vlada Raicevic Daily Settlement Numbers 4:15pm ET Contract Last Net High Low Dow 7859.71 +37.96 7931.63 7799.48 YM 03M 7859 +57 7909 7773 Nas 100 1030.39 +0.60 1042.56 1020.17 NQ 03M 1037.50 +4.50 1047.00 1023.00 S&P 500 833.26 +1.36 841.39 828.26 ES 03M 834.25 +2.00 842.25 826.75 Daily Pivots Contract S2 S1 Pivot R1 R2 YM 03H 7712 7786 7847 7922 7984 NQ 03H 1011.50 1024.00 1035.50 1048.00 1059.50 ES 03H 818.81 826.38 834.31 841.88 849.81 Yesterday the market used up a lot of jet fuel to get where it was. Today? Well, we gapped up, tried to breakout above resistance, then sold off for half an hour. At first support the selling stopped, and we launched upwards and broke the early morning highs in half the time it took to selloff, pulled back again at resistance, made a higher low, and launched again to new highs, breaking above resistance, but it could not hold the breakout and we sold off again to break below the morning lows. With neither sellers nor buyers being able to take the upper hand, we spent the rest of the day in a range, attempting to both break up and to break down, and not being able to either. The afternoon did have a bullish slant to it, with a couple higher lows and higher highs, but they really didn’t amount to anything by day’s end. Did we close flat? Rather than numbers, look at the percentages: NQ up 0.4%, YM up 0.7% and ES up 0.2%. Since the day closed basically flat, you can see on the following daily charts that many questions still remain unanswered, with mixed signals not giving any clear vision. ES daily shows a doji at resistance (bearish), ADX on the verge of crossing (bullish), OBV below it’s trendline, and MACD and Stochastic as turning up but not breaking above any areas that would indicate a real turn of trend. Price did gap and close above its downtrend line (bullish), but some would argue that gapping above resistance areas is cheating, and makes the breakout a little more suspect. A note about those bullish divergences on the chart: they were present on Macd, Stochastic, RSI, and OBV. When they all line up with a divergence it is well worth paying attention to; and in fact, they did foretell the reversal that we’ve just seen. On the daily NQ chart, there is a significantly higher level of bullishness. Macd and Stochastic have moved above their centerlines, ADX has a strong crossover, and RSI is above a downtrending line. The only thing not confirming here is the OBV, which still remains relatively low. Price is also just above the upper tine of the regression channel, a resistance area. YM has a bit of a divergence in all this bullishness. Price has been very enthusiastic, more so than for ES, but the indicators are not responding with the same enthusiasm. Compare the positions of Macd, Stochastic and ADX to that of the ES. So the daily charts have made an attempt at an upside reversal, NQ doing the best job of it so far, ES really trying, and YM looking like a little more weakness will create a bearish divergence. Since the daily charts leave us wondering, I went and looked at the 60 minute, the 120 minute and the 270 minute charts. Unfortunately, they don’t really tell me anything other than that we’ve broken downtrend lines because of a huge move up, and that today’s price action just reset some of the overbought aspects of the futures markets. To really be able to get information from charts, we need them to act with a little bit more sanity. To go straight up with hardly any pullbacks doesn’t help much, and leaves us waiting for some kind of confirmation: break above resistance or pullback below support. We did not get either today. Here is a 270 minute, all sessions chart of the ES. You can see how in this chart, the Stochastic, MACD and RSI have moved into and are still in the overbought area. It may be overbought, but it hasn’t rolled over. With nothing clear, all the charts can tell us is, stay tuned. ******************** INDEX TRADER SUMMARY ******************** Trading in a Broad Range Market By Leigh Stevens lstevens@OptionInvestor.com THE BOTTOM LINE – The further retreat last week to areas at or near prior lows again supports the idea of the indices as being in a broad trading range, which is good for trading. There appears to be a definite perceived "value" area for stocks, especially by institutions, best seen in the S&P 100 (OEX) when this index has gotten into the 400 area. Since the market is now well off its recent lows, the next best new trade is to buy puts in the identified (below) index resistance areas, especially given the short-term overbought condition. FRIDAY'S TRADING ACTIVITY – Even with the confrontation over Iraq getting very close to resolution one way or another, traders Friday were reluctant to place bets on what will happen next after the sharp rise Thursday and after a gain of 100 points early Friday. Hey, comes the weekend, take profits if you got em! This was the first week in a while when the major indices were actually up from the prior weekly close. The Dow was up 1.5% and the Nasdaq gained 2.7%. The market seemed to feel that Friday was a significant plus, in that the strong gains from Thursday were sustained - on Thursday the Dow rallied some 3% and the Composite more. Traders reacted bullishly to an update from President Bush early on Friday that related to the Mid East peace process. Instead of talking about a "roadmap for peace" between the Israelis and Palestinians, market participants had thought he would say something about Iraq. Stocks were trading lower before the speech, but rose steadily during the course of it. Traders saw his more general statement as an attempt to diffuse some tension in the Arab world and gave some lift to the outlook for a post-Iraq conflict. The market's latest thing is looking at the outcome as one that would probably come out all right. The White House also said the president will use a Sunday summit meeting with the leaders of the United Kingdom and Spain to try to forge a compromise resolution on Iraq that can be accepted by a majority on the United Nations Security Council. That development was one factor prompting as much as a $2 a barrel drop in U.S. crude oil prices, though they climbed back as the day went along. Fears about tight supplies were eased when Saudi Arabia indicated that it is sending more than a dozen oil tankers to the U.S. to increase low crude oil inventories. Traders and investors largely did NOT focus on some positive economic news, with the country nearly paralyzed by the uncertainty over war and its uncertain outcome. Just after the Friday open, stocks dipped with the University of Michigan's preliminary survey of consumer sentiment for March. It registered at 75, below the 78 that economists had expected. The consumer sentiment index stood at 79.9 in February. Producer prices rose by 1% in February, after jumping 1.6% in January, as reported by the Labor Department. Consensus estimates were for a rise of 6 tenths (0.6%) of a percent. Core producer prices - which exclude food and energy costs - fell by 0.5%, after rising 0.9% in January, versus expectations for core prices to remain unchanged. The drop in core prices amid the continued overall gain is showing how much energy prices are impacting producers. Business inventories rose by 0.2% in January, after rising a revised 0.7% in December, the Commerce Department reported. The result was below estimates of a 0.3% increase. U.S. industrial output increased 0.1% in February. Gains at mines and utilities offset losses in motor-vehicle production, according to the Federal Reserve - this versus expectations for a 0.1% decline. Capacity use held steady in February at 75.6%, stronger than the 75.4% economists had predicted. The U.S. current-account deficit widened to a record in Q4. The deficit came in at $136.9 billion, up from $127 billion in the third quarter, but was not a surprise. OTHER MARKETS – Gold continued to retreat from the $350 area, falling to around $337 in terms of the nearby COMEX gold futures. Gold has tended to move inversely to the financial assets and is now under my "danger" zone (for stocks). The 10-year Treasury note was up nearly 13/32. The yield (moves inversely to price), fell to 3.704%. The 30-year bond gained 19/32 to yield 4.715%. The dollar was down some against the Yen at 118.26, versus 118.65 the day before but up slightly versus the Euro, which finished at $1.0742 down from $1.0781 late-Thursday in New York trade. MY INDEX OUTLOOKS – Dow Industrial Index (DJX) – Hourly chart: PER MY LAST WEEK COMMENTARY - Re the triangle on the Dow hourly chart: "expect follow through on a move to below or above those converging lines." (We got the decline when the breakout was to the downside.) "Based on the measuring implications of the triangle pattern, downside potential is to 75.5 approximately." MY EARLIER ESTIMATE WAS CLOSE, NOT QUITE EXACT - When I re-did an exact measurement, the implied downside objective (by the vertical length of the triangle came out pretty exactly where the Dow made its low. What now? The prior high at 80.7 in the Dow Index (Dow 8070) will be tough to surmount without a correction first given the overbought condition registering in the hourly stochastic models. Buy puts on rallies to or above 81.0 if reached but stop out on an hourly close over 82.0. More on the "measuring" implications of triangles at - http://www.OptionInvestor.com/traderscorner/082202_1.asp S&P 500 Index (SPX) – Hourly chart: As I said previously the S&P 500 (SPX) would have had to have had a WEEKLY close under 800 to suggest that the S&P was going to have another down "leg" rather than what turned out to be the expected retreat to the low end of its (trading) range. The dip under 810 turned out to be a significant support area and a profitable trade in SPX calls. Hard to do - buy, that is - when the market appears to be falling apart and with a lot of bearish news around. You got to buy em when no one else appears to want them sometimes. I suggested to buy puts in the 840 area - 841 was reached - and I would stay with that trade, risking to 845. If 845 is reached, I would rather hope to buy (puts) again on any rally to the 850 area. A close over 850, or (better) TWO consecutive closes over 850, would suggest that upside potential might be to 870. Maybe wishful thinking! - to get that kind of rally for a next put trade. S&P 100 Index (OEX) – Daily and Hourly charts: The OEX rallied to within a couple of points of its 430-432 resistance area. I suggest buying puts IF the OEX stalls on a rally to the prior 432 highs, risking to 435. Would like even better to buy puts in the 440 area, if reached. I discussed in my last weekly wrap up the likelihood of major support (buying interest) coming in at 400-405 of course and suggested a short-term trade on the call side if 405 was seen and both stochastic models were again fully oversold - my stop out point was a below 400 and my trade objective was 420, which was seen of course. Take the money and RUN, especially when it's a quick unexpected profit! 410 looks to be support now and I would consider buying (calls) on dips to and under this area, but not below 408. NASDAQ 100 Index (NDX) Daily chart – From last week however - suggested put purchases if the NDX got back up into the chart gap area - the closer to 1050 the better. The index did get slightly into the gap by its move to 1042, which happened in short order once the index cleared resistance at 1020. If long puts above 1040, I would risk to 1046 only. The gap area extends up to 1059. The closer that NDX gets to this area, the better the downside potential in my view. If in this trade and if you want to give it plenty of leeway, exit on a close above this same gap area or on a close above 1059. 990, at the 21-day moving average now looks to be near support. 950 is major support. The Nasdaq TRIN showed heavy buying on Thursday, but this trend would have to continue for the 10-day Arms Index (TRIN) to fall to an "oversold" reading closer to the lower dashed (red) line. QQQ Daily and Hourly charts: I last suggested shoring above 25 - if in that trade I would set a stop order above 26.00. If the Q's rally to above 26, they could get up to what I see as tougher resistance around 27.00, an area I suggest shorting. QQQ definitely broke out above its downtrend channel as you can see above. Near support is probably back at this (upper) channel line at 24.8 currently. I suggested a possible long side trade if 23.50 was seen and risking to just under 23.00 - the low for the move was 23.54 - hope you were willing to buy in that AREA rather than the exact price! My objective was for a move back up to 25-25.50, which was easily reached and then some. With war maybe coming up this week, trade carefully, if at all. Might be a good time to trade very lightly if at all! ************************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 ************************************************************** ************** Editor's Plays ************** Failure At Resistance The play of the week is only a week long play, more if you want but a week should work. As I mentioned in my market wrap this Sunday the Nasdaq came to a dead stop at strong resistance at 1350. The same resistance level on the NDX is 1040 and it came to a dead stop at that level as well. The NDX is the base for the QQQ at and trades in a 40:1 ratio to the QQQ. The QQQ closed at 25.73 on Friday. The potential for the market to return to last weeks lows within the next five days is very good. With the unofficial start date of the war now March 24th and the possibility of a declaration of war by President Bush on prime time TV Monday night, the markets are poised to move and the odds are good it will not be up. With the Compx/NDX snuggled up against resistance that dates back to January 17th it would take a very bullish event to power the indexes over this level. Since options on the QQQ are very cheap I am suggesting buying a March $26 put QAV-OZ at the open on Monday. It closed at an ask of $.75 cents on Friday but with two more days of premium decay over the weekend it is possible you could buy it in the 50-60 cent range. This would be especially true if we get even a minor bit of green at the open on Monday. Ideally we would get a bounce back to resistance at 1350/1040 and another failure and that could allow us the potential for a 35-45 cent entry. I am projecting initial support for the NDX at 982, which equates to $24.55 on the QQQ. A $26 put would be worth $1.50 or more at that level. Obviously an entry at 35-60 cents and an exit at $1.50 would provide a +100% gain. The obvious risk points here are a failure to drop or a failure to drop by Friday. The first risk is the risk anyone takes with any speculative investment. The second risk is one of timing and you could eliminate this risk to some extent by moving to an April put option. Unfortunately the April option is $1.45 and a drop in the QQQ to $24.55 would only produce a corresponding gain in the April premium of 50 cents more or less. This return would be more in the 30% range and the risk is tripled if the QQQ surprised us with a move up. This is an expiration week lottery play and best done with the March option. Go long the March $26 put at the open on Monday on a bounce if possible but definitely Monday before the QQQ breaks $25.50 to the downside IF possible. Be prepared to sell the option at a 100% gain or trail a stop loss to avoid any bounce. I would not try to stretch the play past $24 as this should be secondary support. THIS IS A HIGH RISK PLAY Just because the options are cheap does not mean you should buy a bunch. It is a speculative gamble and should only be done with money you are prepared to lose. ******************************** Play updates: Beginning this week I am only going to list the current recommendations with a link to the initial write up and not go into detail unless the play changed substantially. DJX - Laddered Calls - $78.59 Mar-9th ($77.40 when recommended) We were only triggered on two of the laddered calls. We hit 76.00 and 75.00 and missed 74.00 by 19 cents. The prices on the calls when hit were $2.15 for the $76.00 entry and $1.75 on the $75.00 entry. They closed the week at $3.40 so you could close the play now for a nice profit of $1.45 per contract or $2900 according to the game plan. You could close them on Monday morning if the market appears headed down and then reenter the play from scratch when the same entry points were hit again. For record keeping purposes that is the way I am going to account for it. We are well above the initial entry points and I am considering the play restarted. http://members.OptionInvestor.com/editorplays/edply_030903_1.asp CY - Cypress Semi Call - $6.63 3/2/03 ($6.41 when recommended) Cypress rallied to near $7 on Friday and closed at $6.63 despite the Nasdaq weakness. $6.75 was the resistance when it was first recommended and that resistance appears ready to break. Looks good for the long term and weakness next week may be your last chance to get in below this price. http://members.OptionInvestor.com/editorplays/edply_030203_1.asp HLTH - WebMD Call - $8.49 Feb-21st ($9.78 when recommended) WebMD received a negative rating from First Albany after the HLTH earnings. The company said they were skeptical for the long term growth prospects and did not understand the business model. The stop dropped to 8.45 on the news from a near breakout open at $9.88. This may keep a lid on the stock for sometime and I am going to drop this play today. I was already troubled by its inability to break $10 over the last month despite the bad market. It broke support and I suggest putting the money to work elsewhere. http://members.OptionInvestor.com/editorplays/edply_022303_1.asp Microsoft Call - Feb-16th $24.84 (MSFT $24.15 when recommended) Microsoft has roared back to life and rebounded from a $22.55 low on Wednesday to close at $24.84 on Friday on strong volume. I was never worried about this one and you should not either. http://members.OptionInvestor.com/editorplays/edply_021603_1.asp EMC Call from Feb-2nd $7.32 ($7.70 when recommended) EMC also rebounded from a $6.54 low this week and back into respectability but right back at the same $7.50 resistance we have seen for the last few weeks. This is a long term play and we should not be concerned about these fluctuations based on market instability. http://members.OptionInvestor.com/editorplays/edply_020203_1.asp NEM Put from Jan-26th $25.09 ($30.15 when recommended) Again, NEM is trading exactly as we expected falling to a low of $24 on Thursday before rebounding slightly on war talk on Friday. The March $27.50 put profiled at $1.10 in January traded as high as $3.20 this week. I would close that option next week on any drop in NEM. The June $27.50 put profiled at $2.25 traded as high as $4.20 but once the first week of the war is over and positive news about victory emerges NEM could drop as low as $22. I would sell the June put with a NEM trade at $22.00. http://members.OptionInvestor.com/editorplays/edply_012603_1.asp BZH May $50 Put - From Feb-9th $55.84 ($55 when recommended) We have gone from feast to famine to feast on BZH. The positive earnings from another home builder in the sector lifted BZH from $52.50 back into the downtrend channel but not above support. It just means we need to wait for the news to burn off again. This was a May option play and we have plenty of time. Daily headlines continue to predict a cooling in the home builder sector and inventory levels are rising. http://members.OptionInvestor.com/editorplays/edply_020903_1.asp Powerball - From 12/29/02 The PowerBall Lottery play jumped +$115 in value this week despite the Nasdaq weakness on Friday. Corning remains the only winner so far but these are January-2004 leaps and we have plenty of time. The initial concept in December was to capitalize on any 2003 recovery by investing minute amounts of money in beaten down tech companies and expecting many of them to rise substantially while others failed for a few cents. No change here but I am cussing RFMD. It would cost you about $815 to buy one contract of each today. Any one contract could repay that $815 by 12/31/03 leaving the rest as profit. It is a high risk "LOTTERY" play but then $815 is not much risk. It would have taken $1,255 to buy one contract of each on January-2nd. Any bets on what this will be worth on 12/31/03 http://members.OptionInvestor.com/editorplays/edply_122902_1.asp ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** My, Aren't We Sensitive These Days? by Steven Price We got yet another snapshot of current market sensitivity to geo- political concerns with the early trading action on Friday. We started the day with a number of economic reports that took the shine off some big overnight gains in the futures, but still led us higher to begin the day. That economic data was simply window dressing ahead of a press conference from President Bush that was scheduled for 10 a.m. Of course that press conference also coincided with another piece of economic data, complicating matters for traders looking for the development of a trend. That piece of data, the preliminary University of Michigan Consumer Sentiment reading for March, came in at its lowest level in more than ten years, falling to 75.0 from a reading of 79.9 in February. That was worse than expectations for a drop to 76.7 and started the markets rolling downhill. The Dow reversed all the way to a test of 7800, trading as low as 7799 just before the president started talking. I'll get back to the contents of the index in a moment. Then came the press conference. Guess what? No talk about Iraq, just about a new "roadmap for peace" in the Middle East, concerning Israel and the creation of a Palestinian state. After the conference, the markets cruised higher, building on the huge reversal from Wednesday's lows and making a run back over Dow 7900 to a high of 7931. It was a reversal of 130 points on NO NEWS! That shows us just how much negativity is built on a possible U.S. invasion, or at least an invasion without the support of the U.N. Just the fact that the President took a break from talking about Saddam was seen as bullish by traders expecting an announcement of impending action. Back to Consumer Sentiment. The internals of the report showed a drop in the current conditions index from 95.4 to 87.1 and a drop in the expectations index from 69.9 to 67.2. For anyone wondering just how much war fears are contributing to the poor retail sales data we received on Wednesday, a third of consumers mentioned the war and possibility of domestic terrorism as a major factor in their caution on the economy. The head of the U of M's consumer research program said, "Even after a quick and decisive victory, consumer spending will remain subdued through the balance of 2003." Fewer consumers also expect to buy durable goods (high ticket items) in the next six months than at any time in the past ten years. While we have had a nice rally in the past couple of days, it doesn't appear that we should see an increase in spending from the consumer side at least until the international situation is resolved and maybe not even afterward for quite some time. It seems unlikely that the prospect of war is preventing the average shopper from buying furniture or appliances and an increase in consumer spending will likely hinge on businesses' decisions to start spending and hiring once again. The producer price index rose once again in February, mostly due to higher fuel prices. The core rate, which excludes food and energy, actually fell 0.5%. War fears figure into this number directly, as oil continued to climb throughout last month. We have seen some relief in those prices over the past couple of days, which is reflected in the April crude oil futures. The difficulty the U.S. is having building a coalition has pushed the beginning of a possible invasion back, which has had a calming effect on the price of futures. Saudi Arabia has also committed to higher output in case of war and the Bush administration has indicated it might release oil from the national reserves. All of this has dropped the April contract from a high of $40.00per barrel on February 27, to a current reading just over $35. Following this morning's Bush speech, it dipped as low as $33.80. The drop in prices should help producer prices in March, unless we launch an invasion, at which point we can expect an initial spike, likely above the recent high at $40. The big rally that followed the Bush speech eventually found sellers and reversed the gain back into the red after the initial euphoria wore off. Considering Bush is meeting with leaders from Spain and Britain over the weekend, it is likely they are outlining a plan to go into Iraq without U.N. support. When combined with the disappointing Sentiment data, the bulls that had pushed the market higher over the past couple of days eventually took some profits. The other factor that played a role in the rally of the past couple days was a massive asset allocation from bonds back into stocks and that allocation appears to have run its course for the time being. Even during the post-speech rally, bond yields lagged the market, with the 5-yr and 10-yr yield turning green briefly only at the top of the rally as the Dow traded over 7900, before sinking back into the red once again (indicating buyers switching back into bonds, driving yields lower). By the end of the day, the five, ten and thirty year yields were all negative, showing a shift back into treasuries after a sell-off in those instruments coincided with the move back into stocks over the past couple of days. That inflow of cash back into the bond market came in spite of small gains in the broader indices and a flat day for the Nasdaq. The move is a bearish signal for equities, but following a much larger move in the opposite direction since Wednesday morning, it is hard to tell if things were just settling down ahead of the weekend with positions being taken in, or if it was truly a signal that the equity rally had run out of steam and we are ready to reverse back down. With the weekend summit, it is likely that much of the afternoon churning in both markets came from traders tightening up positions ahead of whatever announcements come after the meeting. The Dow, OEX and SPX all posted small gains and the Nasdaq was pretty much flat by the end of the day. However, the most significant technical level that was tested was Nasdaq 1350. The Nasdaq rallied to 1353 numerous times throughout the end of February and beginning of March without breaking thorough, eventually falling to a new relative low last week of 1253. Today's high was 1352.84, indicating we are still seeing sellers at that level. Traders can watch that index for signs of true bullishness and shorts from these levels may want to leave stops around 1360, as it would indicate a significant breakthrough and a possible run at 1400. In the Dow, although we stalled at 7900, the more significant resistance levels lie at 8000, 8050 and 8160. If those are broken, look out above. If we begin to fail at those levels, they may be good short entries for traders looking to pick a top, particularly if they coincide with 1350 resistance in the COMP. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 7860 Moving Averages: (Simple) 10-dma: 7706 50-dma: 8115 200-dma: 8488 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 833 Moving Averages: (Simple) 10-dma: 822 50-dma: 859 200-dma: 897 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 1030 Moving Averages: (Simple) 10-dma: 989 50-dma: 1007 200-dma: 996 ----------------------------------------------------------------- The Semiconductor Index (SOX): The chip stocks finally pulled back today, with the SOX losing 1.7% on the day. While it underperformed the Nasdaq, remember it gained 8% on Thursday and broke into new territory above 300. The closing high at 310 on Thursday was a significant resistance level from late December and today's closing pullback indicated that although we traded as high as 313.56, a close above 310 is still going to be tough. Even tougher yet might be the descending 200-dma, which now sits at 317.74 and has not been crossed since May 2002. If we do manage to break that 200-dma, look for a run to 330 as the next test of resistance. While we did see a pullback, remember the chip stocks have been strong and have given back very little of their gains and are at their highest levels since mid-January. We have actually closed our SLAB call play for a profit, as it has run into resistance and will likely wait for a test of the 200-dma before going long in the sector with so many of the stocks near resistance. 52-week High: 393 52-week Low : 214 Current: 305 Moving Averages: (Simple) 21-dma: 288 50-dma: 292 200-dma: 317 ----------------------------------------------------------------- That 34-35% support level held firm in the VIX on Friday. In fact, even on the morning rally of 130 Dow points, the VIX dropped less than 0.60 and bounced off the 200-dma of 35.40, which also now crowds the support area that has signaled pullbacks in the equity market on each test since the end of January. That low of 35.27 coincided with today's top and traders watching the VIX test 35% could have used it as an indicator to short the rally for at least a brief drop. If we do get a continuation rally which drops the VIX below 34% on a closing basis, look for the next support in the 29-30% range to signal another equity pullback. Beyond that is the recent extreme of 26% from the Nov-Dec and mid-Jan equity highs. If we manage to reach that level, bulls should be tightening stops dramatically because the music is likely to end there. CBOE Market Volatility Index (VIX) = 36.33 +0.40 Nasdaq-100 Volatility Index (VXN) = 45.80 +0.82 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.70 651,503 456,495 Equity Only 0.58 478,164 276,805 OEX 1.07 30,260 32,286 QQQ 0.87 89,349 77,518 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 35.6 - 0 Bull Correction NASDAQ-100 34.0 + 1 Bear Confirmed Dow Indust. 10.0 - 0 Bear Confirmed S&P 500 28.6 - 0 Bull Correction S&P 100 23.0 - 0 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 2.01 10-Day Arms Index 1.82 21-Day Arms Index 1.43 55-Day Arms Index 1.38 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 1585 1249 NASDAQ 1454 1569 New Highs New Lows NYSE 62 66 NASDAQ 48 64 Volume (in millions) NYSE 1,817 NASDAQ 1,585 ----------------------------------------------------------------- Commitments Of Traders Report: 03/11/02 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 to both sides of the equation, with an additional 14,000 long contracts and 13,000 shorts. Small traders mirrored that activity, adding 5,000 longs and 4,000 shorts. Commercials Long Short Net % Of OI 02/18/03 423,871 481,871 (58,000) (6.4%) 02/25/03 424,276 482,476 (58,200) (6.4%) 03/04/03 426,053 472,492 (46,439) (5.2%) 03/11/03 440,688 485,938 (45,250) (4.9%) Most bearish reading of the year: (111,956) - 3/6/02 Most bullish reading of the year: ( 16,472) - 10/01/02 Small Traders Long Short Net % of OI 02/18/03 155,475 91,102 64,373 26.1% 02/25/03 157,790 91,083 66,707 26.8% 03/04/03 164,759 98,636 66,123 25.1% 03/11/03 169,450 102,631 66,819 24.6% 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 almost equally to both sides with 3,700 long contracts and 3,000 shorts. The slightly higher addition to the long side was similar to the activity in the S&P. Small traders got longer as well, with 3,000 additional long contracts and 1,600 additional shorts. Commercials Long Short Net % of OI 02/18/03 38,486 50,501 (12,015) (13.5%) 02/25/03 38,787 51,745 (12,958) (14.3%) 03/04/03 39,934 52,978 (13,044) (14.0%) 03/11/03 43,641 56,020 (12,379) (12.4%) Most bearish reading of the year: (15,521) - 3/13/02 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 02/18/03 25,482 9,425 16,057 46.0% 02/25/03 25,378 7,431 17,947 54.7% 03/04/03 24,240 8,038 16,202 50.2% 03/11/03 27,196 9,674 17,522 47.5% 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 broke ranks in the Dow, adding 1,600 short contracts and only 400 longs. Small traders added 300 long contracts and reduced shorts by about the same amount. Commercials Long Short Net % of OI 02/18/03 18,812 11,939 6,873 22.4% 02/25/03 19,985 11,866 8,119 25.5% 03/04/03 21,326 12,724 8,602 25.3% 03/11/03 21,726 14,370 7,356 20.4% 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 02/18/03 5,561 8,973 (3,412) (23.5%) 02/25/03 4,872 8,723 (3,851) (28.3%) 03/04/03 5,233 8,075 (2,842) (21.4%) 03/11/03 5,549 7,727 (2,178) (16.4%) 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 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 $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *************** ASK THE ANALYST *************** Market, sector, stock, with bullish percent distribution Jeff: Thanks to OI and your commentary regarding the bullish percent indicators, I've grown more interested in how this indicator of measuring supply and demand. It has really helped me understand market risk and its ability to alert me to pending weakness and strength in the markets. My question that you might cover in a future Ask the Analyst column is where I can find some good sector data that uses this same type of technique. Can you direct me and perhaps other traders to a source and give us some idea of how to look for sector moves? I'm glad you are using the major index bullish % data, and right now is perhaps an excellent, if not timely point to discuss not only the various "market" bullish % indicators that we discuss on a daily basis like the S&P 500 Bullish % ($BPSPX), but also the various sector bullish %, that we will quote from time to time and the "six cycles" that a market or sector can be trading in. I subscribe to Dorsey/Wright and Associates point and figure charting, for the sole purpose of their sector bullish % data. I also subscribe to Stockcharts.com, but they don't quite have the extensive and broad sector coverage that I like to have at my fingertips. If any other traders know of, or have found a good source of sector bullish % data, I'd love to know about it and check it out. Now, http://www.dorseywright.com has various "service levels" for subscribers. When I was investment advising with a client base, I used Dorsey's "professional" version, which had a very clear way of UNDERSTANDING how the various sectors were performing internally, which then gave me a much better understanding of the broader MARKET. Their "professional model" had a tool that allowed me to quickly look at the various sector bullish % in a visual presentation. However, just as I've said that hand charting a couple of your favorite stocks on a piece of graph paper gives you a better feel for the stock you're trading, I also like to "hand graph" Dorsey's bullish % data for the various sectors. In my commentary, subscribers have thought that I've lost my mind when I talk about how the MARKET tends to move like an inchworm, or even a snake. Where at certain times (several weeks or months) there are sectors that tend to be at the "head" or "tail" of a move. My first comments regarding how I felt the markets moved like an inchworm was in a May 23, 2002 intra-day update when I was focusing in on the Semiconductor Index (SOX.X), Biotechnology Index (BTK.X) and Software Index (GSO.X) as key sectors to monitor for a move in the QQQ. I drew a goofy chart of what was supposed to be an "inchworm" and how the markets tend to move up or down in similar manor. Here's my "inchworm" chart from that update and the point I was trying to make as what to look for, if the QQQ was going to be able to make a bullish move higher. How and inchworm moves like a market chart. Now, as it relates to the past couple of years, this chart should have had the "head" of the inchworm pointed 180-degrees opposite, but we've still seen rallies from a low, where the inchworm's head has lead to the upside. In my mind, the "head" of a market usually has a sector or two, leading the advance. For sector index traders and ESPECIALLY stock trader's, being in the HEAD of the move upward is where a bull wants to be, and where a bear does NOT want to be, especially if the inchworm is "coiling" and getting ready for a move higher. It has been said that 70-80% of a stock's price action is attributed to both the market and sector conditions, and this is were the bullish % can really help a trader benefit from up and down moves. A trader that decides to begin using sector analysis in both their stock specific and market index analysis for understanding "risk" and building strength and weakness, one way to view the relationship of how sectors will move is view the sector bullish % in graph form, where a horizontal scale is derived. What you will usually find, is something that looks like a "bell curve" or a normal distribution. Now... take the above chart of our inchworm, an rotate it (in your mind) 45-degrees. Look at the "pink" inchworm in the middle. Doesn't it look like a bell curve? I went through all of Dorsey/Wright's sector bullish % data and did this. I looked for the month of December, 2002, and plotted each of their sector bullish % on a piece of graph paper (a Microsoft Excel spreadsheet). I then "color coded" each of the sectors as to their 6-phases of condition that a sector or market may experience at any cycle of distributions or accumulation. The "six conditions" or "cycles" are Bull Alert, Bull Confirmed, Bull Correction, Bear Alert, Bear Confirmed, Bear Correction. I wrote more complete article on this in a "Bailey's Basics" article titled, "Understanding risk is key." PremierInvestor.com subscribers can review this article from this link below. http://www.premierinvestor.com/education/baileysbasics/pibailey_110800_6.asp while OptionInvestor.com subscribers can view it by clicking this http://www.OptionInvestor.com/baileysbasics/bb_110800_6.asp Here's a look at a "sector bell curve" from December 2002. December 2002 Sector Bell Curve Graph There was a lot of "green" on the screen in December in the various sector and major market bullish % indicators. Do you see the "bell curve" type of distribution? The major market bullish % that we follow from www.stockcharts.com showed the very narrow (only 30 stocks) Dow Industrials Bullish % ($BPINDU) having just reversed from above 70% lower into "bear alert" status. The also narrow (just 100 stocks) S&P-100 Bullish % ($BPOEX) and NASDAQ- 100 Bullish % ($BPOEX) were at "overbought" levels above 70%. The broader S&P-500 Bullish % ($BPSPX) (500 stocks) was nearing the 70% level and still "bull confirmed, while both the very broad (3,000 stocks each) NASDAQ Composite Bullish % ($BPCOMPQ) and NYSE Composite Bullish % ($BPNYA) were "bull confirmed" and reflected a more "normal distribution" of bullishness. The remaining "symbols" are those given by Dorsey/Wright and Associates. They give a free 3-week trial to those interested at www.dorseywright.com . Traders that like to trade gold stocks are interested in the BPPREC (precious metals). Technology stock traders follow the Semiconductor (BPSEMI), Software (BPSOFT), Electronics (BPELEC), Computers (BPCOMP), Internet (BPINET), Telecom (BPTELE) and Biotechnology (BPBIOM). Those that like to trade the financials will follow Insurance (BPINSU), Broker/Dealer (BPWALL), Credit/Lenders (BPFINA), Saving/Loan (BPSAVI) and Banks (BPBANK). Deeper cyclical sectors that may be deemed more economically sensitive would be Steel (BPSTEE), Airline/Aerospace (BPAERO), Textiles (BPTEXT), Transports (BPTRAN), Non-ferrous Metals (BPMETA), Machinery (BPMACH), Forest/Paper (BPFORE), Building Products (BPBUIL) and Chemical (BPCHEM). Healthcare traders like the Healthcare (BPHEAL) and perhaps Pharmaceuticals (BPDRUG). Energy traders will monitor the Oil (BPOIL), Oil Service (BPOILS) and even the Gas Utilities (BPGUTI). It's interesting at times to see great divergence between the Gas Utilities and Electric Utilities (BPEUTI). If your a "dividend investor" and attracted to the higher dividends, then it can be helpful to ascertain what sector might be the "strongest/weakest," but also the "riskiest." Somewhat "discretionary" income sectors would be Restaurants (BPREST), Leisure (BPLEIS), Retail (BPRETA) as well as Gaming (BPGAME) and perhaps Autos (BPAUTO). No money to throw around, but have just enough for the basic necessities of life? How about Waste (BPWAST), Household Products (BPHOUS) Concerned about terrorism, or security? Perhaps Protection Device makers (BPPROT) is a sector worth following to determine strength weakness. A trader that follows and begins to understand all the rotation and movement that can take place among the SECTORS, begins to see how these sectors are almost like... well.... kind of like blood pumping through the inchworm. Do inchworms have blood? Maybe plasma. Anyway.... compare the above chart, with what we're looking at today. Then, think about what "sector" a certain stock you hold long/short or put/call has done in the past 3 months, and try to make the "tie" with the sector bullish percent movement. Here's what the current sector and major market bullish % "bell curve" looks like. Note the "change" in their classified "market conditions." Current Sector Bell Curve Graph While I'll talk about how sectors tend to have the markets moving like an inchworm or a snake, we can see how the inchworm has been moving "left" or "lower" since early December. Sometimes, a decline from a very high level of bullishness, seems to have some type of "gravity" exacerbating a move lower as risk removed from an "overbought" condition is like dropping a piano from the 20th floor balcony. That's what has happened to the Dow Industrials Bullish % ($BPINDU) and Wall Street ($BPWALL). Sometimes, a "bottom feeder" will think a "sure bet" is to buy an "oversold" sector on thoughts that it will certainly rebound. That would have been a terrible mistake in December if looking at Latin America (BPLATI), which was a weak sector in December, and has gotten even weaker. I now a good time to be full position short/put the Dow Industrials, or a "Broker/Dealer" stock? Probably not when benchmarking back to December when they were both rather high on the bullish % scale and "bear alert." One sector that might be worth following from the "bearish" side right now, is savings and loan (BPSAVI) group. Traders that are learning the bullish %, don't think they can ever go to 100% bullish, but this group reached 94% bullish in May of 2002 and is currently showing some internal strength, but in a "bear correction" status. A name familiar to many is Washington Mutual (NYSE:WM) $33.53, which is perhaps the sector "bellwether." One sector that has really had a bull's attention and perhaps finding his/her money has been the Internets. While the bulk of sectors have been shifting to the left, the Internets have been holding steady. What are some "top of mind" names in this group that you might consider "sector bellwethers?" How about Amazon.com (NASDAQ:AMZN) retail/Internet, eBay (NASDAQ:EBAY) retail/Internet, Yahoo! Inc. (NASDAQ:YHOO) Internet, AOL Time Warner (NYSE:AOL) media/Internet (see also BPMEDI). In our Index Trader Wraps, I've added the S&P Banks Index (BIX.X) to our pivot analysis matrix, and have classified this sector as a "key sector" for S&P 500 (SPX.X) and S&P 100 (OEX.X) traders to be monitoring and understanding. Do you see perhaps why I've classified it as a "strong sector" that is starting to show some very negative weakness, and should that weakness continue, could drive the SPX and OEX lower? True, it is just one sector, but it may be the "head of the inchworm" that is turning back to see what's pulling at everything else. This can act like a "sledge hammer" that pounds a nail and drives it lower. You can see where the S&P 100 Bullish % ($BPOEX) and S&P 500 Bullish % ($BPSPX) are at in relation to the banks. Two stocks I've mentioned in the Drugs sector (BPDRUG) has been "bearish" McKesson (NYSE:MCK) from $25 on a "bearish triangle" pattern, and "bullish" Forest Labs (NYSE:FRX) based on strong relative strength. I've also mentioned both stocks as a "pairs trade" where a trader shorts/put MCK and buy long/call FRX. Just recently, March 13th to be exact, the Drug Sector Bullish % (BPDRUG) from Dorsey/Wright just turned "bear confirmed." This can become a negative for FRX, as the sector continues to deteriorate, and if its true that 80% of a stocks price action is sector related, then a FRX bull doesn't necessarily like the sector action that is developing. However, the bearish trader in MCK likes the action as it gives some "confirmation" from the sector that there may be continued weakness in MCK. I could go on and on about stocks and how important sector analysis is. Traders that will "think back" to good trades in individual stocks and perhaps look at the sector bullish % charts from Dorsey/Wright and Associates, will probably discover some amazing things. What you will often find, is that your best bullish trades came from a stock that was showing good relative strength versus the market, or the sector that it was associated with, when the sector bullish % reversed up from a low level (near 30%) of bullish%. Your good bullish trades were found in strong stocks, but the gains were perhaps limited as the position was entered at a higher level of bullish%, when sector and stock risk were getting ready to be removed in the weeks ahead. Your worst bullish trades may have been found at a very high level of bullish %, or was entered during a more bearish cycle when the bulk of stocks in the sector were generating sell signals. Bears will most likely find that their best bearish trades came from a stock that was exhibiting signs of weakness, just when, or before the sector bullish % reversed from a high level of bullishness into a "bear alert" or "bear confirmed" status. Good trades were found as sector bullishness continued to deteriorate in a "bear confirmed" status, but was closer to the 30% level of bullishness. The terrible bearish traders were either found when the sector bullish % was at or below the 30% level, or the bearish position was on a stock that was in a strong sector that was gaining bullishness and moving against other sector action. So.... this is one way, which I think a trader/investor can really get some excellent observations from sector bullish % data and make visual observations of what sectors are on the move, what direction they're headed toward, and what level of risk on the scale of 0-100 is in the trade. Jeff Bailey ************* COMING EVENTS ************* ========================================== Market Watch for the week of March 17th ========================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- DG Dollar General Corp. Mon, Mar 17 Before the Bell 0.31 TECD Tech Data Corporation Mon, Mar 17 After the bell 0.55 SVM The ServiceMaster Co Mon, Mar 17 -----N/A----- 0.09 ------------------------- TUESDAY ------------------------------ BTH Blyth Inc. Tue, Mar 18 Before the Bell 0.57 CLL Celltech Group PLC Tue, Mar 18 -----N/A----- N/A KKD Krispy Kreme Doughnut Tue, Mar 18 Before the Bell 0.18 ORCL Oracle Tue, Mar 18 After the bell 0.10 WSM Williams-Sonoma Tue, Mar 18 During the Market 0.66 WOS Wolseley Tue, Mar 18 -----N/A----- N/A ----------------------- WEDNESDAY ----------------------------- CMVT Comverse Technology Wed, Mar 12 After the Bell -0.11 COMS 3Com Wed, Mar 19 After the bell -0.06 ABS Albertson's Wed, Mar 19 -----N/A----- 0.52 AAA Altana AG Wed, Mar 19 Before the Bell N/A BSC Bear Stearns Wed, Mar 19 Before the Bell 1.35 BMET Biomet, Inc. Wed, Mar 19 Before the Bell 0.28 FDO Family Dollar Wed, Mar 19 Before the Bell 0.42 FDX FedEx Wed, Mar 19 Before the Bell 0.50 GIS General Mills, Inc. Wed, Mar 19 Before the Bell 0.66 MLHR Herman Miller Wed, Mar 19 After the bell 0.04 JBL Jabil Wed, Mar 19 After the bell 0.16 LEN Lennar Corporation Wed, Mar 19 Before the Bell 1.41 NKE Nike Wed, Mar 19 -----N/A----- 0.46 ROST Ross Stores, Inc. Wed, Mar 19 Before the Bell 0.74 WOR Worthington Ind Wed, Mar 19 -----N/A----- 0.21 ------------------------- THURSDAY ----------------------------- AZ Allianz AG Thu, Mar 20 -----N/A----- N/A BKS Barnes&Noble Thu, Mar 20 Before the Bell 1.47 CTAS Cintas Corporation Thu, Mar 20 Before the Bell 0.34 GS Goldman Sachs Thu, Mar 20 Before the Bell 0.96 LEH Lehman Brothers Thu, Mar 20 Before the Bell 0.99 MU Micron Technology Thu, Mar 20 After the bell -0.44 MWD Morgan Stanley Thu, Mar 20 Before the Bell 0.62 PAYX Paychex Thu, Mar 20 After the bell 0.19 PCW PCCW LTD Thu, Mar 20 -----N/A----- N/A SLR Solectron Thu, Mar 20 After the bell -0.01 TEK Tektronix Inc. Thu, Mar 20 After the bell 0.08 ------------------------- FRIDAY ------------------------------- ATYT ATI Technologies Fri, Mar 21 -----N/A----- 0.02 CCL Carnival Corporation Fri, Mar 21 Before the Bell 0.18 CEP Centerpulse AG Fri, Mar 21 Before the Bell N/A DRI Darden Restaurants Fri, Mar 21 -----N/A----- 0.35 ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable FFLC FFLC Bancorp, Inc. 3:2 Mar. 14th Mar. 17th LNBB LNB Bancorp, Inc. 3:2 Mar. 14th Mar. 17th BRL Barr Labs 3:2 Mar. 17th Mar. 18th NARA Nara Bancorp 2:1 Mar. 17th Mar. 18th XTO XTO Energy 4:3 Mar. 18th Mar. 19th ANPI Angiotech Pharm 2:1 Mar. 21st Mar. 13th PSS Payless Shoe 3:1 Mar. 28th Mar. 28th -------------------------- Economic Reports This Week -------------------------- The timetable for war is growing short and Wall Street isn't sure how to handle it anymore. Market watchers will be waiting to hear from the FOMC on a possible rate cut and Friday brings the CPI report. Don't look now but earnings warnings season is almost here! ============================================================== -For- Monday, 03/17/02 ---------------- None Tuesday, 03/18/02 ----------------- Housing Starts (BB) Feb Forecast: 1.755M Previous: 1.580M Building Permits (BB) Feb Forecast: 1.745M Previous: 1.779M FOMC Meeting (DM) Wednesday, 03/19/02 ------------------- None Thursday, 03/20/02 ------------------ Initial Claims (BB) 03/15 Forecast: N/A Previous: 420K Leading Indicators (DM) Feb Forecast: -0.4% Previous: -0.1% Philadelphia Fed (DM) Mar Forecast: 4.0 Previous: 2.3 FOMC Minutes (DM) Treasury Budget (DM) Feb Forecast:-$80.0B Previous: -$76.1B Friday, 03/21/02 ---------------- CPI (BB) Feb Forecast: 0.5% Previous: 0.3% Core CPI (BB) Feb Forecast: 0.2% Previous: 0.1% Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************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 ************************************************************** ********************* SWING TRADE GAME PLAN ********************* Bulls Cling to Gains There were so many times I wanted to get short today, I felt like Yao Ming trying to climb into a Volkswagen beetle. To read the rest of the Swing Trader Game Plan click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 03-16-2003 Sunday 2 of 5 In Section Two: Daily Results Call Play of the Day: BVF Put Play of the Day: CEPH Dropped Calls: SLAB Dropped Puts: UTX ************************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 ************************************************************** *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS Mon Tue Wed Thu Week AMGN 57.64 -0.06 -0.10 0.07 1.84 2.48 Still going BVF 39.06 -0.85 -1.34 -0.21 0.70 0.26 New, Over $40 ERTS 56.48 -0.45 -0.42 0.71 2.99 2.60 Minor setback MME 36.00 -0.73 -0.73 0.22 1.00 -1.35 At support SLAB 29.02 -0.25 -0.82 -0.13 2.51 1.39 Drop,take gains STN 19.86 -0.45 0.25 -0.13 0.31 0.46 New, Over $20 ZMH 46.69 -0.74 -0.64 0.65 0.65 1.54 Raised Guidance PUTS BAC 67.31 -1.41 -1.21 0.39 1.76 -0.94 Entry Point CEPH 44.10 -1.06 -1.58 0.40 1.29 -1.68 New, Failed LLY 53.98 -0.84 -2.30 0.33 1.20 -3.00 Real weakness TIN 39.57 -0.70 -0.88 -0.01 1.64 0.57 Stopped at $40 UTX 58.87 -0.28 -1.74 -0.76 3.21 2.62 Drop,Dow bounce XL 68.50 -2.13 -1.71 -0.60 3.22 -0.51 Failed rebound ************************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 ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* BVF – Biovail Corporation $39.06 (+0.11 last week) See details in play list Put Play of the Day: ******************** CEPH - Cephalon, Inc. $44.10 (-1.67 last week) See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ SLAB $29.02 +0.52 (+1.48 for the week) SLAB has been leading the SOX higher for the past few days and out performing the index for the past few months. We added this play at $25.62 with a target between $29 and $30. Friday morning the stock topped out at $29.43, reaching that target. We are closing the successful play with a gain for readers as the stock is now into that heavy resistance level that has kept a lid on it since May 2002. SLAB did top out at $30.40 on December 2 as the SOX hit 393. The SOX is down almost 90 points from that level, but SLAB has bounced back up within a dollar of the top on that day. If the SOX does break out over its 200-dma at 317, there may be some further upside to SLAB, especially if it can make a move above $30.50. Traders who want to try to add to gains can certainly hold on for a run at that level, but they may want to tighten their stops to lock in some of their current profits. PUTS ^^^^ UTX $58.87 +1.51 (+1.75 for the week) How long does it take to erase a $6 gains? Apparently about two and a half days. We were up $6 on this play at Wednesday's lows, but a furious broad market rally took this Dow component with it. We tightened our stop to lock in at least a small gain on the put play in case the rally continued Friday and that is exactly what happened. UTX, which was one of the weakest stocks in the recent market slide, also had the most ground to make up. IT violated our new stop at $58.00, which was $1.55 below our entry, on its way to a close of $58.87. The stock also closed above its 21-dma, which it had failed on the last significant bounce attempt in February. We are going to let this one go, but aggressive bears looking for a broad market rollover may want to use a more lenient stop just above $60. Certainly if the Dow runs out of steam and reverses itself, UTX is likely to follow, but we set stops for a reason and we are now of this play. *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************************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 ************************************************************** ********** 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 Sunday 03-16-2003 Sunday 3 of 5 In Section Three: New Calls: BVF, STN Current Calls: AMGN, ERTS, MME, ZMH New Puts: CEPH ************************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 ************************************************************** ************** NEW CALL PLAYS ************** BVF – Biovail Corporation $39.06 (+0.11 last week) Company Summary: Biovail Corporation is a full-service pharmaceutical company that applies its proprietary drug delivery technologies in developing "oral controlled-release" products throughout North America. The company applies its proprietary drug delivery technologies to successful drug compounds that are free of patent protection to develop both branded and generic oral controlled-release products. BVF has applied its technologies to develop 18 products to date and currently has 16 others under development. Why We Like It: Trigger on move over $40.05 It is becoming increasingly clear that we can't call an entire sector strong or weak, as there are exceptions to every rule we might like to make. On one hand, we are playing the bearish trend in shares of LLY, while here today we have a fresh bullish candidate, also from the Drug sector. After bottoming in July, BVF has been working its way higher in a broad ascending channel for months now. The latest victory for the bulls was breaking above the $35 level, which marked a top back in early December, before the stock fell to support at the bottom of the channel. While BVF is now near the top of that channel right now, things look a bit different, with the 200-dma turning up, the 50-dma above the 200-dma and BVF above both. We're looking for a breakout over the $40 level to really get some legs and run, but we've got to get over that level first. So we're setting a trigger of $40.10 for the play and will only consider new entries after that trigger is hit. Aggressive traders can enter on the initial move above that level, while more conservative typed will want to wait for a subsequent pullback to the $39 level before entering on a rebound. Note that the PnF chart's bullish price target is $49, which coincides with significant overhead resistance. That will be our eventual target for harvesting gains, but would be entirely happy with a short term move into the April 29th gap between $43.50-46.45, as the top of that gap will probably offer some stiff resistance as well. After being triggered, our initial stop will be set at $36, just below last week's lows and the 20-dma ($36.06). *** March contracts expire next week *** BUY CALL MAR-40 BVF-CH OI=3381 at $0.70 SL=0.25 BUY CALL APR-40*BVF-DH OI=3077 at $1.60 SL=0.75 BUY CALL APR-45 BVF-DI OI= 390 at $0.30 SL=0.00 BUY CALL JUL-40 BVF-DH OI=1628 at $3.50 SL=1.75 BUY CALL JUL-45 BVF-DH OI= 504 at $1.50 SL=0.75 Average Daily Volume = 1.14 mln --- STN - Station Casinos- $19.86 +0.38 (+0.46 for the week) Company Summary: Station Casinos, Inc. is the leading provider of gaming and entertainment to the residents of Las Vegas, Nevada. Station's properties are regional entertainment destinations and include various amenities, including numerous restaurants, entertainment venues, movie theaters, bowling and convention/banquet space, as well as traditional casino gaming offerings such as video poker, slot machines, table games, bingo and race and sports wagering. Station owns and operates Palace Station Hotel & Casino, Boulder Station Hotel & Casino, Santa Fe Station Hotel & Casino and Wild Wild West Gambling Hall & Hotel in Las Vegas, Nevada, Texas Station Gambling Hall & Hotel and Fiesta Rancho Casino Hotel in North Las Vegas, Nevada, and Sunset Station Hotel & Casino and Fiesta Henderson Casino Hotel in Henderson, Nevada. Station also owns a 50 percent interest in both Barley's Casino & Brewing Company and Green Valley Ranch Station Casino in Henderson, Nevada. (source: company release) Why We Like It: This gaming stock has been flying under the radar, with a lower profile than other casino stocks such as Mandalay Bay Group and MGM. However, that doesn't mean that analysts haven't been paying attention. The company has numerous smaller casinos spread throughout the southwest and is about to add another - the Thunder Valley Casino in Placer County, California. STN won approval in December for the project from the National Indian Gaming Commission. Thunder Valley and it is scheduled to open this summer. The company was upgraded buy Prudential on March 7 from "hold" to "BUY" based on the prospects for Thunder Valley. The Stock continues to test the $20 level on rallies, as it has done for almost three years now, since early 2000. Each test has eventually failed, with a high water mark for the stock of $20.00 in June 2000. We are back to that level once again, as we get closer to the opening of Thunder Valley. With so much resistance at $20, we think a breakthrough of that level could take us quite a bit higher on a percentage basis, with a possible gain of up to 25%. With a point and figure target of $30, we will settle for half that gain as our target on a move above $20, using a trigger of $20.26. The stock gave its last buy signal at $19.50, but with so many failures at $20, we'd like to see a decisive break above that level before initiating the long play. Set stops below the 50-dma at $17.74 if triggered. *****March Options Expire Next Week************ BUY CALL APR-17.50 STN-DW OI=105 at $2.85 SL=1.45 BUY CALL APR-20 STN-DD OI=302 at $1.15 SL=0.60 BUY CALL JUL-17.50 STN-GW OI=926 at $3.70 SL=1.85 BUY CALL JUL-20 STN-GD OI=326 at $2.10 SL=1.05 Average Daily Volume = 381 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 ************************************************************** ****************** CURRENT CALL PLAYS ****************** AMGN – Amgen, Inc. $57.64 (+1.94 last week) Company Summary: The biggest of the Biotech big guns, AMGN makes and markets therapeutic products for hematology, oncology, bone and inflammatory disorders, as well as neuroendocrine and neurodegenerative diseases. Anti-anemia drug Epogen and immune system stimulator Neupogen account for about 95% of sales. Its Infergen has been commercialized as a treatment for hepatitis C, and Stemgen is approved for stem cell therapy in Australia, Canada, and New Zealand. The company has a strong pipeline of new drugs in various stages of development as well as research and marketing alliances with Hoffman-La-Roche and Johnson & Johnson. Why We Like It: After gradually inching higher for weeks now, our AMGN play looks like it is finally picking up some steam to the upside. First the stock inched through the $54 level, and then $55, but each fractional breakout resulted in a retracement back to the supportive trendline that began last September. But this latest move higher seems a bit different. The past two days have seen strong buying propel the stock to successively higher closing levels and AMGN is now well into that $56-60 resistance zone we've been focusing on here since the beginning. Buying volume is continuing to increase and the real story is told by the On Balance Volume, which is now nearing a 2-year high. Notice that a lack of strength in the broad market, or even the Biotechnology index (BTK.X) isn't able to have a negative impact on AMGN. If things continue this way, the play seems sure to test our primary target of $60 in the near future. But therein lies the problem, as $60 is also the site of the nearly 3-year descending trendline, which is likely to be formidable resistance. For that reason, we're advocating taking gains and exiting the play on a push up into the $59-60 area. That doesn't mean we can't still consider new entries, but should only do so on a dip and bounce from support in the $55.00-55.75 area. This weekend, we're raising our stop to $54.25, the site of intraday support last Wednesday. *** March contracts expire next week *** BUY CALL MAR-55 YAA-CK OI=33937 at $3.00 SL=1.50 BUY CALL APR-55*YAA-DK OI=38035 at $4.00 SL=2.50 BUY CALL APR-60 YAA-DL OI=34406 at $1.30 SL=0.75 BUY CALL JUL-60 YAA-GL OI=40579 at $3.50 SL=1.75 Average Daily Volume = 11.3 mln --- ERTS – Electronic Arts $56.48 (+2.33 last week) Company Summary: ERTS creates, markets and distributes interactive entertainment software for a variety of hardware platforms, including Sony's PlayStation 2, the PC, Nintendo GameCube and the recently launched Xbox. The company's EA.com business segment is engaged in the creation, marketing and distribution of entertainment software which can be played or sold online, as well as the ongoing management of subscriptions of online games and Website advertising. Why We Like It: Given the magnitude of ERTS' short-covering ramp on Thursday, the slight give back on Friday is actually encouraging. It seemed very unlikely that any continued breakout from Thursday's high would have much staying power without at least a minor pullback, and price action seems to be proving that opinion to be true. Unfortunately, with the huge vertical move on Thursday, trying to gauge support where the stock might find support is rather difficult. The $55 level could provide psychological support, but the $54.00-54.50 level seems more logical, based on historical support/resistance and the site of the 10-dma (currently $53.89). That level was prior resistance before last week's breakout, and Thursday's gap ($53.76-54.44) should provide concrete support if the bulls really are back in town. While a breakout over the $58 level could turn out to be the beginning of a runaway move, we're placing the likelihood of such a development as very low. But the dips to support, not the breakout over resistance. Keep stops in place at $53, the site of last week's intraday support, as well as the 20-dma, currently at $53.03. *** March contracts expire next week *** BUY CALL MAR-55 EZQ-CK OI=11293 at $2.10 SL=1.00 BUY CALL APR-55*EZQ-DK OI= 2866 at $3.50 SL=1.75 BUY CALL APR-60 EZQ-DL OI= 1213 at $1.15 SL=0.50 BUY CALL JUN-60 EZQ-FL OI= 6346 at $3.00 SL=1.50 Average Daily Volume = 4.51 mln --- MME – Mid Atlantic Medical Services $36.00 (-1.35 last week) Company Summary: Mid Atlantic Medical Services is a holding company for subsidiaries active in managed healthcare and other life and health insurance related activities. MME and its subsidiaries offer a broad range of managed healthcare coverage and related ancillary insurance and other products and deliver these services through health maintenance organizations, a preferred provider organization, and a life and health insurance company. MME owns a home healthcare company, a pharmaceutical services company and a hospice company. The company also owns a collections company and maintains a partnership interest in an outpatient surgery center. Why We Like It: After the fireworks that brought the prior week to a close, last week's action wasn't nearly as gratifying for the MME bulls. The mid-week bounce from just below $36 certainly looked encouraging and Thursday's bounce back over $37 had us entertaining thoughts of a breakout over the $38 level. Alas, it wasn't to be, as MME reversed course again on Friday, opening at the high and closing at the low, on relatively strong volume. This is not an encouraging sign and it could mean that this stock has run its course until going through another period of consolidation. Certainly a rebound from the site of last week's lows can be used for new entries, but watch out for a continuation of Friday's slide. We don't want to be trying to catch a falling knife here, so wait for the bounce. Our stop is currently at $35.50, as a close below that level will break an important level of newfound support and have us exiting the play. *** March contracts expire next week *** BUY CALL MAR-35 MME-CG OI=1645 at $1.30 SL=0.75 BUY CALL APR-35*MME-DG OI= 20 at $2.65 SL=1.25 BUY CALL APR-40 MME-DH OI= 155 at $0.60 SL=0.25 BUY CALL JUN-40 MME-FH OI= 136 at $1.70 SL=0.75 Average Daily Volume = 428 K --- ZMH - Zimmer Holdings - $46.69 +2.04 (+1.48 for the week) Company Summary: Zimmer, based in Warsaw, Indiana, is a global leader in the design, development, manufacture and marketing of reconstructive orthopaedic implants and fracture management products. Orthopaedic reconstruction implants restore joint function lost due to disease or trauma in joints such as knees, hips, shoulders and elbows. Fracture management products are devices used primarily to reattach or stabilize damaged bone and tissue to support the body's natural healing process. Zimmer also manufactures and markets other products related to orthopaedic and general surgery. For the year 2001, Zimmer recorded worldwide revenues of approximately $1.2 billion. Zimmer was founded in 1927 and has more than 3,600 employees worldwide. (source: company release) Why We Like It: This call play has been sitting on our list since February 22. While it slowly built consolidation near its all-time highs, it struggled to hold over the $45 level. The solid business plan and new products were enough to maintain its gains, but we weren't getting the follow through we were looking for. Until Friday. ZMH came out Friday and announced it would significantly beat its previous revenue and earnings estimates, projecting revenue $15- $20 million greater than the high end of its previously indicated range. The new estimates indicate sales growth of 20% over Q1 2002 and EPS growth of 30% over the same quarter. ZMH Chairman Ray Elliott attributed the increases to, "America's growth in reconstructive products that again exceeds 20% in constant currency (and) our tremendous gains in Europe are continuing, with revenue growth currently running at 50% greater than the market, and Asia Pacific revenue growth running at double-digit rates." The news was enough to push ZMH all the way up to $47.95 in early trading before profit takers took a little more than a dollar off the top. By the end of the ZMH had gained $2.04 to finish at $46.69 and took out that resistance just over $45 decisively. The best entries in this play may come on a pullback to the $45.50 area that served as previous resistance, as long as it now holds as support or possibly at the bottom of Friday morning's gap open at $46. $48 was obvious resistance on Friday and will be the next challenge for call holders. The stock is already on a PnF buy signal, established back at $43 and has a bullish vertical count of $65. While we aren't targeting such a big move on the current play, $50 now seems achievable. If the stock continues to find resistance at $48, traders may want to take some chips off the table on another failed test of that level, locking in a gain of more than $4 on at least part of the position. *****March Options Expire Next Week************ BUY CALL MAR-40 ZMH-CH OI=991 at $7.00 SL=3.50 BUY CALL MAR-45 ZMH-CI OI=1562 at $2.10 SL=0.00 BUY CALL APR-45 ZMH-DI OI=877 at $2.90 SL=1.45 BUY CALL JUN-45 ZMH-FI OI=473 at $3.80 SL=1.90 Average Daily Volume = 1.08 mln ************* NEW PUT PLAYS ************* CEPH - Cephalon, Inc. $44.10 (-1.67 last week) Company Summary: Cephalon, Inc. is an international biopharmaceutical company dedicated to the discovery, development and marketing of products to treat sleep disorders, neurological disorders, cancer and pain. In addition to conducting an active research and development program, the company markets three products in the United States and a number of products in various countries throughout Europe. CEPH's United States products comprise Provigil for the treatment of excessive daytime sleepiness associated with narcolepsy, Actiq for cancer pain management and Gabitril for the treatment of partial seizures associated with epilepsy. Why We Like It: There may be Biotech stocks that are acting will in this market (like our current AMGN Call play), but for the most part, the trend for many of these stocks continues to be down. After the impressive short-covering move on Thursday, the Biotechnology index (BTK.X) drifted back a bit, as expected. Despite making up all of the ground lost over the past month, there's not much to inspire confidence with the 50-dma, 200-dma and long-term descending trendline all bearish down from above. CEPH has been looking unhealthy since late November, posting one lower high and lower low after another. Breaking down under the $48 level in late February put the PnF chart back on a Sell signal, and the break below the bullish support line just reinforced the bearish thesis. The current vertical count projects down to $33, but with all the congestion in the $39-40 level, that seems like too bearish a target for us to work with. But with strong resistance now in the $46-47 area, it looks like there is still room to benefit from a downside move. While CEPH did manage to participate in the short-covering party on Thursday, Friday's session saw all of those gains wiped out and it looks like the stock could just break lower from here. Aggressive traders can certainly consider entries on a break below $43.50, which would have CEPH falling under the bottom of Thursday's gap, but need to be cognizant of support which starts to build near $42, becoming fairly strong by the time the $40 level is reached. For that reason, we favor entering on a failed bounce to resistance, preferably in the $45.50-46.00 area, which very effectively capped last Thursday's rally attempt. Initial stops are set at $47.10, just above the resistance found in early March. *** March contracts expire next week *** BUY PUT MAR-45 CQE-OI OI=1972 at $1.75 SL=0.60 BUY PUT APR-45*CQE-PI OI=2377 at $3.10 SL=1.50 BUY PUT APR-40 CQE-PH OI= 374 at $1.35 SL=0.75 Average Daily Volume = 1.80 mln ************************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 ************************************************************** ********** 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 Sunday 03-16-2003 Sunday 4 of 5 In Section Four: Current Put Plays: BAC, LLY, TIN, XL Leaps: (See Note) Traders Corner: Are You A Quart Low? Top It Off With Profits Traders Corner: Introduction to Elliott Wave Analysis Futures Corner: Moving Average Bands ************************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 ************************************************************** ***************** CURRENT PUT PLAYS ***************** BAC - Bank of America - $67.31 -0.29(-1.68 for the week) Company Summary: One of the world's leading financial services companies, Bank of America is committed to making banking work for customers and clients like it never has before. Through innovative technologies and the ingenuity of its people, Bank of America provides individuals, small businesses and commercial, corporate and institutional clients across the United States and around the world new and better ways to manage their financial lives. The company enables customers to do their banking and investing whenever, wherever and however they choose through the nation's largest financial services network, including approximately 4,400 domestic offices and 13,000 ATMs, as well as 30 international offices serving clients in more than 150 countries, and an Internet Web site that provides online banking access to 4 million active users, more than any other bank. (source: company website) Why We Like It: After the big bounce following the broader markets, BAC finally tested its converging 50 and 200 day moving averages. In our last write-up, we recommended new entries for only the most aggressive bears who could target an entry point on a failure at those levels and a the failure to reverse on the PnF chart. That is about what we got on Friday, with an early trading boost eventually failing just over $68, but the PnF chart did reverse higher. However, that reversal came to yet another lower high on that chart, forming a neatly descending down trend line. Until that trend is broken, we see no reason to conclude there has been a trend reversal. However, given the big reversal in the broader markets over the past couple of days, we would term this a higher risk play, as any continuation to the recent rally is likely to involve financials. Once again, aggressive bears can view the current level and any close below the converging 200 and 50-dmas as a short entry, but momentum traders may want to wait for another trip below Thursday's low of $66.05. *****March Options Expire Next Week************ BUY PUT APR-65* BAC-PM OI=6509 at $1.80 SL=0.90 BUY PUT APR-70 BAC-PN OI=723 at $4.10 SL=2.05 Average Daily Volume = 4.8 MIL --- LLY - Eli Lilly $53.98 (-3.00 last week) Company Summary: LLY discovers, develops, manufactures and sells Pharmaceutical products targeted at the diagnosis, prevention and treatment of human diseases. The company's best known commercial product is the anti-depressant Prozac, although there are numerous other lesser-known drugs that treat conditions such as Parkinson's disease, diabetes, osteoporosis along with a broad range of antibiotics. The company also conducts research to find products to treat diseases in animals and to increase the efficiency of animal food production. Why We Like It: After the big breakdown in shares of LLY last week, the stock looked like a high-odds short that ought to continue down to at least the $50 level. The key to the play was in picking a decent entry point, right? the $55 level had been providing support for so long, it seemed highly unlikely that LLY would just continue lower without first bouncing up to find resistance at that level. Sure enough, Thursday's rebound to the $55.24 level was just the ticket, and in case you missed that entry Thursday afternoon, the market gave you another shot on Friday morning before heading back south. The impetus for the selloff was a Financial Times article on Tuesday about the patent protecting Zyprexa, a schizophrenia treatment that is LLY's biggest selling drug, which is expected to be under greater risk from a court challenge by a generic competitor. Regardless of the root cause, LLY is now looking weak and we're happy to go along for the ride, even without our Prozac. Successive failed rallies below the $56 level should make for excellent bearish entry point, while momentum traders can consider using a break below the $53.25 level to enter the fray. we're lowering our stop this weekend to $56.50, which is just above the declining 20-dma, currently at $56.36. *** March contracts expire next week *** BUY PUT MAR-55 LLY-OK OI=1998 at $1.65 SL=0.75 BUY PUT APR-55*LLY-PK OI=3373 at $3.10 SL=1.50 BUY PUT APR-50 LLY-PJ OI=2054 at $1.15 SL=0.50 Average Daily Volume = 2.80 mln --- TIN – Temple-Inland Inc. $39.57 (-0.17 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: After selling off with the rest of the market into the middle of last week, our TIN play finally found enough support to put together a decent bounce from support near $37. The bounce was strong enough that by midday on Friday, the stock was challenging both the 2-month descending trendline and our stop at $40.25. The over-riding question at this point in the play is whether this bounce has run its course and is now rolling over from resistance, OR if Friday's pullback was just a pause in a recovery off the bottom. While only time will give us the actual answer to that conundrum, the descending trendline gives us a good way to measure the odds. Another rally failure at the trendline can still be used for aggressive entries into the play, but keep in mind that those entries will be on a short leash, with our stop set at $40.25. If TIN does roll back over from here, more conservative traders can look for an entry on a decline back under the $39 level. Of course, with a close over our stop, we won't waste any time dropping the play. *** March contracts expire next week *** BUY PUT MAR-40 TIN-OH OI= 65 at $1.05 SL=0.50 BUY PUT APR-40*TIN-PH OI= 0 at $1.85 SL=1.00 BUY PUT MAY-40 TIN-QH OI= 78 at $2.40 SL=1.25 Average Daily Volume = 371 K --- XL - XL Capital - $68.50 (-0.50 for the week) Company Summary: XL Capital Ltd, through its operating subsidiaries, is a leading provider of insurance and reinsurance coverages and financial products to industrial, commercial, and professional service firms, insurance companies, and other enterprises on a worldwide basis. As of December 31, 2002, XL Capital Ltd had consolidated assets of approximately $35.6 billion and consolidated shareholders' equity of approximately $6.6 billion. (source: company release) Why We Like It: Back where we started. Exactly where we started. Now if we can only get the same action once again that at one point gave us a nearly $4 gain on this play before last week's big Dow reversal. Actually we do find ourselves with one added ingredient we didn't have when we added this short play at $68.50 on March 4 - a combined failed rebound at the 21-dma and $70 level. We did get a failed bounce to $70 as one of our suggested entries, but now that the 21-dma has followed the stock down, Friday's bounce failed at that level and gave us yet another level of resistance above to rely on as an indicator of any true change in sentiment here. As with most other financials, this stock has an awfully big reversal candle on Thursday that mirrors the Dow, but it has continued to fail at $70 and as long as that level holds, it remains in bearish territory. XL's last PnF sell signal came at $69 and it has been unable to manage a close above that level since. We have lowered the stop to $70.06, since a break above that level would also involve the 21-dma. We like short entries below that resistance, but if the market once again heads higher on Monday, wait for a test of those levels before initiating shorts. *****March Options Expire Next Week************ BUY PUT MAR-70*XL-ON OI=293 at $2.65 SL=1.30 BUY PUT APR-70 XL-PN OI=90 at $4.00 SL=2.00 Average Daily Volume = 734 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 ************************************************************** ***** LEAPS ***** Due to weather conditions the Leaps section will not be updated until Monday, March 17th. We apologize for any inconvenience this may cause you. ************** TRADERS CORNER ************** Are You A Quart Low? Top It Off With Profits By Mike Parnos, Investing With Attitude Often in life we’re faced with making important decisions – especially if you’re a trader. We have to prepare. You can’t do heavy lifting with light-weight equipment, so we have some work to do. Very few trading decisions are black and white. There’s always going to be a gray area. What do you need to deal with gray areas? Gray matter. Welcome to the CPTI “Gray Matter Store” -- where brain cells are on sale for a dime a dozen; where black and white brain cells live together in harmony and give birth to little gray cells that are welcome in both the left and right brain. Hmmm. This is pretty good stuff. Maybe I should go into politics. I don’t need a platform, though. I’ve got a couch. Hey, if G.W. can get a 60% approval rating, it’s probably the retail traders that are doing the rating – and we know they’re wrong most of the time. At least I help people make money. Oh well, back to business. I get many letters asking “How do you know when to roll out a position?” or “How do you know when to close a position?” Well, in our Couch Potato Trading Institute portfolio, we’re going to be faced with making such a decision on how to deal with our OIH Calendar Spread. _____________________________________________________________ The Position – At The Beginning Our Thinking: Three weeks ago we established a calendar spread on the OIH (Oil Holders Trust – trading above $57.00). 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 for $4.30 and sold 10 contracts of the March OIH $50 puts for $.45, resulting in a debit of $3.85. If necessary, we had five months to sell short-term puts and reduce our cost basis while we’re waiting for oil to fall. The Position – As It Stands So far, so good. OIH closed Friday at $53.62. It’s been working its way down and the first bomb has yet to hit the sandbox! We have one week left to March expiration. The July $55 put is bidding $5.20 and the March $50 put is asking $.35. Here are some facts to consider: 1. Our cost basis is $3.85 2. The delta of the July $55 put is 47. 3. The delta of the March $50 put is 5. 4. Next Friday, the time value of the March $50 put will be zero. Should we close the position now? It may be premature. If we closed the position now, at current prices, our profit would be $1.00. $5.20 (July $55 put) - $.35 (March $50 put) = $4.85 - $3.85 (cost basis) = $1.00. If we wait until expiration, we’ll make an additional $.35 in time value. Even if OIH doesn’t move, the July $55 put may only go down a dime in that week that’s left. Plus, if OIH continues down, we’ll make an additional $.47 for every dollar it declines and the delta of the July $55 put will be increasing all the way down. What do I do if OIH falls below $50 prior to expiration? We will keep an eye on the deltas. As it stands now, we have a very comfortable 47 to 5 advantage in our deltas. As long as the delta of the July $55 put is higher than that of the March $50 put, we’re still making money. When we no longer have that advantage, we will close the position (at a huge profit). When should we consider rolling out instead of closing the position? A lot depends on where OIH trades this week. If OIH is over $55 in the middle of the week, the March $50 put could probably be bought back for a nickel. Then, it would be worth while to buy it back and roll out to the April $50 put to further reduce our cost basis while we wait for oil to fall. As you better know by now, during the last week of an option’s life, time premium erodes very rapidly on its way down to zero. If you can buy it back for a nickel during the week, it’s probably worth doing. Why? Because if you waited for the March $50 to expire and then sold the April $50 put on Monday after expiration, the April $50 put would likely lose more than a nickel of value. If OIH is at $51 at expiration, should we roll out? If so, to what strike price? If OIH is at $51, the March $50 will expire worthless. We’ll have a big profit on the July $55 put. Ask yourself these questions. Does it make sense to risk that profit? Is the story behind the spread still valid? What other choices do I have? At the CPTI we hate to risk profits. For that reason alone we would close the position and take our profit. Now that the profits are safely in our pocket, let’s look at our choices. If the story is still valid, we could establish another calendar spread – perhaps buying the October $50 puts and selling the April $45 puts. What we look for is a) the delta advantage, and b) plenty of time to be right – without having to risk too much on the adventure. If the story has changed, or even weakened, it’s time to hitch your wagon to another star. Also remember that a calendar spread is a directional play – not necessarily our first choice. However, the risk is defined and, even if you’re wrong initially, there’s a chance that normal market fluctuations may still enable you to be profitable. It’s OK for your portfolio’s desert, but not for the main course. _____________________________________________________________ CPTI Portfolio Update Position #1 – OEX Bull Put Spread – Trading at $424.07. 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. The OEX tested the 400 level, but bounced up nicely. With a week to go, we’re looking good. ______________________________________________________________ Position #2 – XAU Iron Condor – Trading at $65.63. We created an Iron Condor with a 15-point range $65 to $80 for March. We were able to place spread orders and take in $1,400 for our 10-contract position. The objective is for the underlying, at expiration, to finish anywhere within the spread. We closed this position early because XAU broke down through support. We still managed at small $400 profit. For traders who didn’t close the position, XAU has peeked back up above the sold strike. (The chart still sucks). There’s still a week to go. It could be a very l-o-n-g week. _________________________________________________________________ Position #3 - OIH Diagonal Calendar Spread – Trading at $53.62. (See discussion in main text of today’s column). ______________________________________________________________ Position #4 - QQQ ITM Strangle – Currently trading at $25.72. This is a long-term position we created four months ago. We own the January 2005 $21 LEAPS calls and the January 2005 $29 LEAPS puts. We sold 10 contracts of the QQQ April $28 the QQQ April $22. We moved our short sells in by one point because a lot of premium has disappeared from the QQQs in the last two months. ______________________________________________________________ Position #5 – MMM Iron Condor – Currently trading at $125.55. We created an Iron Condor with a 15-point range $115 to $130 for April. We were able to take in $1,550 for our 10-contract position. The objective is for the underlying, at expiration, to finish anywhere within the spread. ______________________________________________________________ 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 ************** Introduction to Elliott Wave Analysis By Steve Gould Over the past 15 years that I have been studying the market, I have looked for that elusive indicator that would tell me where the market is going to move next. I have studied every book I could get my hands on. I have researched every technical indicator I could find. I talked to every guru that I met and I came to this startling revelation. There is no magic indicator. Dang. Yet every discovery is another step in the journey. In my unending search for a crystal ball, I have come across one system that is amazingly accurate in its predictions. No, it is not 100% precise but it has yielded some astonishingly consistent results. It is a system and as such, it is a conglomeration of tools and indicators used to analyze the market. There is nothing secretive about these common tools and indicators. In fact, some of them have been around for hundreds of years. It is the integration that makes this such a powerful system. It does take some skill to utilize it effectively, but the more I study it, the more I am amazed at just how prophetic it is. The system that I have found so predictably accurate is Elliott Wave analysis. I first heard of Elliott Waves many years ago but was hesitant to study it. Everything I read about Elliott Waves was prefaced with how complicated it was. In a way, I was a bit fearful of the technique. It always seemed so esoteric. Then one day someone demonstrated to me exactly how Elliott Waves worked. It was relatively straight forward. What I subsequently uncovered about Elliott Waves was that it is about 60% clear and easy to use. The remaining 40% is difficult to identify. So if I can not identify a recognizable Elliott Wave pattern easily, I simply go on to another chart where the pattern is more obvious. What I learned was that if I just mastered that 60%, I could do quite well. My plan here is to write articles about different facets of Elliott Waves. I want to start out by just describing the basics and showing some real life examples. As the market progresses, it will unfold in waves. All a wave is is a specific series of up and down movements in a particular direction. Bull waves traverse up, bear waves traverse down. Each basic wave is segmented into five parts. For a bull wave, three segments move up and two segments move down. The net movement is up. The opposite is true for bear waves. The basic pattern looks like this: Note that waves 1, 3 and 5 move up. These are called motive waves. Waves 2 and 4 move counter trend and are called corrective waves. A complete cycle is made up of 8 waves: a five wave motive wave and a 3 wave corrective wave. The complete cycle looks something like this. Each 8 wave cycle can be subdivided. Waves 1, 3 and 5 will subdivide into another 5 wave basic pattern. Waves 2 and 4 will divide into another 3 wave corrective pattern. Because waves 1, 3 and 5 subdivide into a basic 5 wave pattern, their behavior is rather predictable. Waves A, B and C will also subdivide, but the permutations are numerous. These corrective patterns are where the complexities of Elliott Wave theory rears its ugly head. After a little training on how to label Elliott Waves a casual observer can look at a historical chart and correctly label a basic and corrective wave. The real trick, however, is to look at a chart and predict which wave will unfold next. To complicate matters even more, many times, a wave will relabel as market conditions change the presentation. The astute reader is no doubt asking the question, then what good is it if I can only tell what happened in the past and not forecast the future movement? Well, every endeavor has its sweet spot and Elliott Waves are no exception. If you can know with relative assurance where you are in the wave count, then you can accurately predict where the market will go in the coming days. Elliott Waves set up two types of trades that have a high percentage of wins. They are creatively known as Type I and Type II trades. Type I trades occur right after the 4 wave is complete. Once that happens, we know that wave 5 will follow. 5 waves will generally reach as high (for bull markets) as the previous 3 wave (a double top) or it will thrust higher. Type II trades occur after the 5 wave completes. Generally, the A-B-C correction, or at times a new basic 5 wave in the opposite direction, will retrace to at least the level of last 4 wave. We would place the trade with that price as the target. Below is a chart of the Dow over the last 12 months. By taking a bird's eye view, it is real easy to see that the Dow has been behaving in a classic Elliott Wave pattern. Note the textbook 5 wave basic motive and the 3 wave correction from 3/19/2002 through 12/1/2002. You can easily see that within each 1, 3, 5, A and C wave is another 5 wave basic pattern. Within each 2, 4 and B wave is another 3 wave corrective pattern. A Type I trade occurred in late August at around the 8750 level. We could have easily ridden that down to 7500 (a $10 move in the DJX) and if really nimble all the way down to the 7250 level. A Type II trade occurred in middle October around the 7750 level. Note how the A-B-C correction retraced almost exactly to the top of the last major 4 wave (late August at around 9100). Finally, take a look at what happened at the beginning of December. The Dow has started another 5 wave pattern down. For those of you who are hoping for the Dow to recover soon, the reality of the markets is such that we will soon experience a corrective 4 wave (up) and then the Dow will plunge lower as it completes the 5 wave pattern. Forget the bull market pundits. Forget the talking heads. The market is headed lower. You can bank on it. So there is my crystal ball prediction for today. ************** FUTURES CORNER ************** Moving Average Bands By Vlada Raicevic When discussing technical charting, there are any number of basic vindicators that people can use. Common ones like Macd or Stochastic are readily available and often discussed. If there are 300 of these types of indicators, then I’ve tried 298 of them. This past week I’ve posted some sixty charts on how I use trendlines and centerlines as signals on these indicators. So, let’s discuss something a little bit different. The price chart, and how it can be used in tandem with those common indicators. Watching the little candlesticks bounce all day long can be fun, and while drawing trendlines along the tops and bottoms of the candles can be illuminating, we really need a little bit more information to put the price action into perspective. The most common of the price chart tools are bollinger bands and moving averages. Ask nine hundred traders how they use moving averages, and you are bound to get eight hundred different answers. So let’s take a look at one of these eight hundred and discuss the use of High/Low bands. A moving average is built using the closing price of the last n’ periods, where n’ is the length of the moving average. High/Low bands are created by putting two moving averages onto the chart, with one moving average built from the period highs, and the other moving average built from the period lows. If one uses different moving average (MA) lengths, for example, a 13 period MA built off the period highs, and another MA of length 7 built off the period lows, then you will get price moving back and forth across these MA’s as well as the MA’s themselves crossing. If you use the same length, say a 13 period MA for both, then the moving averages will never cross, and you create bands’ for the price to move against. The first chart shows an ES 5 minute chart with the black line as the 13 period MA built from highs and the red line as the 13 period MA built from the lows. For trading, one would go short if a candle closes below the red band (low), and would go long if it closes above the black band (high). The blue arrows show trade entries, and the red arrows show where the outer band acts as support/resistance areas. How valid is this method? Well, it’s as valid as any other. There is not one single trading method that is without its weaknesses. Since the market changes constantly, there will always be some particular price action that will give you false signals. Always. Let me repeat that: always. In the chart above, and the one that follows, you can see that in stronger trends, this method can deliver some very good results. These charts look great, don’t they? Ah, the pleasures of thinking you’ve found something marvelous for trading. Let’s dampen that joy a bit with the following chart. As you can see, this trading method, like so many others, stumbles badly in a choppy, sideways market. Price wiggles back and forth across those bands giving false signal after false signal. Also, note the blue box, it shows another weakness of these bands: they are based on moving averages, and moving averages are a lagging indicator. The longer the moving average length, the longer it takes for that moving average to react to severe price swings like gaps. One way to get more information while staying with the theme of bands and moving averages, is to add bollinger bands on top of the 13ema high/low bands. Add a bollinger band of length 21 with standard deviation of 2 to the chart. You can see some patterns emerge. The centerline of the Bollinger band is the dashed blue line. The red arrows show where the upper and lower 13 ema bands cross the center bollinger line, showing strong momentum in a particular move. The green arrow shows price closing above the 13ema high, a long signal, but a false one. Note how all the lines, including the bollingers are flat, and neutral toward each other. Seeing this, you may wait for a second bar to close above the 13ema high to verify the move. Keep in mind that your entry crieria can be as conservative as your personality requires. You can come up with a series of steps or criteria that MUST be present in order for you to take a trade. For example, to go long, 1. Two candles must close above the 13ema high. 2. The 13ema low must be converging with the center bollinger line (or have crossed it). 3. The upper bollinger band must be pointing up for 3 consecutive bars. We are not, however, forced to trade only off these bands. As the beginning paragraph stated, we are looking for something to compliment other information that we are getting from indicators like Macd and Stochastic. The vertical purple lines show where trade signals occur. A Macd long signal is given by trendline break, but not verified until the price moves above 13ema high, which also coincides with ADX bullish crossover. Later, price closes below the 13ema low just as ADX turns bearish, RSI crosses the centerline, and MACD and Stochastic both near a cross of the centerline. The more indicators that line up within 2 bars of each other, the stronger the signal. For these high/low bands, I have tried everything from 9ema to 55ema, on timeframes from 1 minute to 270 minute charts. There is plenty of choice for all trading styles. Spend some time playing with settings and looking for patterns that compliment your style of trading. Cheers. Vlada Raicevic ************************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 ************************************************************** ********** 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 Sunday 03-16-2003 Sunday 5 of 5 In Section Five: Covered Calls: Defining The Primary Trend Naked Puts: Identifying Common Chart Patterns Spreads/Straddles/Combos: Stocks Consolidate Amid Renewed Anxiety Among Investors Updated In The Site Tonight: Market Watch: Will It Hold? Market Posture: Hanging on to Gains ************************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 ************************************************************** ************* COVERED CALLS ************* Trading Basics: Defining The Primary Trend By Mark Wnetrzak With the recent volatility in the market, now is a great time to review one of the fundamental areas of charting: Primary Trends. To be successful in the stock market, it is important to know how to evaluate historic trends. In any exchange system based on supply and demand, there are three primary stages or phases of movement. These three phases consist of a basing or range-bound condition, an upward slope or growth stage and finally, a segment where buying interest becomes exhausted. Some experts refer to these conditions as the accumulation, markup and distribution phases. The first step in any type of analysis is to look beyond the daily gyrations to identify the overall trend. The changes in the rate of upward and forward movement can be moderated with the smoothing effect of a moving average. In simple terms, a moving average is used to identify the mean price of a security at a specific point in time. With this type of analysis tool, a shorter time span produces a more sensitive indication while a longer time span reflects a smoother history. There are many ways to determine the primary trend but few technical analysis tools are as versatile as moving average. The moving average also offers an objective method for defining support and resistance, and it can help isolate cycles and identify overbought or oversold conditions. Traders often use moving averages to render buy and sell signals based on multiple histories plotted on one chart. The crossing of moving average lines, a major topic in the study of stochastics, is a very popular method of recognizing trend reversals. Unfortunately, for a trader to depend solely on a moving average is comparable to using the hour hand of a watch to check the time of day. It provides a good approximation of the time but offers little guidance for specific appointments. In financial markets, a moving average will help identify whether the primary trend is up or down but it does little to help you with timing entry and exit points with regard to a particular issue. To be profitable on a consistent basis, you need to know where the instrument is in its current cycle. Is it in the accumulation phase, markup phase or distribution phase? The movement of a specific issue is generally determined by the intensity with which the shares are bought or sold. A commons method of measuring this effect in a prolonged trend is to use a moving average on transaction or trading volume. Trading volume, or the number of shares traded, is an important indicator in interpreting market direction and stock price. The change in stock price is the result of supply and demand; those who want to buy versus those who want to sell. The key point is that a rise or fall in price on a small volume of shares traded is far less important than a move supported by heavy volume. If there is heavy trading on an upward movement, buyers control the market, and their enthusiasm for the stock often pushes it far beyond a reasonable value. Experienced traders know that rising volume generally accompanies any substantial change in a stock's price and that is an important characteristic to be aware of when when reviewing market trends. When combined with a moving average of trading volume, a simple moving average can help confirm that the market is transitioning into a condition of accumulation or in the case of a failed rally, a new distribution stage. Of course, there are often chaotic and choppy transition phases between each cycle or trend and those can be very difficult to evaluate. The type of indicators that work best during transition periods include the Moving Average Convergence-Divergence system (MACD), or exponential (weighted) averages that are designed to be more sensitive to quick changes in market direction. Investors who develop a background in various technical analysis tools can use intricate moving average combinations to formulate different timing methods for entering and exiting the market. One popular entry technique is based on signals from a short-term MACD and confirmation from the moving average of the volume indicator. A number of exit strategies use the convergence between the price action and the volume average or diversions among different moving averages. Blending diverse combinations of indicators is one way to discover the best system for your style of trading and for new investors, this can create a unique set of tools and intuitive techniques to help you profit in the market on a regular basis. Trade Wisely! SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Note: Margin not used in calculations. Stock Price Last Option Price Gain Potential Symbol Picked Price Series Sold /Loss Mon. Yield ADLR 13.07 12.25 MAR 12.50 1.80 0.98 9.4% IMCL 13.33 14.99 MAR 12.50 1.50 0.67* 8.2% MSTR 21.28 24.22 MAR 20.00 2.60 1.32* 7.7% IMCL 13.72 14.99 MAR 12.50 2.00 0.78* 7.2% FEIC 15.70 15.45 MAR 15.00 1.40 0.70* 7.1% JDSU 2.68 2.92 MAR 2.50 0.40 0.22* 7.0% GLW 5.18 5.89 MAR 5.00 0.55 0.37* 6.9% SEPR 11.17 12.99 MAR 10.00 1.90 0.73* 6.8% CD 12.51 12.49 MAR 12.50 0.40 0.38 6.8% RSAS 5.90 7.00 MAR 5.00 1.25 0.35* 6.5% CMCSA 28.14 28.51 MAR 27.50 1.40 0.76* 6.2% ASKJ 5.86 6.87 MAR 5.00 1.25 0.39* 6.1% MCDT 8.42 8.43 MAR 7.50 1.30 0.38* 5.8% OVTI 19.00 21.18 MAR 17.50 2.15 0.65* 5.6% ANPI 20.10 21.12 MAR 20.00 0.60 0.50* 5.6% ** OVTI 16.83 21.18 MAR 15.00 2.55 0.72* 5.5% RMBS 14.76 13.00 MAR 12.50 2.85 0.59* 5.4% MVL 12.70 12.97 MAR 12.50 0.50 0.30* 5.3% NFLX 14.24 16.55 MAR 12.50 2.30 0.56* 4.1% DISH 28.75 29.20 MAR 27.50 1.75 0.50* 4.0% CBST 7.57 6.95 MAR 7.50 0.75 0.13 2.1% SBL 10.58 9.30 MAR 10.00 0.85 -0.43 0.0% MRVL 20.60 18.78 MAR 20.00 1.35 -0.47 0.0% OAKT 3.23 3.65 APR 2.50 0.90 0.17* 5.3% MANU 2.56 2.30 APR 2.50 0.35 0.09 2.9% * Stock price is above the sold striking price. ** Adjusted for a 2-1 split. Comments: A "Bear-Market" rally or "The Bottom?" Inquiring minds want to know! Next week should offer a few clues but my vote leans to the former. In any case, a dose of bullishness is a nice remedy for the ailing averages. Considering the worrisome environment, the model covered-call portfolio has held up rather well, though some additional positions have been closed in the name of money management. Next week, we will show Symbol Technologies (NYSE: SBL) closed as the near-term outlook became quite bleak when the probability of a Federal civil suit increased. The "early exit" watch-list for this week consists of: Cubist Pharma (NASDAQ:CBST), Adolor (NASDAQ:ADLR), Rambus (NASDAQ:RMBS), Marvell Technology (NASDAQ:MRVL), and one April position; Manugistics (NASDAQ:MANU), which didn't benefit from the rally at all. Will we really find the bottom with so many people searching for it? Perhaps, only in hindsight... Positions Closed: Dendreon (NASDAQ:DNDN), Cryolife (NYSE:CRY), Emisphere Technologies (NASDAQ:EMIS), Alacatel (NYSE:ALA), Arris Group (NASDAQ:ARRS), and Hurricane Hydrocarbons (NYSE:HHL). NEW CANDIDATES ********* Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield EP 5.20 APR 5.00 EP DA 0.70 18455 4.50 35 9.7% SONE 5.20 APR 5.00 FBZ DA 0.55 459 4.65 35 6.5% CPN 2.93 APR 2.50 CPN DZ 0.60 10174 2.33 35 6.3% VECO 15.91 APR 15.00 QVC DC 1.70 824 14.21 35 4.8% PEGS 10.90 APR 10.00 PUG DB 1.40 310 9.50 35 4.6% SNDK 19.11 APR 17.50 SWQ DW 2.40 2072 16.71 35 4.1% ALTR 13.84 APR 12.50 KKT DV 1.80 1432 12.04 35 3.3% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** EP - El Paso $5.20 *** Bottom-Fishing: Natural Gas *** El Paso Corporation (NYSE:EP) is a North American provider of natural gas services. El Paso has core businesses in natural gas production, gathering and processing, and transmission, as well as liquefied natural gas transport and receiving, petroleum logistics, power generation and merchant energy services. The company, which is rich in assets and fully integrated across the natural gas value chain, is committed to developing new supplies and unique technologies to deliver energy to communities around the world. On Thursday, El Paso said it closed on a $1.2 billion 2-year loan and the sale of its Mid-Continent natural gas and oil reserves to Chesapeake Energy Corp. (NYSE:CHK). The stock rose sharply Friday after a Credit Lyonnais Securities analyst raised his rating on EP's shares to "buy" from "hold." Speculators who wouldn't mine owning El Paso can profit from any near-term bullish activity in the issue with this conservative position. APR 5.00 EP DA LB=0.70 OI=18455 CB=4.50 OI=35 TY=9.7% ***** SONE - S1 $5.20 *** Trading Range *** S1 Corp. (NASDAQ:SONE) is a global provider of infrastructure solutions. The company operates and manages 2 business segments: a financial institutions segment and a contact center automation segment. The former focuses on selling the company's enterprise software solutions to financial Institutions. The latter focuses on selling the company's contact center automation products to a variety of industries. S1 also provides services to assist its customers in the planning, implementation and customization of their applications, as well as ongoing maintenance and support and, if desired, application hosting services. S1 said earlier this week that the company is experiencing rapid adoption of its interactive web-site solution with more than 300 successful implementations across the U.S. Favorable speculation on a stock that has been forging a Stage I base with a support area at the cost basis of this position. APR 5.00 FBZ DA LB=0.55 OI=459 CB=4.65 OI=35 TY=6.5% ***** CPN - Calpine $2.93 *** Bottom-Fishing: Natural Gas Part II *** Calpine (NYSE:CPN) is an independent power company engaged in the development, acquisition, ownership and operation of power generation facilities and the sale of electricity, predominantly in the United States, but also in Canada and the United Kingdom. The company also is a producer of renewable geothermal energy, and it owns 1.0 trillion cubic feet equivalent of proven natural gas reserves in Canada and the United States. At the end of 2002, the company will own interests in more than 80 power plants having a net peaking capacity of over 19,000 megawatts, enough to power nearly 19 million households. Calpine also has a number of gas- fired projects under construction and in advanced development. On Wednesday, Calpine said that the SEC concluded its review into the company's accounting for two power-sales contracts, determining no financial statement adjustments will be required. Still, CPN still plans to restate financial results for the last three years to reclassify two power sale-leaseback contracts (not part of the SEC probe) as financing transactions. While the current technical outlook is recovering, this position offers excellent reward potential at the risk of owning this industry-leading issue at a favorable cost basis. Try target shooting a lower "net-debit" to further reduce the cost basis and raise the potential yield in the position. APR 2.50 CPN DZ LB=0.60 OI=10174 CB=2.33 OI=35 TY=6.3% ***** VECO - Veeco $15.91 *** Stage I Speculation *** Veeco Instruments (NASDAQ:VECO) designs, manufactures, markets and services equipment primarily used by manufacturers in the data storage, telecommunications/wireless, semiconductor and research industries. Veeco offers two principal product lines: process equipment and metrology. The company produces and sells several types of process equipment used in the manufacture of optical components, such as filters and lasers, data storage components, such as thin film magnetic heads and specialty semiconductors, such as GaAs (gallium arsenide) devices and magnetic random access memory. Veeco's metrology product line includes atomic force/scanning probe microscopes, optical metrology tools, magnetic force systems and stylus profilers. Veeco said on Wednesday it expects to return to profitability in 2003 after a net loss of $123.73 million in 2002. China will be Veeco's fastest-growing region according to the company's CEO. The stock has been forming a base since July and appears to be bracing for a move higher. We simply favor the bullish technical indications and this position offers a method to participate in the future movement of the issue with relatively low risk. APR 15.00 QVC DC LB=1.70 OI=824 CB=14.21 OI=35 TY=4.8% ***** PEGS - Pegasus $10.90 *** At Historical Support *** Pegasus Solutions (NASDAQ:PEGS) is a provider of hotel room reservation services, reservation technology systems and hotel representation services for the global hotel industry. The company's customers include a significant number of world-wide travel agencies, more than 46,000 hotels around the world and more than 1,000 travel-related Websites. On April 3, 2000, Pegasus completed the acquisition of REZ, Inc., a provider of distribution services and solutions for the hotel industry. As a result of the REZ acquisition, Pegasus is organized into two reportable segments, technology and hospitality. Pegasus has been forming a short-term base since October with support near this position's break-even point. Investors who want a long-term holding in an industry-leading company can use this position to establish a low risk cost basis in the issue. APR 10.00 PUG DB LB=1.40 OI=310 CB=9.50 OI=35 TY=4.6% ***** SNDK - SanDisk $19.11 *** Bottom Fishing: Data Storage *** SanDisk (NASDAQ:SNDK) designs, manufactures, and markets flash memory storage products that are used in a wide variety of electronic systems. The company has designed its flash memory storage solutions for applications in the consumer electronics and industrial/communications markets. The company's products are used in a number of rapidly growing consumer electronics applications, such as digital cameras, PDAs, portable digital music players, digital video recorders and smart phones, as well as in industrial and communications applications. The company's products include removable CompactFlash cards, MultiMediaCards, FlashDisk cards and Secure Digital Cards and embedded FlashDrives and Flash ChipSets with storage capacities ranging from eight megabytes to 1.2 gigabytes. On Thursday, SanDisk introduced a new line of single slot ImageMate(TM) card readers for a variety of popular flash memory cards. Timing is everything as shares of SanDisk rallied sharply in tune to the major average's rebound. The stock has been in a basing formation for over a year and more recently has stayed above the JUN to OCT trend-line. Favorable reward potential at the risk of owning SanDisk near $17. APR 17.50 SWQ DW LB=2.40 OI=2072 CB=16.71 OI=35 TY=4.1% ***** ALTR - Altera $13.84 *** Revenue Outlook Up *** Altera (NASDAQ:ALTR) designs, manufactures and markets high- performance, high-density programmable logic devices (PLDs), intellectual property cores and associated development tools. The company's PLDs, which consist of field-programmable gate arrays and complex programmable logic devices, are semiconductor integrated circuits that customers can program using Altera's proprietary software, which operates on personal computers and engineering workstations. Intellectual property cores are pre- verified hardware description language (HDL), design files for complex, yet commonly used system-level logic functions. ALTR rallied sharply this week when analysts raised their estimates after Altera increased its 1st-quarter revenue outlook due to strength in new and mainstream products. We simply favor the technical support area near $12 and this position offers a way to speculate conservatively on the future movement of the issue. APR 12.50 KKT DV LB=1.80 OI=1432 CB=12.04 OI=35 TY=3.3% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield NWAC 7.64 APR 7.50 NAQ DU 0.85 1100 6.79 35 9.1% OVTI 21.18 APR 20.00 UCM DD 2.70 441 18.48 35 7.1% SMTC 15.32 APR 15.00 QTU DC 1.30 718 14.02 35 6.1% MSCC 10.16 APR 10.00 QMS DB 0.75 166 9.41 35 5.4% EXLT 7.76 APR 7.50 EQB DU 0.70 20 7.06 35 5.4% NVDA 13.42 APR 12.50 UVA DV 1.65 4237 11.77 35 5.4% BRCM 16.01 APR 15.00 RCQ DC 1.85 7062 14.16 35 5.2% TNE 7.55 APR 7.50 TNE DU 0.45 284 7.10 35 4.9% CD 12.49 APR 12.50 CD DV 0.65 1979 11.84 35 4.8% MSTR 24.22 APR 22.50 EOU DX 2.85 741 21.37 35 4.6% HSP 20.55 APR 20.00 HSP DD 1.55 6 19.00 35 4.6% DGIN 12.99 APR 12.50 UGU DV 1.10 20 11.89 35 4.5% CGNX 23.18 APR 22.50 QCG DX 1.60 10 21.58 35 3.7% ***************** NAKED PUT SECTION ***************** Options 101: Identifying Common Chart Patterns By Ray Cummins New readers are always asking for information on how we pick our plays. For short-term trading strategies, one of the principal factors in position selection is the technical condition of the underlying issue. To determine the future trend (or character) for any stock, you must be able to identify common historical chart patterns and understand the implications of basic technical indicators. A large majority of bar-chart formations fall into the category of area patterns and the underlying trends often have predictive value. With the editor of this section on a brief vacation, it's a great time to review some of the most common bullish patterns. Ascending Triangle: Right-angle triangles are the most popular group of area patterns. These patterns are easily identified; one of the two trend lines is generally flat while the other points toward it. When the top trend line is horizontal and the lower trend line slants up and to the right, meeting the upper line at an intersection beyond the price, the triangle is ascending. The outlook for this type of formation is bullish and the continuation rally (after a break-out has occurred), is generally of the same magnitude as the height of the original triangle. Ascending Triangle Chart: Pennants and Flags: In a flag pattern, the upper and lower boundary lines pattern are generally parallel though both may slant up, down or sideways in the trend. In a bullish trend, the formation resembles a flag flying from a mast. This pattern tends to form during the middle of a rally. A pennant is similar to a flag. The major difference is a pennant has converging rather than parallel trend lines (much like an ascending triangle). It generally occurs in a period of congestion. The pattern is short-term and forms after a sharp upward movement in price. Pennants/Flags Chart: Rounded-Bottom: The rounded bottom is a reversal pattern that reflects a gradual and symmetrical change in trend from bearish to bullish. The price pattern (and often the volume pattern) will resemble a concave shape similar to a bowl or saucer. It can be either long-term or short-term. A series of rounding bottom formations can occur where the rising end moves higher than the preceding top of the previous pattern. Individual formations are generally 1 to 2 months long and the change in price can be up to 25% of the share value. Here is an example of a long-term saucer: Rounded-Bottom Chart: Head-N-Shoulders Bottom: This formation is one of the most common reversal patterns. The first element is a pronounced sell-off in which volume increases during the decline. A brief recovery follows but the rally fails near the support area of the previous range (prior to the initial break-down). Now the left shoulder and neckline are established. A second sell-off drives the stock price to new lows but volume quickly fades and a decisive reversal begins. The lowest price is the (inverted) head of the pattern. The recovery again fails at the neckline and with traders unwilling to commit fully to the new trend, the stock fades to a short-term low; approximately equal to the left shoulder. The slump is brief and the change in direction is once again decisive (often a hammer-bottom). The new rally is supported by a surge in volume and the momentum carries the issue up and through the neckline (previous resistance) of the pattern. At this point, a successful test of the neckline (now support) is the final confirmation of a new trend. Head-N-Shoulders Bottom Chart: As with most forms of technical analysis, the key premise is that past price behavior can be used to forecast future trends. But, as with any system, chart patterns should always be viewed with regard to other indications from the instrument being evaluated. With dedication and commitment, you will discover which patterns work best for your style of trading and the market in which you participate. Good Luck! SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Stock Price Last Option Price Gain Max Simple Symbol Picked Price Series Sold /Loss Yield Yield MSTR 20.83 24.22 MAR 17.50 0.80 0.80* 12.0% 4.2% RMBS 15.18 13.00 MAR 12.50 0.25 0.25* 9.9% 3.0% MSTR 22.60 24.22 MAR 20.00 0.30 0.30* 9.7% 3.3% CGNX 22.62 23.18 MAR 17.50 0.55 0.55* 9.4% 2.8% MSTR 20.69 24.22 MAR 17.50 0.75 0.75* 9.3% 3.2% CELG 24.00 24.50 MAR 22.50 0.35 0.35* 9.0% 3.4% SRNA 15.07 14.92 MAR 12.50 0.30 0.30* 8.7% 2.7% RMBS 13.69 13.00 MAR 10.00 0.30 0.30* 8.6% 2.7% OVTI 16.55 21.18 MAR 12.50 0.35 0.35* 8.3% 2.5% AFFX 26.92 27.10 MAR 25.00 0.35 0.35* 8.3% 3.1% IART 19.39 20.26 MAR 17.50 0.35 0.35* 8.2% 3.0% XLNX 23.04 25.38 MAR 20.00 0.50 0.50* 8.1% 2.8% MDCO 16.92 18.27 MAR 15.00 0.60 0.60* 8.0% 3.0% LRCX 12.56 12.47 MAR 10.00 0.25 0.25* 7.9% 2.2% ANSS 22.20 23.30 MAR 20.00 0.80 0.80* 7.7% 3.0% XLNX 22.90 25.38 MAR 20.00 0.35 0.35* 7.7% 2.6% IRF 20.39 21.16 MAR 17.50 0.50 0.50* 7.5% 2.6% MACR 15.22 15.03 MAR 12.50 0.25 0.25* 7.5% 2.2% OVTI 16.83 21.18 MAR 12.50 0.25 0.25* 7.5% 2.2% DIGE 15.54 16.47 MAR 12.50 0.30 0.30* 7.5% 2.1% GILD 36.80 39.25 MAR 35.00 0.45 0.45* 7.3% 2.8% CGNX 21.84 23.18 MAR 20.00 0.75 0.75* 7.1% 2.8% ERES 22.46 24.44 MAR 17.50 0.30 0.30* 6.8% 1.9% MDCO 18.94 18.27 MAR 17.50 0.30 0.30* 6.7% 2.5% HHL 11.56 10.76 MAR 10.00 0.20 0.20* 6.7% 2.2% SLAB 27.12 29.02 MAR 22.50 0.30 0.30* 6.7% 2.0% CKFR 20.66 20.46 MAR 17.50 0.30 0.30* 6.0% 1.9% AVCT 27.82 26.03 MAR 25.00 0.35 0.35* 5.9% 2.1% EPIQ 19.10 18.95 MAR 17.50 0.25 0.25* 5.8% 2.1% OTEX 27.14 27.25 MAR 25.00 0.75 0.75* 5.7% 2.2% ADBE 27.43 30.79 MAR 22.50 0.40 0.40* 5.4% 1.6% FAF 23.10 22.45 MAR 22.50 0.30 0.25 4.1% 1.6% IMCL 15.70 14.99 APR 12.50 0.50 0.50* 9.9% 3.0% MOGN 10.96 11.74 APR 10.00 0.50 0.50* 9.2% 3.8% MEDI 30.68 32.65 APR 27.50 0.65 0.65* 4.8% 1.8% * Stock price is above the sold striking price. Comments: The recent bullish market activity provided new hope to anxious investors and despite the volatility in the equity averages, the majority of positions in the naked-puts portfolio continue to perform well. Among the stocks on the "early exit" watch-list are: Rambus (NASDAQ:RMBS), Hurricane Hydro (NYSE:HHL) and First American (NYSE:FAF). Previously Closed Positions: Possis Medical (NASDAQ:POSS) and American Pharmaceutical Partners (NASDAQ:APPX), which are both currently positive. WARNING: THE RISK IN SELLING NAKED OPTIONS IS SUBSTANTIAL! ***** The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. MARGIN REQUIREMENTS The Initial Margin is the amount of collateral you must have in your account to initiate the position. In specific terms, margin refers to cash or securities required of an option writer by his brokerage firm as collateral for the writer's obligation to buy or sell the underlying interest if assigned through an exercise. The Maintenance Margin is the amount of cash (or securities) required to offset the changing collateral requirements of the written options in your portfolio. As the price of the option and the underlying stock changes, so does the maintenance margin. With (short) put options, the margin requirements can increase when the underlying stock price declines and also when it rises significantly. The reason is the manner in which the collateral amount is determined (with the formula listed above) and traders should always consider not only the initial margin requirement, but also the maximum margin needed for the life of the position. Option writers occasionally have to meet calls for additional margin during adverse market movements and even when there is enough equity in the account to avoid a margin call, the need for increased collateral will make that equity unavailable for other purposes. Please consider these facts carefully before you initiate any "naked" option positions. For more information on margin requirements, please refer to: http://www.cboe.com/LearnCenter/pdf/MarginManual2000.pdf MONTHLY YIELD: MAXIMUM & SIMPLE The Maximum Monthly Yield (listed in the summary and with each new candidate) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The Simple Monthly Yield is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the position. NEW CANDIDATES ***** Sequenced by Maximum Yield (monthly basis - margin) ****** Stock Last Option Option Last Open Cost Days Max Simple Symbol Price Series Symbol Bid Int Basis Exp. Yield Yield XLNX 25.38 APR 22.50 XLQ PX 0.75 1144 21.75 35 8.1% 3.0% AMZN 24.71 APR 22.50 ZQN PS 0.65 5416 21.85 35 6.8% 2.6% MATK 25.32 APR 22.50 KQT PX 0.55 0 21.95 35 6.1% 2.2% CYBX 19.15 APR 17.50 QAJ PW 0.45 189 17.05 35 6.1% 2.3% OVTI 21.18 APR 15.00 UCM PC 0.30 68 14.70 35 5.7% 1.8% LLTC 32.58 APR 27.50 LLQ PY 0.55 211 26.95 35 5.6% 1.8% EXPE 37.14 APR 30.00 UED PF 0.50 13965 29.50 35 5.3% 1.5% PSUN 19.73 APR 17.50 PVQ PW 0.35 69 17.15 35 5.1% 1.8% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MY-Maximum Yield (monthly basis - using margin), SY-Simple Yield (monthly basis - without margin). ***** XLNX - Xilinx $25.38 *** Semiconductor Sector Soars! *** Xilinx (NASDAQ:XLNX) is the world's leading supplier of complete programmable logic solutions. Xilinx develops, manufactures, and markets a broad line of advanced integrated circuits, software design tools and intellectual property. Their customers use the automated tools and intellectual property, which are predefined system-level functions delivered as software cores, from Xilinx and its partners to program the chips to perform custom logic operations. The semiconductor sector soared during the recent rally and one of the best performing issues in the segment was XLNX. The stock has excellent upside potential and the company said earlier in the month that it expects fourth-quarter revenue to be at the high end of its estimated range of $285 million to $295 million, due to strength in Europe and Asia. Traders who agree with a bullish outlook for the issue can profit from a rise in the company's share value with this position. APR 22.50 XLQ PX LB=0.75 OI=1144 CB=21.75 DE=35 MY=8.1% SY=3.0% ***** AMZN - Amazon.com $24.71 *** New 2-Year High! *** Amazon.com (NASDAQ:AMZN) is a website where customers can find and discover anything they may want to buy online. The company lists millions of items in categories such as books, music, DVDs, videos, consumer electronics, toys, camera and photo items, PC software, computer and video games, tools and hardware, outdoor living items, kitchen and house-wares products, toys, baby and baby registry, travel services and magazine subscriptions. At its Amazon Marketplace, Auctions and zShops services, businesses and individuals can sell virtually any product to millions of customers, and with Amazon.com Payments, sellers are able to accept credit card transactions in addition to other methods of payment. The company operates a U.S.-based Website: amazon.com, and four internationally focused Websites: www.amazon.co.uk, www.amazon.de, www.amazon.fr and www.amazon.co.jp. Amazon.com shares rallied this week, in part due to short-covering but also due to the bullish technical break-out amid anticipation of the company's presentation at the Merrill Lynch Retailing Leaders Conference in New York. Investors who wouldn't mind owning the Internet's retail leader near a cost basis of $22 should consider this position. APR 22.50 ZQN PS LB=0.65 OI=5416 CB=21.85 DE=35 MY=6.8% SY=2.6% ***** MATK - Martek Biosciences $25.32 *** On The Rebound! *** Martek Biosciences (NASDAQ:MATK) develops and sells products made from microalgae. Microalgae are microplants. The firm is engaged in the commercial development of microalgae into a portfolio of high value products and new product candidates consisting of Nutritional Products, Advanced Detection Systems and Other Products, primarily Algal Genomics. Their nutritional products include nutritional oils for infant formula, dietary supplementation and other products. Advanced Detection Systems products include fluorescent dyes from various algae for use in scientific applications for detection of certain biological processes. Earlier this week, Martek posted favorable quarterly earnings with a robust revenue increase due to higher sales of nutritional products to the company's infant formula licensees. Investors who are interested in adding this unique biotechnology company to their portfolio should consider using this position to establish a conservative cost basis in the issue. APR 22.50 KQT PX LB=0.55 OI=0 CB=21.95 DE=35 MY=6.1% SY=2.2% ***** CYBX - Cyberonics $19.15 *** Technicals Only! *** Cyberonics (NASDAQ:CYBX) was founded in 1987 to design, develop and market medical devices for the treatment of epilepsy and other debilitating disorders using a unique therapy, vagus nerve stimulation. VNS Therapy is delivered by the VNS Therapy System, an implantable medical device similar to a cardiac pacemaker and the company's initial market is epilepsy, the world's second most prevalent neurological disorder. VNS Therapy with the Cyberonics VNS Therapy System was recently approved for sale in the European Union and in Canada as a treatment of depression in patients with treatment resistant or treatment of intolerant depressive episodes including unipolar depression and bipolar disorder. Cyberonics holds numerous device and method patents covering the vagus nerve stimulation method and the Cyberonics VNS Therapy System. Shares of CYBX are trading near the top of a recent range and the buying support near the cost basis of this position provides a reasonable downside margin for any near-term bearish activity. APR 17.50 QAJ PW LB=0.45 OI=189 CB=17.05 DE=35 MY=6.1% SY=2.3% ***** OVTI - OmniVision $21.18 *** New 2-Year High! *** OmniVision Technologies (NASDAQ:OVTI) designs, develops and sells high performance, high quality and cost efficient semiconductor imaging devices for computing, telecommunications, industrial, automotive and consumer electronics applications. The company's main product, an image sensing device called a CameraChip, is used to capture an image in cameras and camera-related products in a range of imaging applications such as personal computer cameras, digital still cameras, security and surveillance cameras, personal digital assistant cameras, mobile phone cameras, and cameras for automobiles and toys that incorporate both still picture and live video applications. OVTI recently exceeded consensus quarterly earnings estimates of $0.10 per share and revenue projections of $22.2 million, aided by exceptionally strong demand from makers of digital still cameras and cameras for cell phones. The stock has rallied to a new 2-year high on heavy volume, which suggests higher prices in the near-term. Investors can use this position to speculate conservatively on the company's future share value. APR 15.00 UCM PC LB=0.30 OI=68 CB=14.70 DE=35 MY=5.7% SY=1.8% ***** LLTC - Linear Technology $32.58 *** A Rally In The Chips! *** Linear Technology (NASDAQ:LLTC) designs, manufactures and sells a broad line of standard high-performance linear integrated circuits (ICs). Applications for the company's products include telecommunications, cellular telephones, networking products, optical switches, notebook and desktop computers, computer peripherals, video/multimedia, industrial instrumentation, security monitoring devices, high-end consumer products, digital cameras and MP3 players, complex medical devices, automotive electronics, factory automation, process control and military and space systems. The chip sector has recovered in recent sessions and LLTC has been one of the best performing issues in the group. Traders can profit from continued upside activity in the stock with this position. Quarterly earnings are due 4/16/03. APR 27.50 LLQ PY LB=0.55 OI=211 CB=26.95 DE=35 MY=5.6% SY=1.8% ***** EXPE - Expedia $37.14 *** Post-Split Rally! *** Expedia (NASDAQ:EXPE) is a provider of travel-planning services. Expedia's online travel marketplace includes direct-to-consumer websites offering travel-planning services located at Expedia.com, Expedia.co.uk, Expedia.de, Expedia.ca, Expedia.nl and Expedia.it. Expedia also provides travel-planning services through Voyages sncf.com, as part of a joint venture with the state-owned railway group in France. In addition, the company offers travel-planning services through its telephone call centers and through private label travel Websites through its WWTE business. WWTE is now a division of Travelscape, one of Expedia's primary subsidiaries. In February 2002, a controlling stake in the Expedia was acquired by USA Networks. Internet travel companies haves rebounded in recent weeks and EXPE's post-split rally suggests the stock has returned to favor among investors. The inflated premiums provide a low risk cost basis for speculative investors who want to own a popular Internet issue. APR 30.00 UED PF LB=0.50 OI=13965 CB=29.50 DE=35 MY=5.3% SY=1.5% ***** PSUN - Pacific Sunwear $19.73 *** Rally Mode! *** Pacific Sunwear of California (NASDAQ:PSUN) is a specialty retailer of everyday casual apparel, accessories and footwear designed to meet the needs of active teens and young adults. The company operates three nationwide, primarily mall-based, chains of retail stores: Pacific Sunwear (PacSun), Pacific Sunwear Outlet (PacSun Outlet), and d.e.m.o. PacSun and PacSun Outlet stores specialize in board-sport-inspired casual apparel, footwear and related accessories catering to teenagers and young adults. d.e.m.o. specializes in hip-hop-music-inspired casual apparel and related accessories catering to teenagers and young adults. Despite the recent downturn in retail sales, PSUN has performed well fundamentally with earnings up 63% to $23 million in the last quarter on sales that grew nearly 28%. Same-store sales jumped 15% and the company generated $36 million in free cash flow, helping it to pay off virtually all of its long-term debt. Investors who like the outlook for this fashion retailer can establish a conservative cost basis in the issue with this position. APR 17.50 PVQ PW LB=0.35 OI=69 CB=17.15 DE=35 MY=5.1% SY=1.8% ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Maximum Yield (monthly basis - margin) ****** Stock Last Option Option Last Open Cost Days Max Simple Symbol Price Series Symbol Bid Int Basis Exp. Yield Yield REGN 19.83 APR 12.50 RQP PV 0.70 56 11.80 35 13.0% 5.2% IMCL 14.99 APR 12.50 QCI PV 0.50 305 12.00 35 10.8% 3.6% CREE 18.08 APR 15.00 CVO PC 0.50 273 14.50 35 9.3% 3.0% ALTR 13.84 APR 12.50 KKT PV 0.45 536 12.05 35 8.4% 3.2% ELBO 16.35 APR 15.00 LQB PC 0.55 205 14.45 35 8.3% 3.3% MSTR 24.22 APR 20.00 EOU PD 0.50 89 19.50 35 7.3% 2.2% CNCT 15.86 APR 15.00 UXU PC 0.50 85 14.50 35 7.3% 3.0% FLR 32.11 APR 30.00 FLR PF 0.70 110 29.30 35 5.3% 2.1% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Stocks Consolidate Amid Renewed Anxiety Among Investors By Ray Cummins Blue-chip shares edged higher Friday while technology issues ended almost unchanged as buyers retreated in the wake of new concerns about war and the economy. The Dow Jones Industrial Average added 37 points to close at 7,859 on strength in McDonald's (NYSE:MCD), Hewlett Packard (NYSE:HPQ), and Honeywell (NYSE:HON). In the technology group, semiconductor shares consolidated after Thursday's spirited rally, leaving the NASDAQ almost unchanged at 1,340. The broader Standard and Poor's 500-stock index edged up 1 point to 833 as airline, insurance and gold stocks advanced. Crude-oil futures slipped below $34 for the first time in a month, increasing the downward pressure on stocks in oil related industries. Trading breadth was relatively neutral as Big Board winners paced losers 18 to 14 while NASDAQ decliners led advancers 16 to 15. Trading volume was average with about 1.5 billion shares changing hands on the NYSE and about 1.6 billion shares trading on the technology exchange. Market experts noted that the lack of significant corporate news and economic data was cause for the lackluster session. For the week, Trim Tabs said that over $4 billion flowed out of funds investing primarily in U.S. equities, while bond funds took in $2.3 billion. ***************** PORTFOLIO SUMMARY ***************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. PUT CREDIT SPREADS ****************** Symbol Pick Last Month LP SP Credit CB G/L Status SYMC 46.09 44.99 MAR 35 40 0.50 39.50 $0.50 Open COP 48.72 50.58 MAR 43 45 0.25 44.75 $0.25 Open NKE 45.14 49.75 MAR 40 43 0.20 42.30 $0.20 Open CAM 53.03 48.52 MAR 45 50 0.65 49.35 ($0.83) Closed SII 35.34 32.61 MAR 30 33 0.25 32.25 $0.25 Closed CMCSA 29.22 28.51 MAR 25 28 0.30 27.20 $0.30 Open FIC 48.84 45.77 MAR 40 45 0.50 44.50 $0.50 Open? AMGN 55.70 57.64 APR 48 50 0.25 49.75 $0.25 Open EXPE 35.19 37.14 APR 28 30 0.30 29.70 $0.30 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss As noted last week, traders should consider closing positions in oil stocks Cooper Cameron (NYSE:COO) and Smith Intl. (NYSE:SII) to protect profits and/or limit losses. Fair & Isaac (NYSE:FIC) fell below the sold strike on Wednesday and traders who did not exit the play should keep the volatile issue on their watch-list. CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status BSC 59.90 62.07 MAR 70 65 0.50 65.50 $0.50 Open BUD 47.70 47.70 MAR 55 50 0.45 50.45 $0.45 Open MDT 44.15 44.45 MAR 50 47 0.25 47.75 $0.25 Open PEP 39.86 39.00 MAR 45 42 0.25 42.75 $0.25 Open BSC 61.69 62.07 MAR 70 65 0.55 65.55 $0.55 Open NEM 27.51 25.09 MAR 32 30 0.25 30.25 $0.25 Open PG 81.86 83.40 MAR 90 85 0.45 85.45 $0.45 Open TRMS 40.02 41.05 MAR 50 45 0.50 45.50 $0.50 Open CHIR 35.80 36.69 APR 42 40 0.25 40.25 $0.25 Open IP 34.30 35.64 APR 40 37 0.25 37.75 $0.25 Open TOT 65.30 63.71 APR 75 70 0.60 70.60 $0.60 Open XAU 67.44 65.63 APR 80 75 0.50 75.50 $0.50 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss The position in H&R Block (NYSE:HRB), although positive, has been previously closed to limit potential losses. The position in Bear Stearns (NYSE:BSC) remains on the watch-list and Proctor & Gamble may soon become a potential exit candidate as well. CALL DEBIT SPREADS ****************** Symbol Pick Last Month LC SC Debit B/E G/L Status AMGN 52.09 57.64 MAR 45 47 2.20 47.20 0.30 Open EXPE 33.29 37.14 MAR 27 30 2.18 29.68 0.32 Open NBR 40.13 38.10 MAR 35 37 2.20 37.20 0.30 Open? STN 19.40 19.86 APR 17 20 1.60 19.10 0.76 Open LC = Long Call SC = Short Call B/E = Break-Even G/L = Gain/Loss Nabors Industries (NYSE:NBR) is suffering in conjunction with the Oil Service sector and traders should consider closing the spread in the interest of prudent money management. PUT DEBIT SPREADS ***************** Symbol Pick Last Month LP SP Debit B/E G/L Status FDX 50.84 49.80 APR 60 55 4.50 55.50 0.50 Open LP = Long Put SP = Short Put B/E = Break-Even G/L = Gain/Loss SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status WPI 29.22 27.02 MAY 35 22 (0.10) 0.65 Closed AFFX 27.14 27.10 MAR 30 25 0.15 0.15 Open UOPX 37.38 38.89 MAR 40 35 (0.10) 0.25 Open University of Phoenix Online (NASDAQ:UOPX) rallied this week and the bullish play achieved a small profit when the issue hit $40. Watson Pharmaceuticals (NYSE:WPI) was a big mover earlier in the month after the won U.S. FDA approval for Oxytrol, a patch to treat urinary incontinence. Our bullish synthetic position has reached favorable exit points twice since it was initiated in January. The position in Ultra Petroleum (NYSE:UPL) has slumped in conjunction with the Oil Service sector and the play has been closed to limit losses. CALENDAR & DIAGONAL SPREADS *************************** Stock Pick Last Long Short Current Max Play Symbol Price Price Option Option Debit Value Status AXP 33.70 33.48 APR-30P FEB-30P 0.75 1.20 Closed CI 43.02 41.88 APR-45C MAR-45C 0.85 1.00 Open BMET 28.52 31.59 JUL-30C MAR-30C 1.50 1.50 Open WFT 40.55 37.50 MAY-45C MAR-45C 1.25 1.40 Closed OTEX 29.29 27.25 MAY-25C MAR-30C 4.50 4.20 Open CMVT 10.20 11.19 APR-7.5C MAR-10C 2.20 2.20 Open ICST 23.86 23.69 APR-22C MAR-25C 2.10 1.90 Open The bearish position in American Express (NYSE:AXP) has yielded favorable short-term profits. Weatherford (NYSE:WFT) has been closed due to the slump in the Oil Service sector. The bullish play in Biomet (NASDAQ:BMET) may need an adjustment as the issue spiked this week after Zimmer Holdings, an industry competitor, said its first-quarter results would top consensus expectations. Open Text (NASDAQ:OTEX) is the only disappointment, however the issue has rebounded near technical support and market permitting, will likely continue higher in the coming weeks. DEBIT STRADDLES *************** Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status ROOM 40.14 48.15 MAR 40 40 6.50 8.10 Open? The Hotels.com (NASDAQ:ROOM) straddle has reached the target exit profit, however Friday's close at another near-term high suggests additional upside potential. Questions & comments on spreads/combos to Contact Support **************************** Readers Write E-mail Replies **************************** Attn: Spreads/Combos Editor Subject: Credit Spreads Hello Ray, What percentage of the credit spreads shown in OIN are successful, do you know? BJN Regarding the past success of the (OTM) credit spreads on the OIN: I do not know the exact percentage of successful plays however, it could easily be determined by paging through the web-site archives (for the two spreads/combos sections) on the options expiration dates and simply making notes of the winning and losing positions. I don't really think that is necessary though, because the approach I use with that technique involves selecting positions with a 70% or greater (statistical) probability of profit and with any stocks that are trending (directional bias or range-bound), the winning percentage is going to be slightly higher. If I had to guess, I would say about 4 out of 5 plays are profitable on an average basis. But, that doesn't mean you won't lose money with the strategy or by participating in all the credit spread candidates offered in the OIN. The key to success (as always) is how well you manage the losing plays. From a strictly historical perspective, the strategy of writing "deep-out-of-the-money" credit spreads, when correctly applied and diligently managed, provides a monthly (annualized) return of approximately 2-5%. Of course, the profits are larger if you compound the earnings on a regular basis. Are the premium-selling plays (Wednesday) tracked separately or along with the Sunday combos? Both of these sections are tracked separately, to allow more time for research ahead of the publishing deadline (Saturday 6:00 PM EST and Wednesday 8:00 PM EST). The week-end edition (Spreads/Combos) has its own summary, which is published with Saturday's new plays, and the Wednesday edition (Premium Selling) has its own summary as well. We tried to put them together in the past but it was far too time consuming to juggle the different formats and it resulted in much less research for new plays, which is what most readers are interested in anyway. Investors know what positions are in their portfolios, so they don't care as much about tracking any others, but rather in finding new positions. Which portfolio has done better lately (Wednesday or Sunday)? I am interested in credit spreads only right now... There is no difference in the selection criteria for credit spread candidates in the Wednesday and Saturday sections. If one section performs better than the other, it is likely due to the market conditions (directional/range-bound, overbought/oversold, high/low premiums, etc.) that are prevalent when the play selection occurs. Regardless of what strategy you favor, you alone are responsible to decide if the selections meet your criteria for potential plays. Don't enter any of the positions without further "due diligence" as they are simply candidates, based on technical trends and current option prices, to supplement your search for profitable trading positions. Further research is always needed to identify adverse fundamental issues as well as future events and other potential catalysts that may affect the stock price. As the disclaimer says: Only you can know what plays are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, you should avoid any trading techniques in which you are not completely comfortable with the potential loss, the necessary adjustments, and the common entry-exit strategies. Hope that helps, Ray ************* NEW POSITIONS ************* This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. ************** CREDIT SPREADS ************** These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may be higher than other plays in the same strategy, due to small disparities in option pricing. Current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its outcome. ***** APOL - Apollo Group $47.84 *** All-Time High! *** Apollo Group (NASDAQ:APOL) has been providing higher education programs to working adults for over 25 years. Apollo operates through its subsidiaries The University of Phoenix, Institute for Professional Development, The College for Financial Planning Institutes Corporation, and Western International University. The consolidated enrollment in its educational programs makes it the largest private institution of higher education in the United States. Apollo offers educational programs and services at 64 campuses and 116 learning centers in 37 states, Puerto Rico and Vancouver, British Columbia. APOL - Apollo Group $47.84 PLAY (conservative - bullish/credit spread): BUY PUT APR-40.00 OAQ-PH OI=174 A=$0.45 SELL PUT APR-45.00 OAQ-PI OI=269 B=$1.00 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$44.45 ***** MMM - 3M Corporation $125.55 *** Back In A Comfort Range! *** 3M (NYSE:MMM) is a $16 billion diversified technology company with leading positions in health care, safety, electronics, telecommunications, industrial, consumer and office, and other markets. Headquartered in St. Paul, Minn., the company has operations in more than 60 countries and serves customers in nearly 200 countries. 3M businesses share many technologies, manufacturing operations, brands, marketing channels and other important resources. 3M, which marks its 100th anniversary this year, is one of the 30 stocks that make up the Dow Industrial Average and also is a component of Standard & Poor's 500 Index. MMM - 3M Corporation $125.55 PLAY (conservative - bullish/credit spread): BUY PUT APR-110.00 MMM-PB OI=4116 A=$0.90 SELL PUT APR-115.00 MMM-PC OI=5087 B=$1.35 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$114.50 ***** FLR - Fluor Corporation $32.11 *** Rally Mode! *** Fluor Corporation (NYSE:FLR) is a diversified industrial company conducting business through five operating segments. The Energy and Chemicals segment provides design, engineering, procurement and construction services on a global basis to a wide range of oil, gas, refining, chemical, polymer and petrochemical clients. The Industrial and Infrastructure segment provides services to a broad base of businesses including general industrial, commercial, institutional, manufacturing, infrastructure, telecommunications, mining and technology customers on a worldwide basis. The Power segment designs, engineers and builds power facilities globally. The Global Services segment provides operations and maintenance support, temporary staffing, equipment and outsourcing and asset management solutions to the firm's projects as well as to third party clients. The Government Services segment provides basic administration and support services to the federal government and other governmental parties. FLR - Fluor Corporation $32.11 PLAY (conservative - bullish/credit spread): BUY PUT APR-25.00 FLR-PE OI=289 A=$0.20 SELL PUT APR-30.00 FLR-PF OI=110 B=$0.70 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$29.45 ***** OEX - S&P 100 Index $424.07 *** Market "Bulls" Only! *** The Standard & Poor's 100 Index is a capitalization-weighted index of 100 stocks from a range of industries. The component stocks are weighted according to the total market value of their outstanding shares. The impact of a component's price change is proportional to the issue's total market value, which is equal to the share price multiplied by the number of shares outstanding. OEX - S&P 100 Index $424.07 PLAY (very conservative - bullish/credit spread): BUY PUT APR-375 OEW-PO OI=363 A=$3.30 SELL PUT APR-380 OEW-PP OI=4276 B=$3.70 INITIAL NET CREDIT TARGET=$0.45-$0.50 POTENTIAL PROFIT(max)=9% B/E=$379.55 ***** ACS - Affiliated Computer $44.26 *** Trading Range? *** ACS (NYSE:ACS) is a Fortune 1000 company with more than 38,000 people in 35 countries providing unique business process and information technology outsourcing solutions to world-class commercial and government clients. From a single financial industry client, ACS expanded into the energy, financial, government, healthcare, retail, and transportation industries and for the past five years, the company has achieved record growth with revenues climbing 30% on an annual basis. ACS - Affiliated Computer Services $44.26 PLAY (conservative - bearish/credit spread): BUY CALL APR-55.00 ACS-DK OI=1967 A=$0.15 SELL CALL APR-50.00 ACS-DJ OI=1795 B=$0.65 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$50.55 ***** UNH - UnitedHealth Group $83.64 *** Bearish Sector! *** UnitedHealth Group (NYSE:UNH) forms and operates markets for the exchange of health and well being services. Through its family of businesses, the company helps people achieve optimal health and well being through all stages of life. The firm's revenues are derived from premium revenues on insured (risk-based) products, fees from management, administrative and consulting services and investment and other income. It conducts its business primarily through operating divisions in the following business segments: Uniprise; Healthcare Services, which includes the UnitedHealthcare and Ovations businesses; Specialized Care Services, and Ingenix. UNH - UnitedHealth Group $83.64 PLAY (conservative - bearish/credit spread): BUY CALL APR-90.00 UNH-DS OI=795 A=$0.30 SELL CALL APR-85.00 UNH-DR OI=1724 B=$0.85 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=11% B/E=$85.55 ************* DEBIT SPREADS ************* These candidates offer a risk/reward outlook similar to credit spreads, however there is no margin requirement as the initial debit for the position is also the maximum loss. Since these positions are based primarily on technical indications, traders should review the current news and market sentiment surrounding each issue and make their own decision about the outcome of the position. ***** EBAY - eBay Inc. $83.91 *** A New Trading Range? *** eBay (NASDAQ:EBAY) is a Web-based community in which buyers and sellers are brought together to browse, buy and sell items such as collectibles, automobiles, high-end or premium art items, jewelry, consumer electronics and a host of practical and other miscellaneous items. The eBay trading platform is an automated, topically arranged service that supports an auction format in which sellers list items for sale and buyers bid on items of interest, and a fixed-price format in which sellers and buyers trade items at a fixed price established by sellers. Through its wholly owned and partially owned subsidiaries and affiliates, the Company operated online trading platforms directed towards the United States, Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Singapore, South Korea, Spain, Sweden, Switzerland and also the United Kingdom. EBAY - eBay Inc. $83.91 PLAY (conservative - bullish/debit spread): BUY CALL APR-70.00 QXB-DN OI=11002 A=$14.60 SELL CALL APR-75.00 QXB-DO OI=13778 B=$10.10 INITIAL NET-DEBIT TARGET=$4.45-$4.50 POTENTIAL PROFIT(max)=11% B/E=$74.50 ******************* SYNTHETIC POSITIONS ******************* These stocks have momentum-based trends and favorable option premiums. Traders with a directional outlook on the underlying issues may find the risk-reward outlook in these plays attractive. ***** MEDI - MedImmune $32.65 *** Drug Stock Speculation! *** MedImmune (NASDAQ:MEDI) is a biotechnology company with 5 products on the market and a diverse product pipeline. MedImmune is focused on using advances in immunology and other biological sciences to develop new products that address significantly unmet medical needs in areas of infectious disease and immune regulation. The company also focuses on oncology through its wholly owned subsidiary, MedImmune Oncology, Inc. In addition, the company owns Aviron, a biotech company. In January 2002, MedImmune acquired Aviron, a firm focused on the prevention of disease through vaccine technology. MEDI - MedImmune $32.65 PLAY (very speculative - bullish/synthetic position): BUY CALL APR-35.00 MEQ-DG OI=290 A=$0.65 SELL PUT APR-30.00 MEQ-PF OI=235 B=$0.65 INITIAL NET-CREDIT TARGET=$0.10-$0.20 INITIAL TARGET PROFIT=$0.40-$0.70 Note: Using options, the position is similar to being long the stock. The minimum initial margin/collateral requirement for the sold option is approximately $1,110 per contract. However, do not open this position if you can not afford to purchase the stock at the sold put strike price ($30). *********************** STRADDLES AND STRANGLES *********************** Based on analysis of the historical option pricing and technical background, these positions meet the fundamental criteria for favorable volatility-based plays. ***** ETM - Entercom Communications $44.77 *** Reader's Request! *** Entercom Communications (NYSE:ETM) is a radio broadcasting company in the United States. The company has assembled, after giving effect to the pending acquisitions of three stations in the Denver market and two stations in the Greensboro market, a nationwide portfolio of 100 stations in 19 markets. Entercom operates a wide range of formats in geographically diverse markets across the United States. The company's largest markets are Seattle, Boston, Kansas City, Sacramento, Portland, New Orleans and Denver. ETM - Entercom Communications $44.77 PLAY (very speculative - neutral/debit straddle): BUY CALL MAR-45.00 ETM-CI OI=963 A=$0.65 BUY PUT MAR-45.00 ETM-OI OI=325 A=$0.85 INITIAL NET-DEBIT TARGET=$1.30-$1.40 INITIAL PROFIT TARGET=$0.55-$0.90 ***** BAX - Baxter International $19.65 *** Downgrade = Sell-Off! *** Baxter International (NYSE:BAX) engages in the global development, manufacture and distribution of a diversified line of products, systems and services used primarily in the healthcare field. The company manufactures products in 28 countries and sells them in over 100 countries. Healthcare is concerned with the preservation of health and with the diagnosis, cure, mitigation and treatment of disease and body defects and deficiencies. The company's products are used by hospitals, clinical and medical research laboratories, blood and blood dialysis centers, rehabilitation centers, nursing homes, doctors' offices and by patients, at home, under physician supervision. BAX - Baxter International $19.65 PLAY (very speculative - neutral/debit straddle): BUY CALL MAR-20.00 BAX-CD OI=258 A=$0.60 BUY PUT MAR-20.00 BAX-OD OI=1599 A=$0.95 INITIAL NET-DEBIT TARGET=$1.35-$1.45 INITIAL PROFIT TARGET=$0.50-$0.75 ***** ************************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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