The Option Investor Newsletter Monday 03-17-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Diplomacy is Dead Futures Wrap: More Confirmation Index Trader Wrap: Weekly Fund Wrap: Mixed Results for Stocks and Funds Updated on the site tonight: Swing Trader Game Plan: Clearing the Decks Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 03-17-2003 High Low Volume Advance/Decl DJIA 8141.92 + 282.21 8145.84 7779.73 2003 mln 1852/143 NASDAQ 1392.27 + 51.94 1392.41 1326.28 1834 mln 1665/151 S&P 100 438.64 + 14.57 438.64 420.12 totals 3517/294 S&P 500 862.79 + 29.52 862.79 827.17 RUS 2000 365.40 + 11.01 365.40 352.38 DJ TRANS 2094.06 + 66.97 2096.84 2008.03 VIX 36.46 + 0.13 37.75 36.39 VIXN 46.67 + 0.87 48.65 46.63 Put/Call Ratio 0.70 ******************************************************************* Diplomacy is Dead by Steven Price Finally a decision. That's what the markets seemed to be saying today as the U.S., Great Britain and Spain announced they would bypass a vote on a new U.N. resolution and deal with disarming Iraq themselves. The announcement came from those countries' ambassadors this morning, which cited France's stated intention to veto as the reason for not calling a vote. Just asking, did France give the U.S. exactly what it needed - a reason not to count votes and a reason not to blame Russia? President Bush will be addressing the nation tonight and according to Colin Powell, will be issuing a final ultimatum to Saddam Hussein. The U.S. has already suggested that UN weapons inspectors leave the country and that the time for inspections is over. Short of Saddam lining up his mobile weapons factories and handing them over to the U.S., it seems unlikely that the current situation will end in anything but an invasion. The U.N. is pulling its personnel out of Iraq and the Israeli army has instructed its citizens to attain the insulation and other materials they may need for sealed spaces in advance of a possible attack by Iraq. We also got news late in the day that Turkey would now allow U.S. troops. Apparently they decided to take the money that was offered since there was going to be an invasion either way. The trick for traders is deciding just how the markets will react. There has been talk of a possible war rally, as an invasion would finally start the clock ticking toward an end to the uncertainty surrounding war. The futures certainly did not indicate that would be the case overnight. They started out down severely, following similar action in Europe, after last night's announcement that the U.S. was giving the UN until today to get on board. However, once the UN Ambassadors stepped to the mike and said there would be no vote due to France's stated intention to veto, the markets caught fire, reversing from morning lows and rallying strongly. The Dow saw a turnaround of 300+ points intraday following the announcement. Think we're just a little sensitive to each war-related announcement? Overall the market seems to be pricing in a short war. It just took someone to roll the dice and start the game to get the clock ticking. The theory on the recent weakness in the stock market has been traced back to spending by businesses and their reluctance to make any plans ahead of a possible war. Even Alan Greenspan said it was difficult to tell just what type of economy we were looking at until after geo-political concerns had worked themselves out. Businesses are supposedly holding off on spending and hiring until after there is some resolution, either through war or otherwise. The high cost of fuel has not helped either. However, with the start of war apparently imminent, since Saddam Hussein's only response so far has been to threaten worldwide terrorism, we should think about what we are seeing in the economy, since that's all that we will be left with after the invasion. Granted, all of the negativity can be traced back to a reluctance to spend and bulls are hoping for a quick loosening of the purse strings after the uncertainty ends. However, I would be hesitant to assume that all of our economic problems are based on fuel costs or war hesitations. The economy was already starting to crack, heading into recession last year, before things in Iraq started to heat up. The drop in technology spending fueled a stock sell-off that experienced some bounces along the way, but in reality was largely dependent on disappointing earnings and low future outlooks given by both techs and traditional companies. The world economy continues to suffer along with the U.S. and it will take more than the completion of a war in Iraq to turn things around. Will a drop in fuel costs after a war help things? Most definitely. But will it help things to the point of a complete economic turnaround? That seems less likely. I can certainly point out numerous reasons to short the current rally. The most apparent is the fact that once we have the war behind us, we will be faced with the same negativity that ended the January rally. Specifically, the 2003 outlooks by companies such as IBM and Microsoft that included the possibility of geo- political problems eventually ending and still saw a disappointing year. Once the beginning of the year fund contributions were out of the way, that's exactly what we got - bottom line earnings reports and disappointing future guidance. However, any casual market observer will note the massive reversal we have seen over the past few days and certainly can argue that we have seen a reversal in trend off the bottom. We achieved head and shoulders bearish objectives in the Dow, SPX and OEX and have been moving higher ever since. Bears that have mad an attempt at shorting the rallies have had no success and although we can point out plenty of reasons to go short, so far we have not seen signs of weakness. Trade what you see, right? It is certainly hard to do in the current environment and we are steaming ahead right into serious resistance levels. The Dow has now bounced almost 700 points in less than a week. That certainly seems unsustainable and we are likely due for a pullback at some point. But if this constitutes a trend reversal, then should we be looking to buy the pullback? In an uncertain economic environment, there are undoubtedly plenty of bears looking to short any sign of weakness and today's stall as we got into a previous level of resistance from late January and late February would seems to indicate we have run into a significant barrier. Especially considering the rally came on a news event. Unfortunately, we really don't know how much of the recent decline came on geo-political concerns and how much was based on the poor outlooks from individual companies. Therefore, it is difficult to predict just how far we may bounce when the pressure of uncertainty is released. For those traders who are looking for a similar recent pattern in the charts, look no further back than October. At that time, the bullish percents were similarly extended to the downside. The Dow bullish percent was down at 8%, similar to the current reading of 10% heading into today's trading. This reflects the percentage of stocks in the index giving point and figure buy signals. The big rally, with today's extension certainly looks like a similar pop. In October, we gained 15% in the first four days of the reversal off the bottom, which is certainly greater than the 9% gain over the past four sessions, but nevertheless was a significant pop and signaled a coming reversal. While we did get a pullback, it was only for a day, before we headed significantly higher, eventually reaching a top of Dow 8800 before a more significant pullback. Today's rally took out significant resistance at Dow 8000, but eventually stopped dead at the 8150-8160 level that capped the January bounces repeatedly after the Dow broke its head and shoulders neckline earlier that month. The high on the day was 8145, but of course that was after a rally of 284 points, so we must take that failure in context. Daily Chart of the Dow We also broke the 50 day moving average in the broader indices. Rallies in the Dow, OEX and SPX all failed at that level this morning, but cruised past those numbers in the afternoon. The Dow 50-dma of 8097; the SPX 50-dma of 857.76; and the OEX 50-dma of 434.57 all fell in afternoon trading. The point and figure charts show a reversal that has been strong enough to create buy signals in the Dow, OEX and SPX. The signal in the SPX amounts to a triple-top buy signal at 855, which is a very bullish indication. The triple-top also carries with it the possibility of a bull trap, which is a sudden reversal down and would require a trade of 860 to break. We got that trade of 860, when we topped out at 862.68. Unfortunately for bulls, the bearish resistance lines in those averages also lie just above at 870 in SPX (which coincides with resistance from the end of January in the 865-868 range), 8300 in the Dow (which was previously strong horizontal support before the January breakdown, and 442.50 in the OEX (which coincides with strong resistance at 440 from January). Point and Figure Chart of the SPX The COMP, following a 50 point rally to 1392.25, is also approaching its next level of resistance at 1400, powered partially by the chip stocks. The SOX gained 5.6% to close at 322.25 and has crossed its 200-dma to the upside for the first time since May 2002. The next level of resistance in the SOX is likely to be 230, where there is heavy horizontal resistance. The dollar jumped through recent resistance and bonds sold off decisively, lending credence to the idea that now that we have some certainty, the bears are getting out of the way and money is coming back into stocks. One of the factors behind today's rally that was also connected to the war news was a drop in the price of oil futures. While I mentioned above that a decrease in fuel costs might not lead to a complete economic turnaround, it certainly will give the economy some boost by reducing the operating costs of almost all companies, whether they are involved in manufacturing or simply pay shipping costs for their products. Crude Oil Futures dropped another 0.50 per barrel on news that the U.S. may tap its strategic petroleum reserves. While that possibility was not a new one, talk heated up about the possibility in the wake of today's developments. The fact that we have seen oil futures drop over the past few sessions continues the inverse relationship between fuel prices and the stock market. I began highlighting the longer term charts going back to last summer that charted the general trends between the two and so far, little has changed in that relationship. Of course, much of it is due to the fact that both reflect geo-political developments in opposite ways, but the action of the past few days is particularly interesting, since they have been reacting opposite to their traditional behaviors as war becomes more certain, but still maintain to inverse relationship to each other. Chart of Crude Oil Futures and the Dow Does it seem that all I want to talk about is war? Maybe it's because that was the driving force behind today's action. However, there were some developments that are worth noting and could draw some attention after the impact of today's events on the markets begins to fade. J.P. Morgan cut its estimates well below previous estimates for auto stocks and their suppliers. It said preliminary feedback regarding March sales and a slowing momentum of industry incentive spending led it to predict light vehicle sales would fall to 15 million or lower in March and 14.5 million or lower in April. It said it expects the drops to lead to production cuts that are more dramatic than those that have already been announced. Oracle releases results on Tuesday after the bell. This morning we got cautious statements from Pacific Growth, which echoed statements from Lehman on March 5. Lehman cited concerns that ORCL's license revenues could be weak. PG cited similar concerns and said the company should match estimates due to currency and cost cuts, but that revenues and licenses should be lower than forecasts. A disappointing report from Oracle could certainly erase much of the gains from the past few days, but if the auto news didn't put an anchor on the rally then it is likely even results from Oracle will take a back seat to global developments. We also got some indications on retail sales that were mixed. Wal-Mart and Federated both affirmed earlier predictions for March same store sales. Wal-Mart is expecting an increase in the low single digits, while Federated is expecting a drop of 3-4%. J.C. Penney, on the other hand, said its department stores might miss forecasts for little change or a slight decline. One of the more curious developments today was the rise in the Market Volatility Index (VIX). The VIX, which reflects implied volatility levels of options in the OEX, generally rises on rallies and falls on market drops. Part of this is due to the fact that markets generally drop faster than they rise and the other reason is that covered writing (the purchase of stock and sale of out of the money calls) creates selling pressure on the way up. The VIX is usually moved by institutional order flow, since the OEX is a heavily traded product and small retail orders don't usually make much of a dent. Rather than drop on today's big rally, the VIX actually rose, diverging from its usual pattern and suggesting institutions may not believe we are out of the woods just yet. Now we are left to decide where we are headed next. If we follow October's pattern, we could be headed much higher. However, what more can the President say tonight that would make war any more imminent than it seemingly became this morning, or any shorter than analysts are already expecting? Shouldn't the short-covering be over by now? Won't oil spike up initially? Isn't the risk to oil prices greater that Saddam sets the field on fire than that he doesn't? Certainly it is difficult to step in front of a speeding train and even those bears who would like to enter in front of that resistance at Dow 8150 should do so with only small positions. Overnight futures trading should give us an idea of the initial reaction to the President's speech. A move through Dow 8170 could certainly indicate a continued run and if we do break that level, I would suggest shorts step to the side and wait for a test of bearish resistance at SPX 870. If we make it above SPX 870 (actually a break of bearish resistance comes at 875), look out above. For now, we need to respect the extreme uncertainty surrounding the current environment and make sure our bets reflect that uncertainty. I'd like to tell readers just how we will react to the President's speech, which I can't; but if the action of the last few days is any indication, then we have seen a major trend reversal. However, I would feel more comfortable coming to that conclusion if our jittery markets weren't making unpredictable moves each time we get new information on the global front. ************ FUTURES WRAP ************ More Confirmation Monday, March 17, 2003 By Vlada Raicevic Daily Settlement Numbers 4:15pm ET Contract Last Net High Low Dow 8141.92 +282.21 8145.84 7779.73 YM 03M 8102 +252 8128 7715 Nas 100 1077.01 +46.56 1077.14 1018.76 NQ 03M 1074 +37.50 1080 1019 S&P 500 862.79 +29.52 862.79 827.17 ES 03M 860.25 +29.75 862.75 822.00 Daily Pivots Contract S2 S1 Pivot R1 R2 YM 03M 8425 8308 8012 7896 7599 NQ 03M 1000.75 1043.50 1061.75 1104.50 1122.75 ES 03M 810.81 840.38 851.56 881.13 892.31 The last few days we looked at daily charts, and tried to figure out if the recent move up was a valid turning point in the markets, or if it was another mighty bear market rally, doomed to failure. I will continue to leave the geopolitical issues, and even the economic issues outside of this forum, and continue to focus on the charts to give us a somewhat unbiased view of what the futures are doing. The day opened with a mild gap down, a little selling pressure appeared, but the market quickly found a bid and took off in a nice pop to fill the gap and to stall out at minor resistance. There was ample opportunity to let the bears take over, but the market again took off and exceeded yesterday's highs, trading above R2 and actually using it for support for a good portion of the day, never going back below it again. While Friday's doji candle at resistance could have been seen as a potential ending to the move up off the recent lows, today we have some additional confirmation signals that may indicate a continuation of the trend. ES Daily: A big green stick, closes above the upper tine of the shorter term regression channel. A throwover of that line is allowable, but shows that momentum is strong enough to get ahead of the regression channel movement. Remember, the regression channels on my charts are for two specific periods, 78 and 200 periods. They are redrawn at the end of every period. Therefore they move with the price. If price moves very quickly in one direction, it will pierce the outer tines of the regression channel, but rarely stay outside of the channel because it can correct within five to six periods. Along with this channel pierce, the Macd crossed the centerline, fast stochastic does the same, and OBV manages to move above the downtrending line. Also, ADX has a bullish crossover, and RSI moves above its recent range and is moving up nicely. With these kinds of signals one has to poke around a bit to try and generate any bearish sentiments: Macd crossover is tentative, and is not a full crossover, longer term Stochastic is still below centerline, and OBV has pierced the downtrend line before and failed the next day. But let's face it, from a purely technical perspective, the daily chart is bullish. YM Daily: The YM is very similar to the ES. Note how the ADX crossover is the first one since the bearish crossover in mid-January. NQ Daily: The most bullish of the three, all indicators show a strong trend up. Today's move also filled the rather large NDX gap formed on 1/17/03. There is, however, a little more doubt to the NQ bullish chart than for ES and YM. The culprit is the excessively bullish nature of the NQ traders. Look at how steep the Macd and ADX are. When these are this steep, there is often a pullback to release some of the buying pressure. A gentler slope is much prefereable. The steep quality is due to the large gap up that started this whole run. NQ traders need to make sure that the pullback doesn't turn into a rollover that aims for filling that rather large gap. (Note: My charting service printed a strange candle for the NQ daily today, so the following chart is of NDX). Let's look at the 60 minute charts. While the daily charts are looking bullish, the 60 minute chart is not. On the ES you can see that price has pulled well ahead of the regression channels, and now trades above both outer tines, this generally means that some pullback is in order. Macd, Stochastic, ADX and RSI are all forming bearish divergences. This again implies that a pullback is in order. How shallow or deep that pullback will be, is anybody's guess. It could be only long enough to reset the indicators, while still keeping the daily charts bullish. Look at that ADX again, it shows that there have been almost no sellers in this move up. Buying is drying up, but with no selling pressure, the market continues to move up. YM 60 minute chart is nearly identical: The NQ 60 minute chart has stronger divergences present, and unlike for YM and ES, the OBV is rolling over and testing its uptrend line. This is no surprise as these divergences are showing up on the Daily chart. So, it looks like we are definitely short-term overbought and 60 minute charts are telling us that we need a pullback to blunt the extreme bullishness. There is plenty of support now below us, as well as resistance above. The market seems to be in a very strange mood. There has been much trader talk about how sanity will come back soon, and the market will again begin to reflect the terrible underlying business conditions. I say, wait for the charts to tell you about this mood change. As perplexing as it is, we have a bullish tint right now. Wait to see at least a 60 minute rollover before dismissing this as just another insane bear market rally. ******************** INDEX TRADER SUMMARY ******************** War rally cry as Indexes at monthly high The major indexes surged high today on what looked to be a war rally cry that had bulls shouting the indexes to their highest levels of March, and finds the NASDAQ-100 Index (NDX.X) not far from its 2003 highs set in early January. While floor traders cited extensive short-covering on some type of "resolution" coming to a head with Iraq, a strong round of selling, similar to that found from the October lows was found in Treasuries today. The action in the bond market comes just one day before the FOMC meeting, where some expect the Federal Open Market Committee to cuts its Fed Funds rate by 1/4 point to 1.0%. While traders and investors might look for Treasuries to find buying as the Fed cuts interest rate, I'd suggest traders keep a close eye on bond YIELDS and should we see selling, could be a sign from the bond market that the Fed might be nearing the end of an easing cycle. 10-year YIELD Chart - Daily Interval The benchmark bond saw a strong round of selling today, which had its YIELD ($TNX.X) jumping higher, not unlike that found on October 11th. In prior wraps, we wanted to be on the alert for such action in the bond market to hint that a rally in the indexes might still have legs. A good test tomorrow is to see what the FOMC does with its Fed Funds interest rate, which currently stands at 1.25%. Selling in Treasuries along with a good round of short covering had the NASDAQ-100 Index (NDX.X) holding the 1,018 level. In Friday's 01:00 PM intra-day update and Friday evening's market monitor, the 1,018-1,019 level looked to be an important level of support today for the stronger NASDAQ-100 Index, and while there was some weakness at the opening of today's trade, suspicious support was found at 1,108.75, which was the morning's low, and today's trade into the close looked to have this index, or at least stocks within it, experiencing some aggressive short- covering by bears. Amazingly, the NASDAQ-100 Index (NDX.X) 1,077.01 +4.51% closed above its WEEKLY R2 and now has its MONTHLY S2 in play at 1,102. The NASDAQ-100 Index (NDX.X) and NASDAQ-100 Tracking Stock (AMEX:QQQ) $26.60 +3.42% are the only indexes in our matrix that have been able to trade their MONTHLY R2's, which continue to hint that this is the index that bulls will continue to look for leadership from, and help pull the other major indexes higher. Here's a quick look at the pivot matrix. Note that on Friday, we updated the WEEKLY portion of the matrix at Friday's close. Pivot Analysis Matrix As the major indexes push higher today, we're starting to lose many resistance levels as bullishness continues to take out upside resistance. With strength in the NASDAQ-100 Index (NDX.X) a next level of resistance to monitor would be between tomorrow's DAILY R1 of 1,096 and WEEKLY 1,102. Initial support for the NDX would be correlative at WEEKLY R1 of 1,066 and MONTHLY R2 of 1,069. With the NDX having traded its MONTHLY R2 level of support today, I'm now looking for "rock solid" support at the MONTHLY pivot of 989.20 and WEEKLY Pivot of 1,006. NASDAQ-100 Index (NDX.X) - Daily Chart The 1,018 level kept showing up in the WEEKLY pivot matrix and showed up today in the form of 1,019 and despite early morning weakness, this level held support. On Thursday, we looked at QQQ chart and the "volume spike" on gap higher and close above 1,018. Bears look very eager to cover now and builds support from a 2- month base, which can serve as a "powder keg" that looks to be on fire. Similar MACD and Stochastics today that were found back in mid-October when 10-year YIELD ($TNX.X) made a move from the lows. Today's action saw a net gain of 6 stocks to reversing higher point and figure buy signals, and that's enough to have the NASDAQ-100 Bullish % ($BPNDX) reversing up into "bull alert" status at 40%. Based on this indicator's high of 82% in December, I would now put upside potential in the NDX at 1,155 or higher should the bullish % approach the December high reading of 82% bullish, but today's reversal back up shows demand now building in a more meaningful matter. It would currently take a reading of 68% for this indicator to achieve "bull confirmed" status. S&P 100 Index (OEX.X) - 5-point box Today's trade at OEX 435 has the conventional 5-point box of the OEX negating the bearish vertical count and turns the vertical count bullish to 500. Past bullish vertical counts have not been achieved the prior two years, but serve as a bear's alert of upside risk in a bearish position. I've added "blue dots" on the above chart of the OEX to depict that of a bullish channel and I see some formidable near-term resistance at the bearish resistance trend and WEEKLY R2 of 445. Bears will most likely have covered partial positions today, and will be looking for any weakness back near the WEEKLY pivot of 417.50 or MONTHLY pivot of 423.70 as a cover area. In October, the NASDAQ-100 Bullish % ($BPNDX) reversed up into "bull alert" status on October 11th. Two session's later (end of trading Oct. 15th), the S&P 100 Bullish % ($BPOEX) reversed up into "bull alert" status. Today's action saw a net gain of 3 stocks generating reversing upward point and figure buy signals, which has the OEX Bullish % rising to 26%. It would currently take a reading of 28% to have this indicator achieving "bull alert" status. Aggressive bulls can look 1/4 position long at today's triple-top buy signal of 435, but I'd look MINIMUM 3- months expiration out to try and allow time for the bullish % to reverse back high and get the OEX back above its bearish resistance trend (red + at 450). Bear's should be no more that 1/2 position bearish after today's trade at 435. S&P 500 Index Chart - Daily Interval Today's trade at 855 triggered a triple-top buy signal in the SPX and we'll take a look at the point and figure chart in a minute, but the SPX has really been slicing through some zones of resistance and breaking levels of resistance the bears haven't been able to defend. I'd look for some type of bullish profit taking near the WEEKLY S2 of 873, and then look for the pullback into the 833-837 zone for an "excellent" bullish entry. Let's quickly revisit out "suck 'em in and spit'em out, then take it higher" scenario from our March 5th Index Trader Wrap http://members.OptionInvestor.com/IndexTrader/iw_20030305_01.ASP to try and envision the trade. I've been a little off on my price levels, but the SPX action has certainly shown a "spit'em out" move, that is now in the "take" part of the trade. What's left I think is the "them" pullback, and then the higher should the bullish % reverse up into "bull alert" status. S&P 500 Index Chart - 5-point box Similar to the OEX point and figure chart, the SPX conventional 5-point box chart gave a triple-top buy signal. After a "spit-em out" type of move after our March 5th update, the MARKET has been taking the SPX higher. A bull that has been a bit hesitant on a bullish position looks for a pullback move, perhaps to 835, then looks for a 3-box reversal higher, which a bull looks to provide a type of "slingshot" or "catapult" type of action as the last of the bears head for the exits. Today's action saw a net gain of 19 stocks to reversing upward point and figure buy signals, or a gain of 3.8% in the S&P 500 Bullish %. Current reading remains "bull correction," but a reading of 34% would be enough for a "bull confirmed" reading at a very low level of bullishness. Should the S&P 500 Bullish % ($BPSPX) reverse up into "bull confirmed" status, I would then be willing to call October lows an initial bottom as we would have seen higher lows in the SPX itself and the bullish %. However, for a bottom to truly be called, the SPX must trade the 955 level. As you can perhaps see, it is VERY early to be overly bullish at this point. Dow Industrials Chart - 50-point box I turned further bullish in today's market monitor and suggested that bulls that took 1/4 bullish position in a profiled Dow Diamonds (AMEX:DIA) $81.46 +3.16% trade from March 5th, look to round up in the trade to 1/2 position by adding another 1/4 bullish position. At the time, I did not know that the Dow Industrials Bullish % ($BPINDU) has reversed up into bull alert status at 16.67%, but I really build conviction toward bullishness from today's reversal up in this very narrow bullish % indicator. I'm now looking for strong support to build at the "apex" of the triangle that we had been monitoring, and view the ability of the Dow to get back above that apex to now become a level of support. I'm not "sure" if the U.S. is going to war with Iraq, or if Saddam Hussein will put up a fight, but I would NOT look to add to bullish positions until the Dow breaks above its bearish resistance trend. With the NASDAQ-100 reversing up into "bull alert" status and the very narrow Dow Industrials Bullish % ($BPINDU) also reversing up into "bull alert" status, both from lower levels of bullishness, bears should be pressed to begin stepping up their short covering, which should begin building support for bullish pullback entries as demand look to begin outstripping supply. Jeff Bailey ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** **************** WEEKLY FUND WRAP **************** Mixed Results for Stocks and Funds Bargain hunters fueled a huge rally on Wall Street last Thursday, enough to put some stocks and funds in positive turf for the week ended Friday, March 14, 2003. U.S. stocks struggled through mid- week, with a series of economic reports doing little to stimulate any "buy" interest. By Thursday, some investors felt stocks were oversold and snapped up tech and other stocks, but the huge rally didn't extend into Friday's session. Stocks were mixed on Friday going into the weekend. For the week, the S&P 500 large-cap index rose just 0.6 percent, while the mid-cap sector declined by 0.2 percent. Small stocks, as measured by the Russell 2000 index, closed the week just 0.1% higher. Large-cap funds produced small net gains over the 5-day period along with the S&P 500 benchmark, while mid-cap and small- cap funds generated small net losses. Tech funds rose 2.6%, per Lipper, a primary beneficiary of Thursday's monster rally. The MSCI EAFE index of developed foreign markets was 0.4% higher in dollar terms for the most recent weekly period, with European stock gains more than offsetting declines in the Pacific region. Over the weekly period, European stocks rose 1.5%, while Pacific stocks dropped 2.5% in dollar terms. International equity funds were essentially unchanged for the week according to Lipper, but returns within the broad peer group were mixed. The possibility of another Fed rate cut didn't stimulate the U.S. fixed income market. With the exception of high-yield bonds and funds, bond prices were generally lower with the Lehman Brothers Aggregate Bond Index down 0.4% last week. A surge in oil prices pushed wholesale inflation (PPI) up 1.0% in February, putting an end to the recent bond market rally. Most investment-grade bond funds lost ground while high-yield funds rose by 0.4% on average, per Lipper. U.S. Equity Fund Group Week YTD +0.6% -4.9% Vanguard 500 Index Fund (VFINX) -0.2% -7.3% Vanguard MidCap Index Fund (VIMSX) +0.1% -7.3% Vanguard SmallCap Index Fund (NAESX) +0.6% -5.0% Vanguard Total Stock Market Index Fund (VTSMX) +0.4% -4.8% Lipper Large-Cap Core Equity Fund Average -0.2% -5.9% Lipper Mid-Cap Core Equity Fund Average -0.1% -8.1% Lipper Small-Cap Core Equity Fund Average +0.0% -4.9% Lipper Multi-Cap Core Equity Fund Average +2.6% +0.2% Lipper Science & Technology Fund Average Large-cap growth funds and tech sector funds were the highest- performing categories in the U.S. equity fund group last week. With the tech sector higher, funds with growth styles outpaced those with value approaches. According to Lipper, the average large-cap core fund rose 0.4% over the week, while the average large-value fund declined 0.3% and the average large-cap growth fund gained 1.2% in value. Mid-cap growth and small-cap growth funds also did relatively well last week compared to other U.S. equity funds. A few diversified stock funds gained 2 percent or more for the week including the Sequoia Fund (+2.1%), Vanguard LifeStrategy Growth Fund (+2.2%), Harbor Capital Appreciation Fund (+2.2%), and Fidelity OTC Portfolio (+2.0%). Laggards included Clipper Fund (-1.8%), Vanguard Windsor II Fund (-1.6%), and Legg Mason Value Trust (-1.1%). While tech stocks enjoyed a strong rally last week, the natural resources, financial and health sectors were down for the week, producing net weekly declines for many value-driven stock funds. The week's biggest gains were in the tech sector. For example, Fidelity Select Electronics Portfolio had a weekly total return of 5.6 percent. Firsthand Funds Technology Leaders Fund, which draws many of its holdings from the Nasdaq 100 index, picked up 6.3% on the week. Some of the ProFunds and Rydex mutual funds picked up over 8 percent for the weekly period. International Equity Fund Group Week YTD +0.4% - 8.7% Vanguard Developed Markets Index Fund (VDMIX) +1.3% - 4.8% Vanguard Emerging Markets Index Fund (VEIEX) +0.3% - 8.4% Vanguard Total International Stock Index (VGTSX) +0.1% - 9.2% Lipper International Fund Average -0.0% - 5.4% Lipper Emerging Markets Fund Average -3.5% -12.5% Lipper Gold Fund Average If you were invested in the ProFunds Europe 30 Fund last week, you did extremely well. The Europe 30 Fund, which seeks daily investment results equal to twice (or 200%) the performance of the ProFunds Europe Index, returned 8 percent during the 5-day period. Latin America was also a bright spot, as evidenced by the 4 percent gain last week by the T. Rowe Latin America Fund. The MSCI EAFE index would certainly have generated more than a 0.4% weekly return (using Vanguard Developed Market Index Fund) had it not been for weakness in the Pacific region. Vanguard's Pacific Stock Index Fund, for example, lost 2.5% over the 5-day period through March 14, 2003. As a result, there was a broad dispersion of weekly results within the broad peer group. Some funds enjoyed big gains, while others suffered big losses. Billion-dollar international stock funds up more than 1 percent for the week included T. Rowe Price International Stock (+1.4%), T. Rowe Price Foreign Equity (+1.5%), Harbor International Fund (+1.5%), Lazard International Equity Fund (+1.7%), and Longleaf Partners International (+1.9%). Laggards included Liberty Acorn International (-1.3%), Nations' International Value Fund (-2.0%), and ING International Value Fund (-2.0%). As with U.S. equity funds, foreign stock funds with heavy stakes in large-cap growth/technology stocks were among the week's best performers. Non-U.S. funds with heavy exposure to weaker sector groups such as financials and healthcare generally lagged behind, producing losses last week. The $13 billion Vanguard Healthcare Fund, for example, had a 2.1% negative weekly return, similar to the losses produced by Fidelity and Putnam's health sector funds. U.S. Fixed Income Fund Group Week YTD -0.3% +0.9% Vanguard Short-Term Bond Index Fund (VBISX) -0.6% +1.9% Vanguard Intermediate-Term Bond Index Fund (VBIIX) -0.6% +2.7% Vanguard Long-Term Bond Index Fund (VBLTX) -0.4% +1.3% Vanguard Total Bond Market Index Fund (VBMFX) -0.2% +0.8% Lipper Short Investment-Grade Fund Average -0.4% +1.7% Lipper Intermediate Investment-Grade Fund Average -0.4% +1.0% Lipper U.S. Government Fund Average -0.4% +1.6% Lipper Corporate A-Rated Debt Fund Average +0.4% +4.6% Lipper High-Yield Fund Average The imminent threat of war has continued to push oil prices and inflation higher, bad news for the investment-grade bond market. Not helping bond prices either is the belief that war with Iraq is imminent and will end quickly, allowing oil prices to subside and the U.S. economy to begin to recover. For the week, the Lehman Brothers Aggregate Bond index lost 0.4% with intermediate-term and long-term bond funds doing worse than short-term bond funds. Among the laggards were "inflation-index" or "real return" bond funds. For example, Vanguard's Inflation- Protected Securities Fund fell by 1.1% while PIMCO's Real Return Fund declined in value by 1.2 percent last week. The only bond fund sector to perform well last week was the high- yield group, which extended its recent run. According to Lipper, the average high-yield fund returned 0.4% last week, with the top performers returning upwards of 1 percent. For instance, Pioneer High Yield Fund gained 1.0% over the 5-day period. International Fixed Income Fund Group Week YTD -1.5% +2.6% Lipper Global Income Fund Average -2.5% +2.6% Lipper International Income Fund Average Global and international fixed income funds sustained big losses last week, giving back a significant portion of their YTD gains. While its international stock funds were among the stock leaders last week, T. Rowe Price's International Bond Fund was among the week's fund laggards, losing 2.7% over the 5-day period. Dollar strength last week made matters worse for foreign bond funds (in dollar-reported terms). Balanced Fund Group Week YTD +0.1% -2.4% Vanguard Balanced Index Fund (VBALX) -0.0% -3.1% Lipper Balanced Fund Average Balanced funds did their job once again, holding fund losses to a minimum. Within the peer group, weekly investment results ranged from negative 1 percent on the Oakmark Equity & Income Fund, to a positive 1.5 percent on the Vanguard LifeStrategy Moderate Growth Fund. As with pure equity funds, those funds with heavy exposure to large-cap growth and technology stocks did better than hybrids with value-driven styles and heavy stakes in weaker areas of the market (healthcare, financials, etc.). Money Market Fund Group Yield 1.06% Vanguard Prime Money Market Fund (VMMXX) 0.75% iMoneyNet.com All Taxable Money Market Fund Average Current 7-day simple yields among taxable money market funds are continuing to drift lower. According to iMoneyNet.com, the fund average is now just 0.75 percent. Vanguard's Prime MMF, the low cost leader, holds one of the better yields in the "prime-retail" MMF group (1.06%). The Fed funds rate currently stands at 1.38% per Bloomberg, down from 1.62% six months ago, but slightly higher than the 1.25% of two months ago. So, the money markets do not seem to be pricing in another Fed rate cut at this time. Mutual Fund News Morningstar.com reports more fund liquidations, as the industry deals with more discouraging news. The GAO (General Accounting Office) reportedly investigated fund industry charges from 1998 and 2001 and found that fund costs had risen during that period of time. The House Financial Services Committee, which ordered the GAO to review fund costs, also examined other areas such as fund companies use of "soft dollars" to pay for market research. There's also debate about how "independent" fund trustees truly are, mirroring concerns raised by investment guru, Warren Buffet in his most recent shareholder report (i.e. Berkshire Hathaway). Add to that other unsettling news, such as last week's findings by a joint committee of regulators that brokers regularly over- charged investors who bought mutual funds with "front-end" load fees. Financial advisors are supposed to provide "independent" advice and investment counsel but many "load" fund companies do in fact push their own products to derive asset-based revenues. On the fund merger/liquidation front, Schroder Ultra Fund plans to merge into the Schroder U.S. Opportunities Fund (SCUIX), per Morningstar, while the PBHG Funds plan to merge away three fund laggards. PBHG announced that it will be dropping "value" from the names of four funds and taking the "value" language it uses in the prospectuses out, to reflect the likelihood that they'll be more blended in their style. Each of these funds seek long- term growth by investing in stocks of companies that have "low" price valuations as well as "high" growth rates. According to Morningstar, three of the four funds already land in the blend style box. Steve Wagner Editor, Mutual Investor email@example.com ************************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 ************************************************************** *********************** SWING TRADER GAME PLANS *********************** Clearing the Decks I'd like to talk about significant resistance levels that were left untouched today, but there aren't many left. To read the rest of the Swing Trader Game Plan Click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp ************************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 ************************************************************** ******************* 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. 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The Option Investor Newsletter Monday 03-17-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: ERTS Dropped Calls: AMGN, ZMH Dropped Puts: TIN Play of the Day: Call - BVF Leaps (Sunday Edition): Better Late Than Never Updated on the site tonight: Market Posture: Looking Way Up Market Watch: New Highs Everywhere ************************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 ************************************************************** ***************** STOP-LOSS UPDATES ***************** ERTS - call Adjust from $53 up to $56 ************* DROPPED CALLS ************* AMGN $58.50 +0.86 (+0.86) Dropping our AMGN play tonight is like saying goodbye to an old friend, as we've been riding the consistent uptrend for over a month now. Each bounce off that ascending trendline provided a solid entry into the play, but the bullish action has really accelerated over the past few days, with the help of the broad market. While there may still be more upside in the play, the long-term descending trendline at $60 looks like it will be formidable resistance and we're going to call today's intraday top just below $59 "close enough". Traders willing to stay in the play for one more push towards resistance shouldn't be willing to give much back at this point and should ratchet stops up to no lower than $57, just below today's morning low. --- ZMH $48.97 +2.28 (+2.28) How many ways can we say "overextended"? Our ZMH play has performed like a champ, holding key support last week as the broad market plummeted, and then blasting through the key $45.50 resistance on Friday. As pleased as we were with that performance, we were truly amazed to see the stock surge nearly 5% on Monday on continued heavy volume. Closing at the high of the day, ZMH is well outside its upper Bollinger band and a pullback from here seems likely. That isn't to say the bullish trend is wrung out by any stretch of the imagination, but we're going to err on the side of caution, closing out with a solid gain since we began coverage near $44. Traders opting to try to squeeze more out of the play should be aggressive with their stops here, raising them to no lower than $47.60, just below today's intraday consolidation. ************ DROPPED PUTS ************ TIN $40.96 +1.39 (+1.39) Even a lead brick will go up in a rising elevator, and that certainly is true with our TIN play. While it performed quite well for us on the downside last week, that action has been reversed over the past few days, with a string of 3 very bullish candles now. The play skated on the knife edge last Friday, flirting with the $40 resistance level before pulling back a bit into the close. But today's action sealed the play's fate, driving the stock up through our $40.25 stop, then the 2-month descending trendline and closing above the 20-dma for the first time since the middle of January. We're taking our lumps tonight, dropping TIN as the downward trend has apparently run its course. A pullback near the $40 level would be the ideal situation for exiting open plays that weren't stopped out today. ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** BVF – Biovail Corporation $39.71 +0.65 (+0.65 this 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: 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). Why This is our Play of the Day It may seem strange to list BVF as our Play of the Day, as the stock hasn't yet satisfied our entry target of $40.10. But therein lies the beauty of it. BVF did have another solid day on Monday, but the magnitude of the 1.67% upward move seems muted when compared to some of the outsized short-covering type gains seen in other issues. This hints that the action in BVF is more likely real organic buying, rather than short-covering. So if the move in the broad market is for real, we ought to see a real breakout over the $40 level. If the broad market move fades, then the play will likely not be triggered until it can build up more strength. In essence, we're using the BVF play to give us some insulation from the potential that the current stellar rally fades. Keep the trigger in place at $40.10, and then enter on the breakout according to your risk profile. Aggressive traders will want to go long on the initial break, while more conservative players can wait for a pullback to confirm support at old resistance near the $39 level. In either case, stops should initially be set at $36. BUY CALL APR-40*BVF-DH OI=6197 at $1.90 SL=1.00 BUY CALL APR-45 BVF-DI OI= 390 at $0.45 SL=0.25 BUY CALL JUL-40 BVF-DH OI=1637 at $3.80 SL=2.00 BUY CALL JUL-45 BVF-DH OI= 708 at $1.25 SL=0.60 Average Daily Volume = 1.17 mln ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***** LEAPS ***** Better Late Than Never By Mark Phillips mphillips@OptionInvestor.com First off, let me apologize for the tardiness of my column this week. Unfortunately, it couldn't be helped, with strong winds knocking the power out for much of the day on Saturday, keeping me from getting my ideas put down on screen. But we managed to get it all working just fine later on the weekend, and I think you'll agree it was one heck of a week! By late Tuesday, I had pretty much resigned myself to the fact that we were going to break below the DOW 7500 area and our DJX play was going to be toast. Adding to that frustration was the fact that there wasn't a single bearish position in the LEAPS portfolio with which we would be participating. Don't get me wrong -- I made the decision to eliminate any possible bearish plays weeks ago, based primarily on the depressed levels of bullish percent across the major indices. But that doesn't make it any less frustrating, as a trader. We all know the hazards of second-guessing trading decisions, but it is human nature -- whether you've been trading for 10 weeks or 10 years. Fortunately, the LEAPS Portfolio is readjusted based on closing prices. Otherwise, our DJX play would have been stopped out on Wednesday when the DOW plunged to an intraday low of 7417. But the asset allocation gnomes appeared out of nowhere at the critical juncture, resulting in decent rebound into the close that took on truly magnificent proportions by the end of the day on Thursday. While the strong rebound at the end of the week is encouraging, we shouldn't let it fool us into thinking that ANYTHING in the market has changed. The broad market is still in a downtrend and market participants are still on pins and needles, trying to determine when we're going to war, who's going to help (in the war and the reconstruction after the fact), and how successful/quick it is going to be. Don't forget, the economy is still a wreck and getting worse. Elevated price levels for Crude Oil and related products certainly aren't helping, but when you carve away all the meaningless drivel, its about rising unemployment, high levels of debt (both at the consumer and business level) and a complete lack of capital spending growth at the corporate level. The economy is weak, and that is being reflected in the equity markets. The war situation is a side-show in terms of determining the trend of the market, providing just one more area of uncertainty. We're going to war and probably sooner than later. Those hoping for a strong and sustained rally after the beginning of Gulf War II are likely to be in for a rude awakening. I see no hope of any rally powerful enough to lift the broad market (SPX) out of its long-term descending channel. Technology is a somewhat different issue though. I've gone into the reasons for my position on the NASDAQ, but what it really boils down to is the steep losses in this area of the market were taken out in the first 2 years of the bear market, and there are some stocks that are really looking attractive at current values. Hey, we've got some of them in our LEAPS Portfolio! But the relative strength in the NASDAQ is likely to result in this area of the market being the place to be for bullish moves over the balance of 2003. That doesn't mean to go out and buy the QQQ tomorrow and hold through to the end of the year. But I do think that is the best way to capitalize on the sharp, brief rallies between now and the end of the year. Just to align the Watch List (and hopefully the Portfolio) with that perspective, I'm adding a new play on the QQQ this week. I really like the way the QQQ is now above both the 50-dma and 200-dma and finally broke out on Thursday over the descending trendline that began back in May of 2001. With respect to what to expect from the market in the near-term, I reluctantly report that we should expect more of the same. That's right, weakness should predominate, with short and sharp bullish moves while we all try to best position ourselves for the rally we all "know" is coming. You see that is the part that bothers me the most. The entire market seems to have accepted that there will be a quick resolution to the Iraq conflict and the market will respond by putting on a powerful rally. Hey, nothing would make me happier, but there is nothing to base it on. The reason it concerns me is that it seems most investors (and certainly the financial media) have accepted it as fact. To me, that is very dangerous, since the market is called the Great Humiliator for a reason. The VIX is not showing any signs of a market that has changed its stripes, meandering back near the 36 level at the close on Friday. Aside from the failed push through 40 on Wednesday, the VIX remains confined below the descending trendline (38.25) that we've been talking about for weeks on end now. Take note of the 200-dma of the VIX, which is now at a new all-time high of 35.40. Using the maximum possible downward deviation of 18% below the 200-dma, I now peg the "floor" for the VIX in the vicinity of 29. That's right, a VIX of 29 (historically a top) may now be a bottom, signaling us to buy puts. If you're wondering about the logic behind that statement, I'll refer you to my February 12th Options 101 article, "Fixated on the VIX". There I went into great detail about the changes I see in VIX-land, and so far I haven't been proven wrong. GRIN I really haven't said anything about the technicals in this market, and the primary reason is that they haven't changed. Sure the H&S targets were achieved in the DOW, SPX and OEX, but we still have bullish percents in the bear confirmed condition. There is very little sign of internal strengthening just yet, and I don't expect to see it until we get resolution to the Iraq mess. But in the midst of that confusion and indecision there will always be the opportunity for gains. Along those lines, I think we've managed to pick up on some viable targets in the past few weeks and from the look of the LEAPS Portfolio, things are looking good. Care to take a look with me? Portfolio: QCOM - After spending the better part of a month meandering between the $33-36 levels, it was certainly reassuring to see the stock take part in the broad market rebound on Thursday, and then hold onto the majority of those gains heading into the weekend. Of course, that just lifted the stock back up to the broken ascending trendline (just under $38), and the bearish resistance line of $38 on the PnF chart. It is going to take another strong push to vault QCOM through that level and we're going to need to see a trade at $40 to get the PnF chart back on a Buy signal. But this is one of the distinct benefits of getting a good entry point. It gives us the ability to wait for the move in our favor, without constantly worrying that the play is in the red. With the break out of the recent consolidation area, it seems safe to raise our stop to just below the bottom of that area. It is now set at $33. DJX - We've got several recent examples of excellent entry points into bullish plays. Our DJX play is an example of a poor entry point. Even after the strong short-covering late last week, we're just barely back to break even on the play. Of course, if the market can get some upside conviction (other than a brief bout of short-covering), then we'll be in the green and far less concerned with a poor entry, except for an interest in avoiding another one in the future! Weekly Stochastics are still pointing north, but there's some strong resistance first at $79, then $80.50 and then $81.50, all of which will have to be cleared before the bulls can challenge the H&S neckline near $83. With the DOW Bullish Percent still buried down at 10%, we haven't yet seen any of the internal strengthening necessary to suggest an extended upside move. At least not yet. But at these levels, risk is more in favor of the bulls than the bears. Keep stops set at $74.50 As mentioned in the mid-week update, if this position is stopped out, we'll look to re-enter the play on a rebound from the $72 area. MSFT - Finally! A move in our favor. After that incessant downward bleed, I was starting to wonder if this play was going to be a lemon. But that rebound from the lows on Wednesday sure has the play looking a lot better this weekend, don't you think? Make no mistake, there's some significant technical damage on the chart that needs to be repaired, with Mr. Softee coming to rest right at the 50-dma ($24.86), which is still below the 200-dma ($25.45). There are also numerous levels of resistance overhead, and the stock won't really be on the road to recovery until it can close that big gap left behind on January 17th ($26.47 -27.67). While the PnF chart doesn't show a Sell signal due to the split, we're really going to want to see a new Buy signal at $30 to convince us that MSFT really wants to run. ADBE - We may have jumped the gun on entering the ADBE play, as described in the mid-week update. But we didn't miss it by much, as the stock dropped to the intersection of the 200-dma and ascending trendline and rebounded smartly. The stock was already looking good on Thursday before the company released its earnings results. Beating estimates by 3 cents was well received on Friday, with the stock gapping up strongly and seeing heavy buying interest (more than triple the ADV) throughout the day, ending with its highest close since June 14th of last year. That surge in price created a powerful Triple-Top Buy signal on the PnF chart. The vertical count of $50 (generated last October) is still in play, although it will likely take some time to get there. The next obstacle to the upside is the June gap from $32.64-36.19, which will likely present formidable resistance. Now that we've gotten the first strong move out of the consolidation pattern, it seems safe to raise our stop to $26.50. Watch List: BEAS - Alright, it appears I exercised a bit too much patience on our BEAS play, but I think I corrected the error of my ways in time. This one moves to the Portfolio this weekend. NVDA - See why we weren't interested in chasing NVDA higher? Thursday's short-covering spurt got stopped cold at the 200-dma on Friday. That isn't to say that this chip stock can't power through that level, but I like our odds much better if we can enter on a pullback to strong support first. Given the consolidation above the $12 level over the past several weeks, that level is looking like pretty strong support. So let's raise our entry target to $12 in hopes of one more solid pullback before NVDA breaks above the 200-dma. It is worth noting, that last week's trade at $14 puts the PnF chart back on a Buy signal, with the bullish price target of $23.50. If only we can get a favorable entry into the play, we could be in for an exciting ride. AA - When initially added to the Watch List, I pointed out that we were going bottom fishing on this play and at first blush it looks like we caught a winner. The stock found support near the $18.50 level on Wednesday and that was good enough for a new Portfolio play this weekend. EMC - Last weekend we talked about waiting for EMC to fall into the $6.50-7.00 area before initiating a position, and that patience was rewarded this week. EMC dipped to an intraday low of $6.54 on Wednesday before the rebound took it solidly higher by the end of the week. EMC moves to the Portfolio this weekend as well. NEM - In tandem with the short-covering burst in equities on Thursday, gold got whacked to the tune of an $11 loss. Interestingly, the gold stocks didn't really get hit that hard, suggesting that the bulk of the selling has already taken place. At any rate, our $24 entry target hasn't been achieved yet, and we won't take the plunge until after the war starts or Saddam retires by other means. It is that initial post-war plunge that is likely to give us that attractive entry into the NEM play, while the masses make the error of selling their gold shares, losing sight of the real reason they should be held -- currency weakness. Despite having several fairly new bullish positions in the LEAPS Portfolio, I'd be lying if I said I was really wild about ANY of them. While I think they are among the best opportunities for long-term trades in the current market environment, we must not lose sight of the fact that this environment is HIGH RISK. If you can take the risk and sleep at night then feel free to play along. For those of you that aren't comfortable with the risk, there's no harm in remaining on the sidelines in cash until the geopolitical situation becomes more stable. Once that happens, it will allow us to make decisions based on the economy and corporate profits once again, not the next war-related press conference. Have a great week! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: None QCOM 02/14/03 '04 $ 40 LLU-AH $ 4.60 $ 5.30 +15.22% $33 '05 $ 40 ZLU-AH $ 7.90 $ 8.70 +10.13% $33 DJX 02/25/03 '03 $ 80 DJX-LB $ 6.40 $ 6.20 - 3.13% $74.50 '04 $ 80 YDJ-LB $ 9.30 $ 9.40 + 1.08% $74.50 MSFT 02/27/03 '04 $ 25 LMF-AE $ 3.20 $ 3.80 +18.75% $22 '05 $ 25 ZMF-AE $ 5.10 $ 6.00 +17.65% $22 ADBE 02/28/03 '04 $ 30 LAE-AF $ 4.70 $ 6.60 +40.43% $26.50 '05 $ 30 ZAE-AF $ 7.50 $ 9.60 +28.00% $26.50 AA 03/12/03 '04 $ 22 KJP-AX $ 1.15 $ 1.80 +56.52% $17.50 '05 $ 25 XAP-AE $ 1.50 $ 2.05 +36.67% $17.50 BEAS 03/12/03 '04 $ 12 LZP-AV $ 1.55 $ 2.40 +35.42% $7.50 '05 $ 12 ZWP-AV $ 2.75 $ 3.70 +34.55% $7.50 EMC 03/12/03 '04 $ 7 LUE-AU $ 1.40 $ 1.65 +17.86% $5.50 '05 $ 7 ZUE-AU $ 2.15 $ 2.60 +20.93% $5.50 Puts: None LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: NVDA 02/02/03 $12 JAN-2004 $ 12 KMF-AV CC JAN-2004 $ 10 KMF-AU JAN-2005 $ 12 XMF-AV CC JAN-2005 $ 10 XMF-AU NEM 03/09/03 $23.50-24.00 JAN-2004 $ 25 LIE-AE CC JAN-2004 $ 20 LIE-AD JAN-2005 $ 25 ZIE-AE CC JAN-2005 $ 20 ZIE-AD QQQ 03/16/03 $24.00-24.50 JAN-2004 $ 26 KLF-AZ CC JAN-2004 $ 22 LKF-AU JAN-2005 $ 26 ZWQ-AZ CC JAN-2005 $ 22 ZWQ-AU DJX 03/16/03 $72 DEC-2003 $ 76 DJX-LX CC DEC-2003 $ 72 DJX-LT DEC-2004 $ 76 YDJ-LX CC DEC-2004 $ 72 YDJ-LY PUTS: None New Portfolio Plays AA - Alcoa Inc. $18.87 **Call Play** For the first part of last week, AA was looking anything BUT bullish, as the selling pressure in the broad market drove the stock further below its February lows. But it was interesting how the stock found strong support near the $18.50 level, right at the bottom of the October 11th gap. As noted in the mid-week update, the mild rebound from that level on Wednesday looked good enough to me to call that a solid entry point into the play, and were we ever rewarded for that one. Thursday was a runaway success for the bulls, and AA was dragged (albeit kicking and screaming) back towards the $20 level by the end of the day on Friday. To say that the bulls have a lot of work to do on this one is an understatement, but we have the advantage of having nabbed an excellent entry point, where we can very effectively manage our risk. We've got just over $1 of risk to our $17.50 stop and it will likely take a breakdown in the broad market below the October lows to trigger that kind of selling in AA. So here's how we're going to manage the play. When the stock manages to crest the $21 level on a closing basis, we'll raise our stop to $18.50 and once over $22, we can ratchet up to $19.25 (just below the top of Thursday's gap). Needless to say, the first big obstacle will be the 50-dma at $20.74, but I like the technical picture here. Keep in mind that AA was one of only 3 DOW stocks during the latest market decline that did not generate a PnF Sell signal. And with the broad market doing its best to put in a near-term bottom, AA could very well challenge its 200-dma ($24.14) in the next couple months, market permitting. While LEAPS on AA are incredibly cheap, that is a notable advantage to the play. The stock is only up a little over $1 from our entry on Wednesday, but the listed LEAPS are showing a very nice paper gain already. BUY LEAP JAN-2004 $22 KJP-AX $1.15 BUY LEAP JAN-2005 $25 XAP-AE $1.50 BEAS - BEA Systems, Inc. $10.00 **Call Play** As we've noted in recent weeks, our desired entry target into BEAS was in the $8.50-9.00 range, and given the persistent weakness in the broad market, I was sure that it would be imprudent to rush the entry. Well, that rebound from the $9.15 level looks like the best we could have done, as the bulls really came out to play during the latter half of last week. The push back up to the $10 level (exactly) at the close on Wednesday convinced me that the rebound was underway, in large part due to the increasing volume. That rebound continued on Thursday, with the stock plowing through the 20-dma and coming to rest just below the 50-dma at the close on Friday. The short-covering surge on Thursday broke the stock's descending trendline from the January highs, but I'm not convinced that we're out of the woods just yet. We could very well see another drop to test that bullish support line on the PnF chart at $8.50, and that is the primary reason why I'm keeping the stop rather generous, down at $7.50. Weekly Stochastics are very much in our favor, as they are just starting to poke up out of oversold territory, but we need to keep in mind that the PnF chart is still bearish until we see a trade at $13.50, generating a new Buy signal. I would view any return to the $9.50-10.00 area as a second chance for an entry into the play, but I would not be interested in chasing the stock higher from here. If you missed this entry, wait for the stock to come to you. Our first target on the upside is $14 (the January high) and then the $20 level, which will likely be very strong resistance. BUY LEAP JAN-2004 $12 LZP-AV $1.55 BUY LEAP JAN-2005 $12 ZWP-AV $2.75 EMC - EMC Corp. $6.93 **Call Play** While just a shadow of its former self, EMC has really been looking much healthier in recent months. Sure the stock has been weak with the rest of the market since the middle of January, but I like the way it rebounded on Wednesday, finding support near $6.50. The low of the day ($6.54) was just above the bottom of the January 6th gap, and the rebound showed a rejection of that intraday breakdown below both the 200-dma ($6.72) and the 38% retracement of the rally off the October lows ($6.71). I'm thinking that's an important level. Below the aforementioned gap, there is strong support at $6, and the fact that EMC didn't challenge that support level indicates a bit of relative strength to me. Sure enough, a look at the relative strength chart (relative to the COMPX) shows a steady series of higher lows since the middle of October. Don't look now, but EMC's PnF chart is still on a Buy signal, and the bullish price target equates to $15.50. Isn't it interesting that the bearish resistance line is currently $15? There's no guarantee the stock will get there, but it at least gives us a long-term target to shoot for. The big obstacle to deal with right now is the 18-month descending trendline that is currently at $7.90. That trendline turned the stock back in January, and will take some serious bullish enthusiasm to crest on the next test. Then we'll have to deal with the January high (also the August 2002 high) at $8.50 and the July 2002 high near $9.40. So it should be clear that there is a lot of work that needs to be done to the upside (and an improving economy would certainly help!), but now that we've gotten a solid entry, the rest should take care of itself. We're starting out with our stop at $5.50, as a trade at that level is what would be required for a PnF Sell signal. BUY LEAP JAN-2004 $7 LUE-AU $1.40 BUY LEAP JAN-2005 $7 ZUE-AU $2.15 New Watchlist Plays QQQ - NASDAQ-100 Trust $25.72 **Call Play** We've been talking for the past few months in this column as well as others about my expectation for the NASDAQ market to outperform the broader market this year. This belief is based on relative strength studies, the fact that the NASDAQ suffered a steeper fall than the rest of the market, and just the basic chart patterns. A perfect measure of that relative strength is seen on the daily chart of the QQQ, which seems to be finding a firm bottom in the $23.50-24.00 area, well above the October lows. Contrast that to the SPX or INDU charts, which show the broader indices very close to testing their October lows in the middle of last week. But here's the real clincher. Thursday's rally took the QQQ through both its 50-dma ($25.00) and its 200-dma ($24.80) on strong volume. Note that the 50-dma is back above the 200-dma and the 50-dma is just starting to turn up. Finally, QQQ broke above its descending trendline ($24.93), and this is no short-term trendline. It has been capping every rally in the stock since May of 2001! Demonstrating the significance of that breakout, it came on volume of more than 128 million shares vs. the ADV of about 67 million. Is this the end of the bear market in Technology? I sincerely doubt it. But it does look like an important inflection point that could result in a pretty impressive rally in the months ahead. Our challenge now is to try to grab a solid entry point. Risk is starting to shift in favor of the bulls with the NDX bullish percent appearing to be reversing from the 30% level. Now we just need to look for one more dip near strong support to give us an entry into the play. My preference would be for a rebound from the site of Thursday's gap ($24.23-24.64), but I recognize we may not be that fortunate with the apparent inflection point seen on Thursday. So let's target a rebound from the $24.75-25.00 area for new entries. After entry, initial stops will be set at $23, just below the recent lows. BUY LEAP JAN-2004 $26 KLF-AZ BUY LEAP JAN-2004 $22 KLF-AU **Covered Call** BUY LEAP JAN-2005 $26 ZWQ-AZ BUY LEAP JAN-2005 $22 ZWQ-AU **Covered Call** Drops None ************** MARKET POSTURE ************** Looking Way Up To Read The Rest of The OptionInvestor.com Market Watch Click Here http://www.OptionInvestor.com/marketposture/mp_031703.asp ************ MARKET WATCH ************ New Highs Everywhere To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/wl_031703.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. 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