The Option Investor Newsletter Tuesday 03-18-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Confused? (Readers Write - Market Assessment) Futures Markets: Consolidation Index Trader Wrap: (See Note) Market Sentiment: Tick, Tick, Tick Weekly Fund Screen: Schwab Select List: Taxable Bond Funds Updated on the site tonight: Swing Trader Game Plan: Take a Deep Breath Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 03-18-2003 High Low Volume Advance/Decline DJIA 8194.23 + 52.30 8209.36 8096.12 1.85 bln 1731/1494 NASDAQ 1400.35 + 8.30 1400.55 1378.83 1.57 bln 1788/1455 S&P 100 440.38 + 1.74 440.66 435.37 Totals 3519/2949 S&P 500 866.45 + 3.66 866.94 857.36 W5000 8200.32 + 37.20 8200.72 8114.52 RUS 2000 368.02 + 2.62 368.02 363.30 DJ TRANS 2129.02 + 35.00 2129.02 2086.54 VIX 35.78 - 0.68 37.47 35.19 VXN 48.02 + 1.35 50.36 48.02 Total Volume 3,721M Total UpVol 2,643M Total DnVol 1,024M 52wk Highs 151 52wk Lows 151 TRIN 0.59 PUT/CALL 0.61 ************************************************************ Confused? If so you are in good company. Even the Federal Reserve heads cannot decide what is happening in the economy. The mixed economic reports and the fog of war has everyone confused. The recent rally in the markets has confused analysts as well. The only people not confused appears to be retail traders who are buying everything in sight. Wilshire 5000 - Daily Nasdaq Chart - Daily The biggest economic news at the open was the -11% drop in New Housing Starts. This was significantly below expectations and significantly below last months -1% drop. This was the third consecutive monthly drop in starts and they are accelerating. The decline was broad based and not specific to any particular region which negated the weather factors. This was the largest drop since December 2000. A new factor is the growing number of existing homes for sale which is climbing rapidly. Rental vacancy rates are at an all time high which shows weakness in the multifamily market. Chain Store Sales were actually positive at +0.4% for a change but most stores reported sales were flat or below plan for the period. Unemployment, war worries, high gasoline prices are still being given for the drop in consumer spending. The Semiconductor Book-to-Bill ratio came in at .99 and an improvement over last months .94 level but they are still booking less than they are shipping. The $781 million in shipments in February is still less than the $826 million they shipped in December. The trend is improving but it is a long way from well. Part of the problem is the low profit margins from vast overcapacity but SEMI said there were over 20 new fabrication plants scheduled to begin production in the next two years. These new enterprises are coming as older companies are closing plants and laying off workers. AMAT was the latest confirmation that this trend is continuing. Still looks like tough times ahead to me. MCHP warned after the bell that equipment manufacturers were frozen in place and were continuing to cancel or delay orders. They said they were going to delay opening a new plant until demand returned. They said fears over North Korea had caused a drop of -8% in Asian sales to complicate the US picture. The Fed met today to determine monetary policy and decide if they needed to cut rates to stimulate the economy. Despite the constant flow of negative information the Fed ended the meeting without making any decision other than to wait another 30 days to see if the fog of war had lifted. The Fed heads in all their wisdom could not decide if the economy was in the tank due to economic reasons or war reasons or both. They issued a strange post meeting press release saying they had retained the bias at neutral with no changes in the interest rate. They said "incoming economic data was mixed and the labor market was disappointing. However, the hesitancy of the economic expansion appears to owe importantly to oil prices and geopolitical uncertainties. In light of the unusually large uncertainties clouding the geopolitical situation and their apparent effects on economic decision making the committee does not believe it can usefully characterize the current balance of risks to the economy." They will continue to maintain "heightened surveillance". As opposed to the partial surveillance that got us here? (grin) Basically they dodged the bullet and use the "Iraq ate my economy" excuse and left the markets hanging. Now investors are faced with forming their own decisions about the value and prospect of stocks. Fidelity surveyed 300 fund managers and found that nearly 70% of fund managers thought the market was either fairly valued or over valued at these levels. Only 12% thought stocks would beat bonds for the rest of 2003. Now that is a scary statistic. With earnings warnings rising and profits falling it is not surprising that professional money managers are skeptical about the rest of 2003. There is starting to be more rumors that the last two days of gains were due to some asset allocation shifts by a couple large fund groups. Surprise! I wrote about this possibility last Tuesday but it still caught me off guard. Now the funds that missed the rocket launch are trying to decide if it was real or just another bear market rally. With volume shrinking again and new highs/lows only breaking even today and not negative for the first time since March 3rd there is no real confirmation. We had a nice 90% down day last week and a 90% up day this week. Unfortunately it takes an average of six 90% days to for a normal bottom. Two down, four to go. We are heading full speed into warning season and should the war get launched this week it should not take long before attention returns to those earnings only three weeks away. One positive is the -3.26 drop in oil prices to $31.67 today. The drop was on the fear that the US would open the strategic petroleum reserves when the war started to offset any drop in Iraqi production. The lower oil prices will eventually result in a reduction in costs for manufactured products but that could take a couple quarters. Until we are in control of the Iraqi oil fields there is no assurance that oil flow will return to normal. Another Dow problem today was the filing of a $289 billion suit by the Justice dept to recover profits from tobacco companies that was earned through deceptive advertising according to their claims. The Justice Dept said new evidence showed that the companies were manipulating nicotine levels, lying to their customers about the dangers of smoking and directing billions of dollars of advertising at children. The government's case will take years to prove and many claim it will be next to impossible but the risk is there and tobacco stocks fell sharply. Dow component MO dropped -2.08 on the news. Oracle announced earnings after the close and beat the street by a penny but warned that the current quarter could fall below current estimates due to falling new license revenues and the war climate. The new license revenues are seen as an indicator for future revenues due to follow on renewals and support. With new business slowing future revenues may suffer. Is it the economy or is it the war? Not even Greenspan knows for sure so is it any doubt that average traders are confused. The Dow has made an astounding bounce from last weeks lows of nearly +800 points in five days. It came to a stop today well out of the current range, over 8150 and right at light resistance of 8200. This +11% bounce in five days has everyone expecting for a pullback. The Nasdaq stopped right at a very strong resistance range of 1400-1425. With the ORCL and MCHP warnings tonight I would be surprised to see it break that level tomorrow. Nasdaq futures are down -10.50 at 8:15PM and with a large amount of rebound profit on the books it looks shaky for Wednesday. The general consensus of opinion is that nobody missed the train. There is a growing feeling that the pattern of the last Iraq war has already been broken and we will not see a post war rally. I know this is heresy but that is the feeling making the rounds. With the Fed giving traders no assurances and warnings continuing to fly the bulls will have to call in the reserves to push the markets higher. One positive event remains the growing number of Iraqi soldiers trying to surrender. One instance today had some Iraqi tanks flying white flags try to crash through the lines to surrender. They had heard some gunshots from troops taking last minute target practice and wanted to surrender before the fighting got to them. The strangest thing is the friendly forces told them the war had not started and made them turn around and take the tanks back with them. The next couple days are probably going to get even stranger in the market. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor ************* Readers Write ************* Market Assessment Rick Utt A while back I had written you regarding news events and how I believe they are given much more credence in relation to the market than they really deserve. A great example would be the rally last week when it looked like the war would be postponed and the rally this week when it looks like war is imminent. You can't have it both ways and the way news events are attached to market moves one would think a professional investor has a game plan no longer than a CNN update. I also wrote you at the time that the Dow had set up a target for itself at 8150 and planned to use it. I pointed out it had knocked a few times on the 8150 door and when it couldn't get through it would probably retrace quite a bit so it could go down and take a run at it. The 8150 mark was built from January 27th thru February 5th and then it moved south to accomplish its agenda. Today that agenda was filled. Dow Jones Industrials 120 minute bar chart The Dow is less prone to support and resistance than the other indexes because its made of only 30 stocks, however it certainly does offer a certain amount of support and resistance and you can see how it got squeezed in between support and the resistance it set up for itself in the process (far right red arrows). I said at the time that sooner or later this resistance would come into play because it was put there for a reason. I also speculated that it was going to have to take quite a run at it in order to break through. It took over a month and a half but that line of resistance was finally dealt with. I can find no logical reason for the placement of the latest bounce but I think since the Dow is made up of equities in the other indexes that when the S&P found support, the Dow since it shares stocks, had no choice but to join in. I'm not saying this will lead to a break out of the bear market, I'm simply saying that traders knew at the time that this resistance was put there to be broken so they had no problem running up prices until that happened. And I might add, they did it quite handily. As I've said many times the market is a well-choreographed event and almost exclusively is impervious to news events. Even if you go back to 9/11 you'll find we were on a course southward that was picking up steam from the end of August. 9/11 just allowed things to accelerate and when it's agenda was accomplished it rallied from October all the way through January in spite terrorist threats on the hour and every major public event being cancelled because we didn't know who in the crowd was packing a bomb. The market didn't rally last week because of war or lack of war. Let me show you why the market rallied. S&P 500 120 minute bar chart The S&P 500 hit the last bastion of support that went all the way back to last July. It was rock solid and if anything was going to provide a bounce, this was it. The first red arrow was the bottom in July, the second red arrow was the last bounce it took prior to the October low and the last red arrow is a reaction to those two points of support. Any news that was pinned to the market bounce was purely coincidental and not related to the war in the least. The SPX had set a line of resistance up as a target for itself and its agenda was to get enough momentum to allow it to break through. Nasdaq Composite index 120 minute bar chart The Nasdaq also was able to find the last area of support at the same time as the S&P. The first red arrow was a bounce we took at the beginning of last August. The second red arrow was when the Nasdaq came down on support in September. Notice at the open of the next session we gapped lower. The third red arrow was after the October low when the Nasdaq was halted at resistance and then in the following session exploded over that resistance. And the fourth red arrow was the last and most solid support before we would go back to the October low. We still may be headed there but this was the most logical place to bounce, also the strongest and last chance we had. This will either propel us to higher highs or its the last bounce before a new low. The trajectory of the rise looks more like the last bounce before a new low and if the market is truly based on momentum it fits that its going to need all the height it can get before coming down hard enough to break support. Of course the red line of resistance we recently broke through was set up by the Nasdaq as a target to break through almost a month ago. Again, I find it hard to believe that any news event was tied to these areas of support. Where we go from here is of particular concern because we also have the Volatility Index to deal with and that is giving us some strange signals as of late. Volatility Index 120 minute bar chart The VIX has been setting up a line of resistance as well since the low we reached last July. The VIX can be charted with the same breakout or breakdown patterns as a stock. As you can see it is also momentum based and when it set up resistance for itself in December it had to fall way back and get up enough momentum to break through. Recently it set up a secondary resistance point along with the sloping resistance line in progress since last July. Notice the spike up under the blue arrow last week. It immediately came down the next day, however yesterday with the Dow rising close to 300 points and the Nasdaq over 50, the VIX actually rose modestly. This was a phenomena and in normal conditions with that type of rise in the indexes the VIX would have fallen precipitously. The only thing we can read from the fact that it isn't falling with over a 700 point rise in the Dow is because its telling us this rally isn't for real and we're going to see some lower prices ahead. The VIX is going up, not down. By my estimation before we hit a bottom the VIX will rise considerably over its most recent high in the upper 50's. And its going to start heading there soon. This could lead to the true capitulation event we have yet to see since this bear market started. This dissertation started because every time I hear a news event associated with a market movement, I cringe. The market knows what its doing, has an excellent memory and doesn't watch CNN or CNBC. Things the market does today can be realized in weeks, months and sometimes even years from now, but they are always realized. People say the market is forward thinking. They may not realize how true that really is and also not realize that they're applying it to the wrong motives. It's forward thinking about itself and not the economy or anything else. Market makers control the market. Who says a stock is worth what on a given day. If you want it you'll pay the price being asked for it the same as you would a dinner when you dine out. What you have to realize is the market maker is in this business to make a profit. If he or she knows the market is going down, since he or she is the one taking it there, then is it more profitable to let it drift down and make some money along the way or run it up as far and as fast as you can, short as much as you can and double, triple or quadruple your profits. Greed drives everything concerned with money! Have you ever noticed how QCOM will fall three for four dollars before it heads to the next higher level. Is because of extremely greedy market makers and its also a dead giveaway to anybody that follows the stock. How about SYMC (Symantec) trying to break through the $48 barrier. On February 28th it dropped straight to $40 on a "rumor" of accounting mismanagement. In the last two weeks it has climbed back to $46 and will most likely now break through $48. Did everyone forget about the accounting rumor? If indeed there was a rumor it was started by the market makers so they could grab all the shares they could at $40 and sell them along the way to their new Ferrari's. To the novice a drop like that means "run away". To the professional it means "its money time!" The same as an extremely sharp rise in a downtrend. To the novice it means the worries are over and people must be buying like crazy. To the market maker it means "short all you can, we're taking it down" Again, if you can discount the news, and most of the time even the economy and think ahead to "How will this move benefit me the most in the future, you're starting to think like those that run the market. And those who think the investor runs the market are dead wrong. If that wasn't the case, why or how can it frustrate the majority of its participants. The majority should always rule, but it does not in the stock market. Market makers maximizing movement to their advantage rules. This is why stocks with infinite P.E.s can fetch high prices and markets rise with no hope of earnings. The mentality of what signals today will affect you tomorrow or next week and a keen eye on stock movement and not on CNBC will give you a heads up as to what is going to happen, and not on what already has. . *************** FUTURES MARKETS *************** Consolidation Tuesday, March 18, 2003 By Vlada Raicevic Daily Settlement Numbers 4:15pm ET Contract Last Net High Low Dow 8194.23 +52.31 8209.36 8096.12 YM 03M 8170 +68 8218 8067 Nas 100 1082.20 +5.19 1082.20 1063.02 NQ 03M 1087 +13 1089 1066 S&P 500 866.45 +3.66 866.94 857.36 ES 03M 866.75 +5.75 872.75 856.00 Daily Pivots Contract S2 S1 Pivot R1 R2 YM 03M 8005 8094 8156 8245 8307 NQ 03M 1059 1075 1082 1098 1105 ES 03M 848.75 858.25 865.50 875 882.25 With the recent strong markets, and a Fed Meeting today, there was expectation for wild swings and high volatility. What we got was a few feeble attempts to both break up and to break down, with the net result of a mild gains across the board. Look at the ES pivot chart for today, and you'll see we just meandered around the middle between Pivot (solid red line) and R1 (black dashed line). If you look at the 15 minute chart of the ES, you can see that we really haven't moved much from that 10:45 high of 859 set yesterday morning. In fact, after an early morning break of that 859 level, ES found buyers and then used that area as support for the remainder of the day. Price broke below it again with the post-Fed announcement selloff, but the break never held, and the futures in general just moved sideways for the rest of the day. ES 15 minute Chart: Big picture trendlines. ES 15 minute Chart: Closeup You can see how the blue trendline, which had been supporting price since it was broken to the upside, was broken to the downside, acted as resistance and then again was broken to the upside at the end of the day. There is support from the second trendline off the 3/12 lows, and that trendline now sits at the 855.75 area, along with strong horizontal support. That trendline is rising roughly fifty cents per 15 minute period. At the close, a small run closed the ES at the highs of the day, against a slightly rising line drawn along the three most recent highs. Looking at the ES daily chart, I notice that RSI(10) is at 65.65, recent peaks on this indicator were 64.82, 67.80, 68.90. All of these highs led to a minimum of two days of selling, sometimes more. On the ADX, D+ is at 30.17, with the recent highs for D+ being 28.66, the early January high, and 28.57, the November high, and the highest reading for that late year run. The actual December high in price gave a reading of 25.69 on D+, and formed a bearish divergence with the November high for that indicator. With the modest rise today, the daily chart is still bullish, with OBV breaking above a longer term trendline stretching back to the December highs. However, the high readings on the RSI and ADX look like they're topping out, which goes along with the bearish divergences on the 60 minute charts, and indicate that we are in need of a pullback. Whether this pullback will be just that, or whether it becomes a turning point, will be determined by the levels that we reach when the selling starts. ES 270 Minute All-Sessions Chart: RSI showing a bearish divergence. Look at ADX, and where the arrows are pointing. The shape of D+ has a very strong similarity to the 3/2 timeframe, only the magnitude is different. Again, noticing patterns and similarities on charts doesn't mean these patterns will repeat, but they can give us clues. For the moment, this chart, which is situated between the daily and the 60 minute charts, is showing some weakness, with the second Macd Wave rolling over, and the Stochastic looking strong, but overbought. Looking at the NQ daily chart, I note a couple of interesting things: RSI(10) is at a level that it hasn't been since mid- November of last year. Since then, it has peaked below this level, and after the peak it has sold of an average of 3 days minimum. However, that high in November led to only a two day selloff, and then was followed by another run upwards into the December highs before rolling over. That December high also gave a lower RSI reading, forming a bearish divergence. Also, on ADX, D+ is currently at 32. For comparison, D+ reached 32.60 in the November high, and 33.88 at its December high during last years bull run. These high readings are similar to the ES readings which show we may be topping in the near term. NQ 270 Minute All-Sessions Chart: All the comments for ES pertain to the NQ chart as well. All comments for ES and NQ apply equally for YM. So, we are at the same point as we were yesterday. Seeing divergences show up, and telling us that we are topping out For The Short Term. I capitalized it because that's what divergences do, they give you an insight into an imbalance with price movement and underlying strength or weakness. The lack of any real pullback means that there hasn't been much profit taking. A rollover from these levels could lead to traders trying desperately to lock in profits. When we start selling off, the question is when will we stop? The following is a Renko chart, it prints a black box for every point that the underlying equity moves up or down. It does not depend on time, just price, and hence is a very good chart to check for support/resistance areas. The sideways chop that can muddy regular charts is gone. I've added text indicating recent tops/bottoms of price swings. These should be considered when looking at where we can pullback to. The dashed red lines show my standard 200 period regression channel. I have set the chart up for a 2 point box, so actual values will vary slightly, but it does give you an idea of where price has stopped and reversed within the past few weeks. All values shown are on a closing basis for that bar. Daily Renko for ES: Daily Renko for NQ: Daily Renko for YM: This one is a little more difficult. I set the box size to 5 rather than 2, and I don't display the huge climb from the recent rally (it would take up most of the chart). With the larger box size, the absolute numbers have a slightly larger margin of error. ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff's Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_031803_1.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** **************** MARKET SENTIMENT **************** Tick, Tick, Tick by Steven Price 48 hours. Is that how long it will take before we see another leg higher? Or a reversal? It will likely depend on how successful the U.S. is in its war plans and whether we get retaliatory terror attacks in the U.S. Of course a wait and see approach doesn't do traders much good, since the recent moves have been swift and large and by the time they've been obvious they've seemed overdone. So let's take a look at some important levels to watch, which should at least give traders a roadmap to when support and resistance come into play. I drew a head and shoulders pattern back in January with a downside Dow target of 7500, OEX of around 400 and SPX of 787. Those objectives were hit almost exactly following the neckline break that I had drawn at Dow 8200. We have now seen a rebound of 778 Dow points; but that rebound found resistance in the same area it did in January when it was attempting a bounce from the neckline break. At that time it consolidated between a downside floor of 7950 and an upside ceiling of 8160. The rally added some points to the upside this morning, getting above that 8160 high in the Dow, but falling below 8200 by the close. More importantly, the SPX also found resistance in the 865-868 area, which corresponded with the Dow rally attempts at 8150-8160 in January. The OEX finished right at the 440 level, which has been pivotal as both support and resistance going back almost a year now. Picking an exact number in the Dow for support resistance can be trickier than the SPX because the futures on the SPX are so heavily traded and give institutions more control over picking levels at which to buy and sell. That resistance at 868 happens to coincide with bearish resistance on the point and figure charts, which appears to be the lone roadblock to the triple-top buy signal given in the SPX on Monday's rally. That buy signal at 855 was confirmed with a trade of 860, which got the SPX beyond the classic bear trap on the PnF. The triple top in the SPX was accompanied by buy signals in the Dow and OEX and maybe even more importantly the first upturn in bullish percents since December. The bullish percent charts show a bounce in the Dow from a much oversold 10% up to 20%. The NDX shows a rebound from 30% to 44%. The bullish percent shows the number of stocks in an index giving PnF buy signals and 30% is considered to be oversold territory (70% is overbought). Certainly a bounce from bearish H&S objectives, accompanied by point and figure buy signals and an upturn from oversold bullish percents, would seem to indicate a very bullish reversal - especially considering the 10% gain off the bottom form last Wednesday. But we also need to remember that we had fallen 1400 Dow points and so far the bounce of 778 points has taken us to just below the neckline break. We have essentially retraced 50% of the recent drop. Is that bullish? Certainly a move back over that neckline would register more than a 50% reversal, but then we have yet another crucial level to look at. Dow 8300 served as a closing support level for many months. In fact, it served as horizontal support on both the July-September head and shoulders that eventually broke down and achieved its objective of 7200 and again as horizontal support for the November-January head and shoulders pattern. The neckline sits at 8200 because of the downward slope, but technicians can argue that the first close below 8300 was the domino that started us falling to last Wednesday's low. 8300 also happens to be the location of the bearish resistance line on the Dow's PnF chart. The OEX can be viewed with the traditional PnF chart or with the 2.5-box size, which has more closely mirrored action in the other indices. The OEX also topped out at 440 on the January rebound attempts and today's high of 440.66 demonstrates that the level remains as resistance. The bearish resistance line here is 442.50 on the 2.5 point box and at 448 on the traditional chart. Now that we are less than 48 hours from a possible invasion into Iraq, we are entering a time in which the markets will be ultra- sensitive to almost any world event that either hints at a prolonged war, such as early setbacks for the U.S. in the invasion, or any event that suggests terrorist retaliation. I think back to the refinery fire on Staten Island and remember the sudden market drop and rebound. During war time, it seems likely that the reaction to such events would be even more extreme and traders looking to set stops need to decide whether they are willing to give their positions room for larger moves, or if they want to tighten things up to avoid any sudden reversals. It seems that anything in the middle is subject to whipsaws. The economy got some more bad news last night and today. The tech sector continues to suffer, with Applied Materials (AMT) announcing it will cut 14% of its workforce and close some of its facilities. It was the second round of job cuts for the chip equipment maker in five months and signals that the company does not see a recovery in the immediate future. Gateway followed with a similar announcement, saying it would cut 17% of its workforce and close 76 of its retail stores. The company is aiming toward the fourth quarter of 2003 for a return to profitability. Tech Data also guided to the low end of first quarter earnings expectations. After the bell, Oracle released its numbers as well. The company beat expectations, but widened its revenue and earnings estimates due to war uncertainty. Investors punished the stock after hours, taking the NASDAQ futures along with it. After closing at $12.25, it was last trading $11.52 as of this writing. Housing Starts were also released this morning and the picture underscores January's drop and the input that many OI readers gave us in an informal poll a couple of months ago. New residential construction fell 11% in February to an annualized rate of 1.622 million, which is the lowest rate since April 2002. The percentage decline was the largest in nine years. Although Alan Greenspan said he thought there was no housing "bubble," he did say that last years pace for new homes and mortgage refinancing was unsustainable. That appears to be the case after a second straight monthly decline to start off 2003. Some of this can be blamed on seasonal patterns, but with interest rates beginning to bounce, it seems that the trend has certainly pulled back, if not reversed itself. The relationship between oil and the equity market has remained consistent. Even when they don't behave as expected, they continue to maintain an inverse relationship today. I heard an analyst equate a drop in oil from $31 to $24 per barrel to a 1% increase in GDP as a result of savings to Americans. That could certainly be behind the relationship. Since Monday's close, crude oil futures have dropped 10%, due to the acceleration of the war plan (which gets us closer to the end if it is short), as the Dow gained more than 50 points. Think traders are having a hard time figuring out the economy? Apparently the Federal Reserve Open Market Committee doesn't have a clue either. They did not adjust interest rates, which was expected, but also did not give an opinion on the economy, which was unexpected. Instead, the statement from the FOMC read "In light of the unusually large uncertainties clouding the geopolitical situation in the short run and their apparent effects on economic decisionmaking, the Committee does not believe it can usefully characterize the current balance of risks with respect to the prospects for its long-run goals of price stability and sustainable economic growth. Rather, the Committee decided to refrain from making that determination until some of those uncertainties abate. In the current circumstances, heightened surveillance is particularly informative." The committee also said the labor market looked weak, but the hesitancy of expansion was likely due to oil prices and geo- political concerns. In other words, until the Iraq situation becomes clearer, they don't know what to expect either. Tomorrow should get even more interesting, as we get closer to an invasion. Saddam has said he will stay and fight, but with 300,000 troops sitting on the border and the stated intention to remove him from power, doesn't it make more sense for him to take off with a couple billion dollars. Of course the fact that he is holding his ground may indicate that there are weapons of mass destruction and that he is planning on using them. If that is the case, the war may not go as neatly as we are hoping and then the recent bullishness may not last. Certainly if the oil fields begin to burn, the price of futures is likely to spike and if the above relationship is consistent, then we should see an equity drop. The futures were slightly lower after the bell, following the Oracle news. It could certainly lead to a pullback after a huge up move that seems like it is due for some profit taking. However, after hours activity is not always an indicator of the following morning's sentiment. While things feel awfully bullish right now overall, anything can happen in the next few days and traders should be managing their accounts in accordance with that risk. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 8194 Moving Averages: (Simple) 10-dma: 7785 50-dma: 8091 200-dma: 8461 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 866 Moving Averages: (Simple) 10-dma: 829 50-dma: 857 200-dma: 895 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 1082 Moving Averages: (Simple) 10-dma: 1007 50-dma: 1009 200-dma: 995 ----------------------------------------------------------------- The Semiconductor Index (SOX): The SOX built on its 200-dma breakthrough and is now approaching the 330-331 resistance level from December that I've highlighted here recently. It pulled back this morning as the churning broader markets tried to pick a direction. However, that pullback found support at the 200-dma - a bullish sign that gave a reliable signal as the bounce took it up 11 points. Now that it is just points away from the next resistance level, bulls can look for a break above 331 to next test 350. However, after the bell, Oracle dragged down the NDX and the techs may get swept lower with a broad brush to start the day, so watch that 200-dma to see if it continues to provide support. 52-week High: 614 52-week Low : 214 Current : 328 Moving Averages: (Simple) 21-dma: 75 50-dma: 76 ----------------------------------------------------------------- Market Volatility The VIX once again found support at the 35% level and at its 200- dma of 35.53. With the exception of a breakout on March 12, it has also found resistance at a descending trend line connecting the highs of last July, October and this February. The rally in equities has been impressive but will be even more promising if the VIX can manage a close below its recent extreme of 34%. CBOE Market Volatility Index (VIX) = 35.78 -0.68 Nasdaq-100 Volatility Index (VXN) = 48.02 +1.35 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.61 785,908 479,523 Equity Only 0.46 545,384 249,910 OEX 1.04 39,275 40,909 QQQ 0.41 85,207 35,078 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 37.1 + 2 Bull Correction NASDAQ-100 44.0 +10 Bull Alert Dow Indust. 20.0 +10 Bull Alert S&P 500 34.2 + 6 Bull Confirmed S&P 100 27.0 + 4 Bear Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 0.63 10-Day Arms Index 1.34 21-Day Arms Index 1.38 55-Day Arms Index 1.34 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 1593 1248 NASDAQ 1706 1362 New Highs New Lows NYSE 46 35 NASDAQ 51 36 Volume (in millions) NYSE 1,838 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 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 trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ****************** WEEKLY FUND SCREEN ****************** Schwab Select List: Taxable Bond Funds Week Four of the Schwab Select List fund review brings us to the taxable bond fund group, which consists of government, corporate and high-yield bond funds. Bond funds offer a higher yield (and greater total return potential) than money market funds, but are subject to moderate fluctuations in NAV share price. Generally, they offer a risk-reward tradeoff that falls somewhere between a money market fund and a stock mutual fund. Bond fund investments are advantageous in a time of low inflation and when the economy is slowing (and interest rates are falling). However, bond funds generally don't offer much protection against erosion of "buying power" in a time of rising inflation since the bondholder gets the same amount of interest or dividends although goods cost more. In our opinion, we are in the "late innings" of the bond market rally, so prudence is in order today. Since bond funds tend to rise when the economy is contracting and stock prices fall, they can offer long-term equity investors some protection against market declines. In other words, they can add income and stability. Bond funds may also be suitable for income oriented investors who desire a current level of "monthly" income (dividends are usually paid monthly) or investors who do not have long-term investment horizons. Within the taxable bond fund group, there's a range of styles and strategies, offering investors various risk-reward tradeoffs. In general, high-yield funds and funds that seek "total return" have more risk than high-quality funds and funds that seek only income (don't look for appreciation opportunities). Further, bond funds with greater average durations/maturities tend to be riskier than short-term bond funds, but they offer greater return potential in the long run. The Schwab Select List utilizes the Lehman Brothers Intermediate Government Bond Index as the primary fund performance benchmark, but the Lehman Brothers Aggregate Bond Index is perhaps the most common benchmark for investment-grade bond funds. Depending on the type of bond fund, there may be other appropriate benchmarks. Screening/Evaluation Process The Schwab Select List includes 13 taxable bond funds that have met their stringent criterion. Below is a summary of the funds, along with their Morningstar category. Schwab Select List: Taxable Bond Funds BBH Inflation-Index Securities N (BBHIX) Intermediate Government Dodge & Cox Income (DODIX) Intermediate Bond Vanguard GNMA (VFIIX) Intermediate Government Federated U.S. Government 2-5 Year (FIGTX) Short Government SSgA Bond Market (SSBMX) Intermediate Bond Federated Income (FICMX) Intermediate Government Vanguard Short-Term Federal (VSGBX) Short Government Payden Short Bond R (PYSBX) Turner Short Duration Fixed Income (TSDGX) Short Government Turner Ultra Short Duration Fixed Income (TSDOX) Ultrashort Bond Federated Government Ultrashort (FGUSX) Ultrashort Bond PIMCO Real Return D (PRRDX) Intermediate Bond PIMCO Total Return Mortgage D (PTMDX) Intermediate Government As you can see, the bond fund list includes some well-known names in the fixed income world: Dodge & Cox, PIMCO, Federated, Turner, and low-cost provider, Vanguard. No long-term bond or high-yield bond funds are currently on the Schwab Select List. As we have done in prior weeks, we took the 13 funds and put them into Morningstar's system to get the latest fund data. Using the Fund Compare tool at www.morningstar.com, we compared these funds on the basis of performance, risk, cost and other factors such as management approach and tenure. Using the Snapshot View, we compared YTD performance, expense and Morningstar star ratings. The two highest YTD performers are the BBH Inflation-Index Securities Fund (BBHIX) and PIMCO Real Return Fund D (PRRDX), two TIPS-focused portfolios. The former fund has increased in value by 3.1% since December 31, while the latter is up 2.6% this year. Seven of the 13 funds currently have a 5-star rating for "risk-adjusted" performance relative to category peers per Morningstar. Another four funds currently receive 4 stars by Morningstar for above-average, risk-adjusted returns within their category peer groups. The fund expense ratios of the two Turner bond funds are close to that of the two Vanguard bond funds, which have the lowest ratios in this group except for the Federated Government Ultrashort Fund (FIGTX) which represents the fund's "institutional" class shares. As in prior weeks, we went on to review the funds based on return performance and risk over various time periods, and looked at the funds' portfolio characteristics. Over the past five years, none of the funds holds a torch to the BBH Inflation-Index fund, which produced an average annual total return through March 17, 2003 of 9.6% (1st percentile). Dodge & Cox Income Fund has the next best annualized return in the past five years of 7.5%, followed by the Vanguard GNMA Fund which has averaged 7.1% per year over the same time period. Over the trailing 3-year period as of March 17, PIMCO Real Return Fund (no 5-year record) is right up there with the BBH Inflation- Indexed Securities Fund. Both funds sport average-annual returns of nearly 13 percent for the 3-year period, an exceptionally good period for TIPS securities, with the economy sagging and interest rates coming down. Dodge & Cox Income Fund's 10.1% average total return is also noteworthy. But, you cannot discount the Vanguard bond funds which produced near top-decile rankings for the 5-year period and ranked in the top-quintile for the 3-year period as of March 17, 2003. Having lower expenses does not guarantee success but it sure helps when it comes to bond fund investing. Over the trailing 10-year period, for instance, the Vanguard GNMA Fund has a 7.1% annualized return, ranking in top 7% of its fund category. It's also noteworthy that BBH and PIMCO's inflation-indexed funds have incurred above average to high risk for the past three years versus their category peers. So, the old adage is true - greater returns are normally associated with greater risks, something you will want to keep in mind if you decide you like one of these two TIPS-focused funds. The Federated Income Fund and Vanguard's two bond funds have incurred below average risk relative to peers for an attractive risk-reward tradeoff. In the Portfolio View, we looked to see which taxable bond funds were of "high-grade" quality and all of them are. So, each fund invests primarily in "AAA" and "AA" rated debt securities, which means they have less "credit" risk than similar funds. That was helpful last year with all the corporate debacles. Many medium- grade and low-grade funds got pummeled last year, when the bonds they held went south due to all the corporate scandals. Only one fund, PIMCO Real Return D, had an average duration that was longer than the bond market. That partially explains why it has above average risk relative to similar funds. Most funds on the list have average portfolio durations that are less than the broad fixed income market. The top yielding funds over the past year have been the Federated Income Fund, the Dodge & Cox Income Fund and the Vanguard GNMA Fund. Each fund had a trailing yield of over 5 percent, per Morningstar. Our Favorite Funds Putting all the pieces of the puzzle together, the funds we like the most now each have short-term maturity structures, which may help them from declining too much if the economy improves in the second half of 2003, and interest rates rise. Funds with longer average durations, such as the PIMCO Real Return Fund, could see greater-than-average losses if interest rates do an "about-face" and head upwards again. We also have to rule out the Federated bond funds since they have a minimum initial investment of $25k. Dodge & Cox Income Fund (DODIX) is a great fund with experienced management. The Morningstar Fixed Income Manager of the Year in 2002 has produced top-notch results over both the short and long term according to Morningstar by focusing on security selection. It tends to favor high-grade government and corporate bonds, and mortgage-related securities with limited "prepayment" risk. Its low expenses add to its appeal, says Morningstar. The above chart shows how well the Dodge & Cox fund has performed over the past six months with the economy slowing again. But, it is the fund's long-term performance that demonstrates its ability to enhance value. For the trailing 10-year period as of February 28, the fund had an average annual total return of 7.6%, beating the LB Aggregate Bond index by an average of 0.34% a year during that period. That was strong enough to rank in the top 5 percent within the Morningstar intermediate-term bond fund category. Its short-term stance today tells me it is guarding against a rise in interest rates. We also like the Vanguard Short-Term Federal Fund now, because of its low expense, short duration and strong long-term track record of risk-adjusted returns. John Hollyer has managed the fund over the past seven years, and has kept the fund's category ranking in the top decile during his tenure. For the trailing 5-year period through March 17, the fund produced an annualized total return of 6.7% (10th percentile). Its trailing 10-year average return thru February 28 of 6.1% isn't quite as strong as the Dodge & Cox fund but it was strong enough to rank in the top 10% of the short-term government bond fund category, per Morningstar. Conclusion Investors seeking income and stability have a few good bond funds on the Schwab Select List to choose from. We would tend to favor those funds that have short-term average durations and high-grade average credit qualities today to minimize both duration risk and credit risk. We'd also tend to favor leading bond managers, such as PIMCO, Dodge & Cox, and Vanguard. They each have strong track records of performance across various fixed income disciplines. For more information, visit Schwab.com, Morningstar.com, and each fund family's website. Steve Wagner Editor, Mutual Investor firstname.lastname@example.org ************************Advertisement************************* "If you haven't traded options online – you haven't really traded options," claims author Larry Spears in his new compact guide book: "7 Steps to Success – Trading Options Online". Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********************** SWING TRADER GAME PLANS *********************** Take a Deep Breath Looks like it was time for a deep breath. After a 700 point Dow gain in four sessions, the prospect of war and an FOMC meeting in which the Fed admitted even it didn't know what to expect, the markets mostly churned on either side of unchanged. However, by the end of the day, the bulls remained in control. 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. 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The Option Investor Newsletter Tuesday 03-18-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: None Dropped Puts: CEPH Daily Results Call Play Updates: BVF, ERTS, MME, STN New Calls Plays: BCR Put Play Updates: BAC, LLY, XL New Put Plays: CAI **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** None PUTS: ***** CEPH $47.30 +0.86 (+3.20) The strong rebound in the broad market has driven the Biotechnology index sharply higher over the past week and the Biotechnology sector has certainly gone along for the ride. Our CEPH play has continued to power higher as well, with Tuesday's closing surge taking it through the 20-dma, as well as our $47.10 stop. Dropping the play tonight is a no-brainer, as the recent strength is not what we want to see in a bearish play. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue BCR 61.05 1.29 1.31 New, Quad top breakout BVF 39.62 0.64 -0.09 Triggered Monday ERTS 58.43 2.11 -0.10 Holding Monday Gain MME 37.53 1.76 -0.18 Relative Intraday High STN 20.37 0.70 -0.13 Support at $20 now PUTS BAC 68.34 1.81 -0.78 Look for 200-dma close CAI 30.16 -0.83 -0.59 New, Under $30 CEPH 47.30 2.27 0.86 Drop, stopped LLY 55.98 1.90 0.68 Can't hold $56 XL 69.19 2.22 -0.78 $70 too tough ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************** PLAY UPDATES - CALLS ******************** BVF $39.62 -0.09 (+0.56) With a push and a shove early this morning, the bulls managed to get BVF over our $40.10 trigger point. But without any follow through from the broad market, there simply wasn't any staying power, and the stock fell back to consolidate above the $39 level for the remainder of the day. When all was said and done, BVF ended the day with a small fractional loss, and now we're watching to see if the $39 level does in fact provide support. The month-long ascending trendline is now at the $37.25 level and as long as that level isn't broken, we still have a solid trend of higher lows to work with. A rebound from the $39 level tomorrow can be used for new entries, although a dip and rebound from the $38 level would make for an even better point to initiate new positions. Traders looking to enter on strength will want to wait for a volume-backed move through $40.25, just above Tuesday's morning high. We're raising our stop on the play to $37 tonight, as the ascending trendline should provide strong support on any more significant drop. --- ERTS $56.43 -0.10 (-0.05) Considering the significant gains ERTS has accrued in the past week, Tuesday's mild consolidation above the $58 level is an encouraging sign for our play. Looming just overhead is the 200-dma ($60.08) and it will likely take another concerted push up in the broad market to get ERTS through that level. It seems highly likely that we could get a dip back near the $56.50 level (intraday support on Friday) before the next strong bullish move, and that's where the dip buyers will want to focus their efforts. Yesterday, we raised our stop to $56, as that level shouldn't be violated the bulls are going to mount a serious assault on the $60 level. Traders that prefer to enter on strength will want to wait for the breakout over $60, preferably with a trade of $60.25 before playing. But keep in mind, that this is a formidable resistance level, which has us leaning towards taking entries on a pullback and bounce from support. If contemplating an entry on strength, be sure to use broad market strength as a confirmation before entry. --- MME $37.53 -0.18 (+1.83) While that $38 resistance level is certainly a formidable obstacle for our MME play, that didn't stop the bulls from making an assault on that level on Tuesday. The stock actually managed a new intraday high of $38.29 this morning before the buying interest dried up. But even with the broad market lacking for a bullish catalyst, MME didn't show too much weakness, ending the day down only 18 cents. After yesterday's slingshot move through the $36 and then $37 levels, we're left waiting for a break of the recent range. Resistance at $38 and support at $35.75 has kept MME confined for 2 weeks now, and a break from this range seems imminent. Traders that took advantage of last week's dip back to support are in good shape here, with stops set at $35.50. Should MME find support at the $37 level on this pullback, that can be used as an entry point into the play at a higher level than what was offered last week. Taking an entry on strength though, will need to wait for a volume-backed move over $38.50. --- STN $20.37 -0.13 (+0.51 for the week) STN finally got above the $20 hump that has formed a top on the stock for the past three years. It not only crossed the $20 level, but added another box on the point and figure chart with a trade of $20.50 on Monday. The stock pulled back with some other casino stocks following the announcement by Mandalay Bay Group that it would offer $350 million in convertible securities, in order to repay its outstanding credit facilities. However, STN held up quite well, considering the sector pressure. It found support over $20, indicating that previous resistance may now put a floor under the stock. Deutsche Bank also had some positive comments on the sector today citing the 28% rise in casino stocks in the month after the beginning of the Gulf War. They had been somewhat beaten down before then, as well, but rebounded strongly during the conflict. We like long entries in STN now that it has broken the $20 barrier. If it fails to hold on a pullback then look for support above $18.50 before entering. ************** NEW CALL PLAYS ************** BCR - C. R. Bard, Inc. $61.05 +1.31 (+2.65 this week) Company Summary: C. R. Bard, Inc. is engaged in the design, manufacture, packaging, distribution and sale of medical, surgical, diagnostic and patient care devices. Hospitals, physicians and nursing homes purchase approximately 90% of the company's products, most of which are used once and discarded. BCR's major product group categories are: vascular diagnosis and intervention, urological diagnosis and intervention, and oncological diagnosis and intervention. In addition, the company maintains a fourth product group, surgical specialties. Why We Like It: The past few days have seen some impressive bullish action throughout the market, with many stocks in numerous sectors posting impressive upward moves. Many of those moves have seemed to be largely short-covering related, but we've got a new play tonight that is breaking out on what looks like good old-fashioned organic buying. The longer a stock takes to break out of a consolidation pattern, the more powerful that move tends to be. Well, BCR has been working its way higher since the July lows, with each rally being stopped by the $60 resistance level. But not this time. Monday's surge higher took BCR right to the edge of that resistance again, and then despite the broad market indecision on Tuesday, the bulls blasted through that level on strong volume. Closing just over the $61 and at the high of the day, BCR posted its best closing price since January of 2002. That move was good for a quad-top breakout on the PnF chart, and the bullish price target is now tentatively set at $74. BCR's all-time high is just shy of $65, so achieving that target will have the stock well into new high territory. Following such a strong breakout, it is entirely possible that BCR could continue to power higher. That means a continued breakout over today's highs (as long as volume remains strong) can be used for new momentum-based entries, using $61.25 as a trigger. Of course, the preferable entry point will come on a dip back to confirm the $59-60 area as newfound support. Place stops initially at $57.75, just below recent support. BUY CALL APR-60*BCR-DL OI=2246 at $2.20 SL=1.25 BUY CALL APR-65 BCR-DM OI= 70 at $0.35 SL=0.00 BUY CALL JUL-60 BCR-GL OI=1252 at $3.70 SL=2.00 BUY CALL JUL-65 BCR-GM OI= 38 at $1.50 SL=0.75 Average Daily Volume = 279 K ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* PLAY UPDATES - PUTS ******************* BAC $68.34 -0.78 (+1.03 for the week) BAC has not been one of our better shorts in recent days, following financials higher during the broad market rally. However, the stock continues to fail at its 50-dma, which also sits just below the $70 resistance line. It was one of the weaker stocks in the market today, giving up $0.78 in spite of a gain in the Dow. The S&P Banks Index (BIX) also underperformed, with a small loss, but BAC underperformed even the index. The stock did bounce from its 200-dma at $68.18 and we'd like to see a close below that level before recommending new entries in the short play. If it does fail it could follow a market rollover and re-test $66 in a hurry, but we will likely need to see broad market weakness for that to happen. --- LLY $55.98 +0.68 (+2.00) Short-covering has lifted virtually every sector of the market in recent days, and the Pharmaceutical sector (DRG.X) is certainly no exception. Buyers propelled the DRG index through the 50-dma on Tuesday, but there is formidable resistance looming at the year-long descending trendline, which is sitting right on top of the 200-dma ($296). LLY has been driven upward by the buying pressure in the sector, but is finding its own resistance near the $56 level, which is the location of its own 20-dma. A failure of the current rally near this level is the best opportunity for new entries into the play, and risk is quite manageable with our stop set at $57.10, just above resistance that held back any bullish moves throughout early March. With Tuesday's tight consolidation range, momentum traders can use a break below the intraday lows ($55.40) as an entry signal. The key here will likely be the action in the DRG index, and we'll want to use a rollover in that index to confirm weakness in LLY before playing. Late breaking news tonight had LLY's CEO warning that weakening patent protections or imposing government price controls in the U.S. could lead to "a death spiral" in the pharmaceutical industry's ability to develop new medicines. While this isn't really "new" news, it could help to apply downward pressure, both on LLY and the DRG index tomorrow. --- XL $69.19 -0.78 (+0.69 for the week) XL continues to flirt with our adjusted closing stop loss of $70.06. It also continues to fail its rebounds at that level. It is also struggling with its descending 21-dma, which now sits at $69.64. It was one of the weaker stocks in the market today, giving up $0.78, in spite of a continued rally in the broader indices and appears to again be rolling over form an attempt at $70. The $70 level should continue to be pivotal here, as it was the last level of support before the recent PnF double-bottom sell signal at $69. Aggressive bears can continue to target entries below $70, but unless we get a rollover in the broader markets after the pre-war rally, the financials may hang in there. The exception for insurers like XL may be some type of terrorist retaliation involving large amounts of indemnification, or even the fear of such acts. We will continue to hold XL and let our stop determine its fate, as its continued failure at $70 may simply be giving those bears that didn't enter on the last failed rebound at this level another chance. ************* NEW PUT PLAYS ************* CAI - CACI International, Inc. $30.16 -0.59 (-1.41 this week) Company Summary: CACI International delivers information technology (IT) and communications solutions to clients through four areas of expertise or service offerings: systems integration, managed network services, knowledge management and engineering services. Through these service offerings, the company provides comprehensive, practical IT and communications solutions by adapting emerging technologies and continually evolving legacy strengths in such areas as information assurance and security, re-engineering, logistics and engineering support, automated debt management systems and services, software development and reuse, voice, data and video communications and geo-demographic and customer data analysis. Why We Like It: Despite the recent meteoric rise in the NASDAQ, it isn't all good news in the land of technology. Even a reaffirmation of earnings guidance isn't enough to stem the selling in stocks that are out of favor. Shares of CAI got a small pop last week with the rest of the market, but that bullish action was promptly reversed yesterday following the company's reaffirmation of earnings estimates. The stock plunged back to the $30 level in the early going before a quick bounce back and slow bleed lower throughout the day. That was in sharp contrast to the action in the broad market, and that weakness persisted on Tuesday. CAI fell back to close just above that critical $30 level and looks poised for a breakdown in the very near future. The PnF chart doesn't show much hope for the bulls either, as the stock is currently on a Sell signal, below its bullish support line, and the bearish price target works out to $25. The standard price chart shows some very bearish indications as well, with the selling volume running double the ADV and On Balance Volume plunging to new lows on Tuesday. Since we don't want to get caught trying selling at the bottom on CAI, we're setting a trigger of $29.50 on the play. Momentum traders can consider entries on the initial break below that level, while more cautious traders will want to wait for a failed rebound below the 10-dma ($30.98) to enter the play. Once below our trigger level, the next likely area of support will be $27.50, the reaction low last September. Stops should initially be placed at $32, just above last week's intraday highs. BUY PUT APR-30*CAI-PF OI= 359 at $1.65 SL=0.75 BUY PUT APR-27 CAI-PY OI= 1 at $0.75 SL=0.40 Average Daily Volume = 344 K ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Tuesday 03-18-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: Call - BCR ********************** PLAY OF THE DAY - CALL ********************** BCR - C. R. Bard, Inc. $61.05 +1.31 (+2.65 this week) Company Summary: C. R. Bard, Inc. is engaged in the design, manufacture, packaging, distribution and sale of medical, surgical, diagnostic and patient care devices. Hospitals, physicians and nursing homes purchase approximately 90% of the company's products, most of which are used once and discarded. BCR's major product group categories are: vascular diagnosis and intervention, urological diagnosis and intervention, and oncological diagnosis and intervention. In addition, the company maintains a fourth product group, surgical specialties. Why We Like It: The past few days have seen some impressive bullish action throughout the market, with many stocks in numerous sectors posting impressive upward moves. Many of those moves have seemed to be largely short-covering related, but we've got a new play tonight that is breaking out on what looks like good old-fashioned organic buying. The longer a stock takes to break out of a consolidation pattern, the more powerful that move tends to be. Well, BCR has been working its way higher since the July lows, with each rally being stopped by the $60 resistance level. But not this time. Monday's surge higher took BCR right to the edge of that resistance again, and then despite the broad market indecision on Tuesday, the bulls blasted through that level on strong volume. Closing just over the $61 and at the high of the day, BCR posted its best closing price since January of 2002. That move was good for a quad-top breakout on the PnF chart, and the bullish price target is now tentatively set at $74. BCR's all-time high is just shy of $65, so achieving that target will have the stock well into new high territory. Following such a strong breakout, it is entirely possible that BCR could continue to power higher. That means a continued breakout over today's highs (as long as volume remains strong) can be used for new momentum-based entries, using $61.25 as a trigger. Of course, the preferable entry point will come on a dip back to confirm the $59-60 area as newfound support. Place stops initially at $57.75, just below recent support. BUY CALL APR-60*BCR-DL OI=2246 at $2.20 SL=1.25 BUY CALL APR-65 BCR-DM OI= 70 at $0.35 SL=0.00 BUY CALL JUL-60 BCR-GL OI=1252 at $3.70 SL=2.00 BUY CALL JUL-65 BCR-GM OI= 38 at $1.50 SL=0.75 Average Daily Volume = 279 K ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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