The Option Investor Newsletter Sunday 03-23-2003 Copyright 2003, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. Entire newsletter best viewed in COURIER 10 font for alignment In Section One: Wrap: Shock and Awe Futures Market: Things Couldn't Be Better Index Trader Wrap: LIFT. Editor's Plays: Now What? Market Sentiment: Awe, Shocks - It's Just Another Rally Ask the Analyst: Take It or Leave It? Coming Events: Earnings, Splits, Economic Events Updated on the site tonight: Swing Trade Game Plan: No Sign of Weakness Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 3-21 WE 3-14 WE 03-07 WE 02-28 DOW 8521.62 +661.91 7859.71 +119.68 7740.03 -151.05 -127.03 Nasdaq 1421.17 + 80.84 1340.33 + 35.04 1305.29 - 32.25 - 11.48 S&P-100 456.37 + 32.30 424.07 + 3.95 420.12 - 5.24 - 4.51 S&P-500 895.89 + 62.62 833.27 + 4.38 828.89 - 12.26 - 7.02 W5000 8463.32 +566.83 7896.49 + 39.17 7857.32 -115.30 - 63.35 RUT 376.23 + 21.84 354.39 + .21 354.18 - 6.34 - 3.84 TRAN 2263.49 +236.40 2027.09 - 15.39 2042.48 - 6.57 - 47.36 VIX 33.62 - 2.71 36.33 + 0.68 35.65 + 1.50 + 0.01 VXN 45.78 - 0.02 45.80 - 0.59 46.39 + 0.74 - 0.45 TRIN 0.59 1.11 1.29 0.84 Put/Call 0.63 0.70 0.75 0.59 ***************************************************************** Shock and Awe by Jim Brown Yes, I am shocked and awed but by the moves in the market not the bombs in Iraq. Without showing extreme vertical spurts of buying and even with intraday drops and periods of inactivity the Dow has managed to produce more shock than the war in Iraq. Numerous record book entries were created and support and resistance points rewritten. Economic reports on Friday were bland with the CPI rising slightly due mostly to high oil prices. Real inflation remains tame despite gas prices being up +43% over last year. That high priced energy component is about to change with the June contract for oil dropping to $26 a barrel and well below the $39.99 price paid a month ago. This should add +1.25% to the GDP for the 2Q. This is the removal of the -1.25% impact that will be felt in the 1Q GDP when finalized. The lowered energy prices are very bullish for the stock market as lower costs are passed through in manufactured items. It is good for the market because the consumer feels better paying less for gas and will be spending that money on other things to benefit the economy. The Weekly Leading Indicators fell slightly on the basis of jobless claims, a falling money supply and selling in bonds. The leading indicators and the economy appear to be in a wait and see mode as the war progresses. Mutual Funds saw the first inflow of funds in eight weeks as the war appeared to be going well and the prospect of a new bull market looms. The +$900 million of inflows for the week ended Thursday was but a trickle compared to the -$4.9 billion that flowed out the week before. Remember the 90% downside volume day last week? Evidently that was a capitulation day and the flood of money out of funds was the evidence of capitulation by many investors. What a week! I am still spinning in disbelief. The Dow turned in its best week since 1982, a 21 year record. It is now positive for the year and has gained over +1100 points since the low for last week at 7400. Yes, +1100 points in eight days. This is the biggest gain since Dec-1998. It is an amazing feat, especially when you consider the major resistance levels that were passed with barely a pause. 7900, 8050, 8150 and 8350 are just blips on a chart now but they were major battle lines in the past. The Dow is above all averages now except the 200 day EMA. This average has stopped the last two major rallies in their tracks but I am not sure anything can stop this train. Dow Chart - Daily The Nasdaq performed admirably but significantly less convincingly than the Dow. The Nasdaq closed over 1400 but only managed +19 points compared to the +235 for the Dow. Problems for the Nasdaq included CSCO, which was weak on the rumor that JNPR would warn next week. The same 200 EMA that stopped the Dow and the Nasdaq in the past was 1416 at Friday's close with the Nasdaq at 1421. This technical break was encouraging for the bulls but there was little real difference. Nasdaq Chart - Daily The S&P, a broader indicator of market strength than the Dow, has not reached the same levels of bullishness as the Dow or the Nasdaq. The S&P is below the 200 EMA at 912 and horizontal resistance at 950 and down trend resistance at 900 and 923. I am not claiming that any of these levels will stop the advance but the picture for the S&P is clearly more challenging than that for the Dow. For an even broader look at the markets we can look at the Wilshire 5000. This broader look takes out the confusion of the Dow 30 where one or two major stocks can influence the entire average and indirectly the market reaction to the the Dow gains. We can't ignore the Dow but for real market breath the Wilshire is a better indicator. Notice on the chart below the confluence of resistance at 8675 and the 200 EMA at 8613. This will be a serious problem for the broader market to overcome. Wilshire-5000 Chart - Daily I definitely do not want to claim a sell off is imminent. I have been expecting it for several days based on the unsupported spike and terrible economic conditions but obviously the market has a mind of its own. The war and the perception of the war is controlling our destiny. We have rallied on hopes that the war was going to be delayed, on hopes it would be sooner, on expectations that it would be quick and we even rallied on statements from Bush that it would be longer and more difficult than previously thought. We have alternately rallied on bombs falling and sold off on bombs falling. We rallied when Saddam was killed and rallied again when it appeared he wasn't. The bottom line is we rallied. Good news or bad news from the war, good news and bad news from the economy. We rallied because everybody thought we should rally. Traders had been condition to expect a war rally just like they were conditioned to sell on uncertainty before the war. Nearly $5 billion in cash left equity funds last week on fear of the war. The Dow has rallied +15% from last weeks low when that cash was flowing out of the market. Is this rational buying? Not in any market I have ever seen. We have these big spikes but they very seldom stick. They are reactions to extremes in the market. We were extremely oversold last week. We are extremely overbought this week. There has to be an equalization of pressures where reality comes back into the market. Maybe Monday, maybe next week, maybe in a couple weeks but it will eventually correct. Remember this was a quadruple option expiration Friday in a month/quarter where there were extreme market moves. Art Cashin said on Friday night that the type of orders appeared to be option related not buying from Ma and Pa Investor. Volume across all markets was 4.3 billion shares and very strong but only 2:1 advancers to decliners. The 2.1 billion on the NYSE came in two buying spurts with 500 million in the first 45 min and another 500 million in the last 90 min. The rest of the day was quiet and trending lower except for a 45 min buy program at 11:50 that triggered some short covering. I went back and looked at some similar rebound streaks over the last couple years. There were more than I expected but all had the same result. They streaked into the stratosphere only to pause and retrace much of their gains before moving up again. The biggest problems with streaks like this is not the massive individual streak itself but the dozens of less spectacular rebounds that only lasted 3, 4 or even five days before rolling over. Those dozens of bounce and roll rebounds are quickly forgotten as traders chase stock prices to either catch the speeding train to add to long positions or by shorts just waiting for it to slow so they can jump off. Those who remember the 3-4 day bounces have been waiting patiently for the retracement for a week to no avail. Combo Chart - Dow What should investors do? Investors are faced with a tough choice. Wait for a pull back that may never come or jump on the speeding train. There are plenty of reasons to buy including the potential for the war to be over next week. The massive 20,000 vehicle US advance is moving at high speed toward Baghdad but when they get there the war could be over. With the surrender of the 51st Iraqi division on Friday the incentive for other commanders to follow suit is growing. With massive destruction of everything related to Saddam in Baghdad it will quickly be obvious that clinging to past hopes is a losing battle. IF the war is over next week the market could add another 1000 points on happy thoughts alone. This would be especially true if the troops were greeted in Baghdad as liberators as they have been in the towns already passed. This continued rally would be emotional only and could push the indexes to even more unsupported heights. Should the war turn into a street fight where high tech cruise missiles and laser guided bombs are useless then the TV sound bites could turn into Mogadishu type pictures of US wounded and dead civilians. The administrations hopes are built on the war being over before the street fight begins. They are almost begging everyone to surrender to prevent having to fight in Baghdad. A street fight could turn this rally into a rout very quickly. As traders we need to remain focused and trade what we see. I have not been successful in that recently. My remembrance of the dozens of bounce and rolls is much more vivid than the half dozen 7-8 day spikes over the last several years. I know many traders are not saddled with this affliction and I am envious. I have bought so many breakouts over the years that turned out to be tops that I have an instinctive fear of unsupported rallies. I understand that markets sometimes make major moves on nothing and that appears what is underway now. The earnings picture is terrible with almost every guidance announcement negative. Traders have decided momentum is more important than fundamentals and until that momentum fades the earnings and the economy will be a footnote. On the positive side a quick war with minimum casualties will do wonders for consumer sentiment. Once families of servicemen hear the fighting has stopped and they are no longer in immediate danger several million relatives will rejoice. With nearly 500,000 military personnel in theater counting the shipboard crews that will be one big sigh of relief. If the collective sigh of relief carries over to consumers and the wallets are opened then a recovery can begin. This does not mean it will be instant. The summer months are normally a drag on the economy and the market. Offsetting this drag could be the successful passage of the $700 billion stimulus package. The house passed it on Friday but the Senate has put off the vote until next Wednesday. There could also be a rush of government spending to replace equipment used in the war and buy new equipment with enhancements from lessons learned in the war. Still we are faced with a tough decision. Do we jump on the speeding train knowing there is a bridge out up ahead just not how far ahead? Or do we wait for the pull back and for fundamentals to catch up with the market. It is a tough call. If the current rebound continues like the October rebound then it could be a month or more before weakness appears. If it is like the July rebound then weakness could hit next week. If you are an agile trader then jumping on the train is not risky as long as you keep your eye on the exit. It is the market timing thing that becomes risky. Is this the drop or a pause? Is this the next wave up or just a spike. Get in, out, in, out, etc. With any positive news over the weekend the rally should continue as any remaining shorts bite the bullet and exit. Investors who took $5 billion out of the market last week may also decide to put it back in +15% higher. Investors on the sidelines may read the paper this weekend and see a 21 year record for the Dow and start looking for the mattress money to put back in the market. In short until the fog of war clears and the heightened uncertainty of market direction fades we are likely to see continued unexpected moves. Next week we should see an increase in earnings warnings but they will likely be overshadowed by events in Iraq. They are important and whether the market pays attention next week or not they will come back to haunt us in April. With the quadruple expiration Friday behind us we will have one more day of nervous trading as exercised options are settled on Monday. Another factor will begin to take control soon and that is end of quarter window dressing. Especially after the big rally equity funds will be hard pressed to go into the quarter end with cash on the books. With investors getting statements after such a big market event they will be looking for signs that their fund owns the winners. Ironically, those, which are currently heavy in cash will be trying to doctor those statements to show they participated in the rebound even if it means buying at the current inflated prices. Next week should be a key week for the markets. If they can retain the momentum through the end of March then we could see some significant gains from train chasers. If this momentum fades next week then we could see three weeks of consolidation until April earnings give us our next direction. Either way next week should not be dull. Just don't let your bias get in your way. Enter Very Passively, Exit Very Aggressively! Jim Brown ************** FUTURES MARKET ************** Things Couldn't Be Better By Vlada Raicevic Daily Settlement Numbers 4:15pm ET Contract Last Net High Low Dow 8521.97 +235.37 8522.18 8290.38 YM 03M 8463 +201.00 8499.00 8239.00 Nas 100 1093.12 +12.88 1099.61 1078.64 NQ 03M 1094.50 +13.00 1103.50 1078.50 S&P 500 895.90 +20.06 895.90 877.65 ES 03M 893.25 +18.50 895.75 873.00 Daily Pivots Contract S2 S1 Pivot R1 R2 YM 03M 8156 8333 8416 8593 8676 NQ 03M 1068 1082 1093 1107 1118 ES 03M 866 882 889 904 912 These futures wraps are meant to give you an idea of what is happening in the world of futures trading. Using technical analysis, and a little bit of news or sentiment, we can generally understand the lay of the land. Today, however, it appears that I'm at a loss for words. If we look at sentiment, over the past few weeks we have slowly built into a bullish market based on news of no war, then news of war. We rally when the bombs are about to drop, and when the bombs drop. We rally with wave after wave of bad economic news getting worse, and we rally when terrorist dangers become more heightened. We rally on news Saddam may be dead, and continue rallying when we're told he's not. Ahead of the weekend, on the hopes that the war may be quick and decisive, we rally, even though the president was on TV yesterday saying that the war could drag out and not be so decisive. On the technical side, we have resistance falling like autumn leaves, extremely overbought markets which refuse to pullback for any reason. Technical indicators are pegged at highs they haven't been to for quite some time, but no selling appears to relieve the pressure. Bearish divergences are present on all time frames. If one steps back and tries to remove all emotion from their bodies, and any preconcieved ideas they may have, and just looks at the market today, there is little doubt that they would be looking for a strong pullback. I use the word strong, because a mild pullback would have been good for the market, but now that the bullishness has gotten so extreme, the greed so violent in its expectations, that the only thing that I can see to help this market is a strong pullback. Without that pullback to reset indicators, and to dull expectations, any bad news that actually sticks in the minds of traders could cause a huge rush out the door. Can this market continue up? Sure it can. Can you stretch the rubber band further? Of course, but eventually that rubber band will break. The farther out that it is stretched, the more violent and painful the sting when it breaks. This is not the rise of a healthy market. Straight shots upward have ALWAYS ended badly. Please, don't take my word for it, but pull up a daily chart and look for yourselves. At times like this, the only thing we can do is look at the past, and try to find correlations. In a healthy bull move, the market goes up, then pulls back to allow some profit taking, and allows shorts to exit, and others to get in long. This 'ratcheting' effect creates a strong bullish case, much like building a good foundation for your house out of cement, rather than out of tupperware. This works both ways. Strong selling with no moves upward creates a sucking sound that eventually implodes and stops the selling. Longs can't get out, new shorts can't get in. All in all its called imbalance. This can happen for any number of reasons, and it doesn't happen too often. External events, like last years Enron-induced fears, just feed a fire which human nature could not handle well. That human nature is blinded by both extreme joy and by extreme fear is not new or news, and doesn't require a doctorate in psychology. All you need to do is look at a daily chart of your favorite stock or index to see that mass hysteria does, and the results that follow. What IS surprising, however, is that each time this happens, traders run around screaming, bumping into walls, thinking either the end is near, or DOW 12,000 is just around the corner again. It seems that human nature has an attention span equal to the expiration date of the lunchmeat in my fridge. It is absolutely critical that traders understand when to stand aside, and to understand that these extremes can feed on themselves, and that any normal analysis is nearly impossible. In fact, to enter the fray when emotions are this high is to allow yourself to be sucked into these emotions, which lead to bad decisions and poor trading. ES daily: Here are some numbers: RSI has only been this high once (last March) in the past 3 years. CCI has not been this high in the past 3 years. Fast Stochastic has been this high once (last March again), and slow Stochastic is bearish divergent as it is not even remotely as high as other recent bull runs. For example, Slow Stoch is now 71, last March it was 90, and this past Oct it hit 91. The large rise this past October was 4 days, followed by a day of profit taking, followed by three more days up, followed by long consolidation before another move up. Look at previous runs, the pattern is clear, rise, then pullback or consolidate, then rise. Eight straight days without pullback is not healthy. Don't get me wrong, I am not trying to build a bear case here. I have no wish to fight the market, only to profit from it. To do so, I have to use what I know. This is what the technicals tell me, and what previous market behavior tells me. Feel free to think that the market is in a new phase, where old patterns don't work anymore. Just remember that was the mantra at the top of the bull market a few years back: "we are in a new phase, the old rules don't apply anymore". To watch traders buying with both fists on a Friday afternoon after a 1000 point Dow rally in 8 days is, well, is surprising (I have other words on the tip of my tongue, but nevermind). I am waiting with baited breath for this 'interesting' rally to resolve itself. I'll post only one chart tonight, the ES 270 minute all sessions chart: Chart of the ES Futures contract: Price is at the upper channel of the 78 period regression channel, and Far above the upper tine of the 200 period regression channel, a sure sign price has gotten ahead of itself. Note the Macd and Stochastic, which are well below their highs even though price has continued to move up. The CCI moving average ha actually rolled over and is pointing down. When I look at NQ, YM, ES, or for that matter any stock that I'm tracking, this is the kind of divergence that I see. Have a great weekend, and let's hope a tiny bit of sanity returns to the markets next week. ----------------------------------------------------------------- Renko Charts. These will be updated when necessary. Daily Renko for ES: chart link: Daily Renko for NQ: chart link: 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. chart link: ******************** INDEX TRADER SUMMARY ******************** LIFT By Leigh Stevens lstevens@OptionInvestor.com It only took the initial lifting of the uncertainty about an Iraq conflict to unleash significant buying and short-covering last week. And you thought traders would stand aside to see what happened when U.S. forces got closer to a possibly tougher fight around Baghdad? Wrong! Saddam is not the only master of the unexpected, as the market never fails to be the mother of all surprises. The buying was institutionally dominated as money managers are forced in as soon as the crowd speculates on victory - buy the fact, sell the rumors or unknown, just as oil bought the scare and sold the reality THE BOTTOM LINE – The S&P is leading and the Composite lagging so short the Nasdaq, such as QQQ in the 27-28 price zone. There may be some tougher periods ahead and the market has gotten ahead of itself - the indexes are overbought near-term, suggested by the short-term oscillators and bullish extremes in my trader "sentiment" indicator. Meanwhile, it was a nice week to be long calls - just take some (all) of the profits and run! This is not to say that there will be a sharp collapse, judging by some strong underlying buying interest by the pros. What we have is the common run the market up quick and fast while main street investors stand back from much new buying. FRIDAY'S TRADING ACTIVITY – Unlike Thursday, when the market got off to a tough start (the Dow fell 135 points in the morning) there was steady strength all day as there was more certainty about how the U.S. was faring tow days into the strikes. (Thursday's tone was all set somewhat by President Bush's speech on Wednesday night, when he warned that the war may be "longer and harder" than some people have predicted.) Given the spectacular nature of the strikes again Baghdad, traders found continued encouragement that the war wouldn't be too drawn out. By the week's close, many if not most market participants appeared at least somewhat optimistic that military action was progressing in a favorable way. Traders are also concerned that there is a turbulent time ahead for stocks and bonds. Major players in the market have been hedge funds and shorts, as everyone else is probably too scared to do much of anything new. The public will likely take its "usual" 6 months to come back in the market. Of course, many figure that the recent strong rally signals that the market is too optimistic about the shape the war in Iraq will take. There is the fear that the economy and corporate earnings will continue to stay lackluster once the war is over. Some thinking in traders I talked to or heard on Friday say that a resounding win in Iraq is already priced into stocks, per a repeat of 1991's Gulf War rally, when stocks rebounded some 18.5 percent in 15 trading after the action started. So, buyers were getting in ahead of the expected war rally in a classic buy the rumor, sell the news gambit, suggesting that as the conflict winds down, traders will then take profits. The market in terms of its public focus on the Dow average, has gained nearly a 1000 points off its low, up some 13% and represents the longest winning streak since August of 2000. While many analysts and the other media news talking heads continue to caution that the U.S. economy remains sluggish, many traders were betting that the so-called war rally may be their best opportunity of the year for big gains. And once the guns fall silent, there is a fear that the rally may fade as well. Nobody wanted to be short was the long and the short of it, pun intended. OTHER MARKETS – Gold continued to fall with nearby futures reaching the 327 area, down some $10 from the prior week close at $337 in terms of the nearby COMEX gold futures. Oil prices were the most encouraging news as nearby futures fell sharply last week. One report I noted last week was that between Tuesday and Thursday of the prior week, investors took out $2.61 billion from stock mutual funds, while adding $1.38 billion to bond funds. Bonds are seen as the dominant "safe haven" - much more so than gold which is a non-interest earning asset. In fact, it costs to store it. MY INDEX OUTLOOKS – If you are interested in the BIG picture, you may be interested to know that the mother of all market theories has never given a sell signal. Dow theory would expect to the Industrials to go to a new closing monthly low relative to its low before the big 2000 top - the idea being that the Dow 30 should "confirm" the lower lows in the Dow Transportation average to confirm a major bear trend. Anyway, of passing interest per the chart below: Chart of the Dow Industrials: Of course the market has lost a lot since the top 3 years ago but the bigger picture view offers the possibility of a market rebound in coming months - hope springs eternal for my retirement account! S&P 500 Index (SPX) – Daily chart: The S&P benchmark, the S&P 500 or SPX, did something that we haven't seen in a year by closing above its 200-day moving average which stood at 892 on Friday. Last March, SPX managed to get above this key average for all of 2+ weeks, before the relentless bear market dragged stocks down again. Chart of the S&P 500 (daily #1) Stopped out of my first foray into puts, I also speculated that a close or two above 850 would suggest upside potential to 870 at least, where I would drool over the put potential again - WRONG or early on that thought as SPX blasted through 880! And, I thought I was being outrageous by suggesting 870 as a target. What now market? I can forecast that the market is vulnerable to any bad news given the fact that SPX is now both fully overbought on price and "sentiment" terms - for that I have another chart view below. Bullish sentiment is ahead of the fundamentals if we look at the still-sluggish state of the economy and actual earnings. At 900, the S&P is up to the upper moving average envelope that suggests that prices are extended (a push to far) relative to the 21-day moving average trading "mean". So, whether SPX extends its gains to next resistance in the 912 to 920 zone, or makes a sky shoot to the 930 area, a setback is coming. Chart of the S&P 500 Index (SPX) – (Daily #2) My other key indicator here is the Equities call to put daily volume ratio - as call volume ran more than double put volume at week's end, a clear "danger ahead" sign. The lead time to a top is typically 1 to 5-days once this kind of extreme is seen. Get ready, get set, to take out some put insurance to the risk that the market is ahead of itself. Baghdad or bust is not going to suddenly mean a booming economy. Dow Industrial Index (DJX) – Daily chart: In terms of the Dow, significant resistance or selling interest can be expected at 8800, if not sooner. But just on the chart, and basis the overbought stochastic reading, a sell off is getting closer. Chart of the DJX What we do NOT have shaping up is the mother of all technical sell signals - well, at least a pretty reliable one - when a new high is made WITHOUT a confirming higher high (relative to the prior peak) in the oscillator type indicators. For example, note the picture perfect bullish technical divergence above when, at the 7500 bottom (a new low), but with the stochastic making a HIGHER low. Love those divergences as I wrote about in my last week's Trader's Corner article. See - http://www.OptionInvestor.com/traderscorner/tc_032003_2.asp If I just did heavy buying of puts or calls when these divergences happen a few times a year - well, I could retire on the Spanish (not French) Mediterranean that much sooner. Dow Industrial Index (DJX) – Hourly: The Dow has made a nice move since getting above the "line" of resistance as shown on the hourly chart below. The upper boundary of the steep up trend channel also suggests that resistance will get more significant around 88 on DJX. I anticipate good support at those prior highs - resistance "becomes" support - in the 81-80.80 area. This area would be a good profit target for puts bought on a further extension of the current advance. Chart (HOURLY) of the Dow Jones Industrials: I especially would welcome another 200 point gain - like Friday's - to do some new put buying in DJX. Watch, now the market fall apart on Monday! There is this validity to a close above the 200-day moving average not being "confirmed" so to speak UNTIL there is a second consecutive close above the 200-day. Stay tuned. S&P 100 Index (OEX) – Daily and Hourly charts: I was being cautious I thought to suggest OEX put purchases in the 440 area (risking to 445), but the bulls had all this pent up fury. Maybe they heard too many gold bugs saying financial assets were finished, done, kaput. 463-465 is where I peg next resistance. Meanwhile there is an HOURLY non-confirmation in the latest push to a new price peak. This divergence on the 60 min charts, while never as important as such a signal on a DAILY chart basis, is often the early warning that a move has gotten ahead of itself - a bridge too far. Daily & Hourly chart of OEX: 475 is the next BIG potential resistance on the S&P 100 and would represent a complete retracement of the last big down swing. It could happen - unless traders head those warnings by the Commander in Chief that the next or further stages of the Iraqi conflict may not be so easy as the romp through the desert. But all good wishes to the troops for great good fortune. NASDAQ Composite (COMPX) Weekly chart – Just a point on the bigger picture in the Nasdaq, as prices at least achieved an upside penetration of the weekly down trendline as you see in our next chart. However, as always, the proof of the staying power of a rally is the ability to pierce the prior rally peaks - in this case that is COMPX above 1467, then 1520. Weekly chart of the COMPX If the Nasdaq continues to push higher we'll soon see the 8-week Relative Strength Index (RSI) registering an overbought reading at 70. If so and there was a move that took this Index up toward he 1500, take a strategy contrary to that trend by booking call profits and taking out puts. I favor selling into rallies in this way. QQQ Daily charts - two views: My next shorting target in QQQ was on a move to and above $27. I still favor this trade as the Q's bump up against the upper envelope line that often has suggested that the Nas 100 tracking stock has reached an area where selling will push the stock back down. Significant technical support can be surmised as occurring on a drop back to the 25-25.50 area. At 28.50, an arrested (stalled) rally is a potential double top. Side by side view of the QQQ: There are not divergences yet shaping such as a lack of confirmation in volume or things of this sort. All we can say for SURE is that the market reacts more bearishly to negative news when an advancing trend is steep enough to cause the 2-week stochastic or RSI to reach the upper end of its typical range. My profit objective on long stock and long calls was, it turns out, pretty conservative at 25.5-26.00. Maybe the Q's will reach 29 on this run, but that's the long shot - such as if the recent consolidation was a bull flag or about midpoint in a move. ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** Editor's Plays ************** Now What? What do you do when every play you look at looks like a put play and the market continues to go up? This was my challenge for this weekend. The easy play would be to take any index and list puts on it but with the potential for further irrational exuberance next week that could be dangerous. Instead I searched for some stocks that had failed to go up last week for some unexplained reason. Most stocks were either going vertical to the upside of continuing their downward drift. The ones drifting down could be seen as value buys at any time once the general advance slows. The stock I ended up with was QLGC. This stock spiked on the big gap open last Monday and then flat lined at $40 for the rest of the week. Perfectly flat with no upside indications. It almost looked like an anomaly as one of the only tech stocks not to rise. BRCD had an almost identical pattern but at $5 is not a candidate for any downward move. The longer term down trend from the May 2002 high of $52.50 is still intact and it looks like we could be entering at the cycle high. I checked the news and it was less than exciting. There was a downgrade on Monday from overweight to equal weight and before that the last coverage initiated was at under perform. The entire sector appears to have dropped into a hole and been forgotten. EMC was downgraded on Friday after a negative article on the data storage sector. My analysis is that if QLGC could not rally during the best week in 20 years then what would happen if the market turned south again. Even if the market did continue upward would QLGC attract attention? This appeared to be a relatively low risk play. I am recommending the April $37.50 PUT (QLC-PU) which closed on Friday at $1.65. The target price is $35 on QLGC. This is not rocket science but it looks to have a decent chance of success and does not depend on the market crashing. Chart of QLGC ******************************** Play updates: I am only listing the current recommendations with a link to the initial write up and unless the play changed substantially. QQQ - Puts - March 16th. Scratch that one up as a loser before it got started. The NDX gapped up from 1020 to 1070 at the open on Monday and negated the play concept in the first 20 min. DJX - Laddered Calls - $85.19 Mar-9th ($77.40 when recommended) This was another play that did not get triggered last week. The laddered calls from the prior week went on to spectacular success but no new positions were triggered. The DJX-DZ calls finished the week at $7.50 and up form the average entry price of $1.95. This play is now over and we will consider this one a winner. click here for details: http://members.OptionInvestor.com/editorplays/edply_030903_1.asp CY - Cypress Semi Call - $7.56 3/2/03 ($6.41 when recommended) click here for details: http://members.OptionInvestor.com/editorplays/edply_030203_1.asp Microsoft Call - Feb-16th $26.57 (MSFT $24.15 when recommended) click here for details: http://members.OptionInvestor.com/editorplays/edply_021603_1.asp EMC Call from Feb-2nd $7.34 ($7.70 when recommended) click here for details: http://members.OptionInvestor.com/editorplays/edply_020203_1.asp NEM Put from Jan-26th $24.44 ($30.15 when recommended) No problems here. NEM dropped back to near its lows from last week and appears headed for our target at $22.00. The March $27.50 put closed at $3.10 on Friday and well over the $1.10 price when recommended. The June put closed at $4.10 on Friday and up from the $2.25 recommended price. Gold is still falling and an end to the war next week should close this play. Close the put at a NEM trade at $22.00. click here for details: http://members.OptionInvestor.com/editorplays/edply_012603_1.asp BZH May $50 Put - From Feb-9th $55.84 ($55 when recommended) Kiss this one goodbye. We have gone from feast to famine several times and after a drop to $52.50 last week the sector has caught fire and BZH shorts have been scrambling to cover. Despite bad housing data from several sources this sector is evidently seen as safe for bounce investing. BZH hit our stop loss of $60.50 and we are done. click here for details: http://members.OptionInvestor.com/editorplays/edply_020903_1.asp Powerball - From 12/29/02 The PowerBall Lottery play jumped again in value this week as the rally continued. Corning was joined by CMVT as the only winners so far but these are January-2004 leaps and we have plenty of time. The initial concept in December was to capitalize on any 2003 recovery by investing minute amounts of money in beaten down tech companies and expecting many of them to rise substantially while others failed for a few cents. No change here but I am still cussing RFMD. It would cost you about $950 to buy one contract of each today. Any one contract could repay that $950 by 12/31/03 leaving the rest as profit. It is a high risk "LOTTERY" play but then $950 is not much risk. It would have taken $1,255 to buy one contract of each on January-2nd. Any bets on what this will be worth on 12/31/03 Matrix of current Portfolio: click here for details: http://members.OptionInvestor.com/editorplays/edply_122902_1.asp ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** Awe, Shocks - It's Just Another Rally by Steven Price The bombs keep coming, Iraqis keep surrendering and the market continues to bet on an economic recovery as a result. We saw significant levels tested in most of the broader indices and those levels were mostly taken out to the upside, giving us little reason to pick a top just yet. We have been hearing plenty of bearish comments from companies giving full year or quarterly outlooks, but most of those comments have cited economic uncertainty due to geo-political concerns as a big reason for those outlooks. Now that the war has begun with little opposition and the price of oil has dropped significantly, much of that uncertainty seems to have been removed. The question now is whether it will bring back corporate spending. While it would be nice to see companies benefiting from lower fuel costs, therefore having more money to spend on expansion and hiring, we have to remember the position we were in before the Iraq situation began to heat up last year. We were creeping and crawling out of a recession and we repeatedly got profit warnings and signals that a recovery was not on the immediate horizon. Once the possibility of war began to increase, attention turned to the international arena and most companies began targeting that possibility as the reason that spending was on hold. There is certainly something to be said for certain industries having greater exposure to war. Airlines and other travel related stocks come to mind, as travelers refrain from making overseas (or even domestic) travel plans. Certainly transportation stocks, which can only pass along so much of increased fuel costs to customers, would also suffer. Those transportation cost certainly affected almost every business sector that has goods to ship, as well. Now that those fuel costs will be coming down, it's a good bet to see improvement in the bottom lines of those industries. May crude oil futures finished below the 200-dma for the first time since November and also below the $27 per barrel mark for the first time since December. The drop followed news that the U.S. forces had taken control of oil fields in southern Iraq and that the fires that had been set in the north were not as numerous as expected. The May contract has dropped almost $10 per barrel since march 12, while the April contract has dropped almost $13 form its February 27 high and $11 in the past seven sessions. However, are we going to see an upturn in demand for technology? Intuit (INTU) is obviously not seeing an upturn (see sector report on GSO below). Certainly if companies begin hiring once again, there may be a need for new computers. If unemployment drops, we may also see the demand for PCs grow in the consumer sector as new hires have more disposable income to invest. Lower gas prices will have an immediate effect on disposable income and the effects may be seen in the retail sector sooner rather than later. Still, we need to be aware that the sales expectations for many retailers have been dialed down considerably over the past year and even if they are able to beat recent forecasts, we still have a ways to go before we see a recovery. Wal-Mart is an example of a store that had given traditional monthly same store sales growth guidance in the 4-6% range for several years, but throughout last year, dropped that guidance to around 2-4% in most months. Seasonal purchasing has lead to estimates that are much higher for April, but we need to be looking back a couple of years for comparison before deciding if the economy has come back. It may be hard to imagine a rally of over 1000 Dow points in a week not experiencing a pullback, but most of the technical indicators are telling us to buy that dip. It has been almost year since the Dow and SPX crossed their 200-dmas and exactly a year since the OEX dropped through its 200-dma for the last time. Those averages have been falling dramatically since then. The levels on the last cross were SPX 1140, Dow 9885 and OEX 586. Just to measure how far we've fallen, the current readings that we crossed today were SPX 892, Dow 8440 and OEX 450. Still, we have made several attempts to cross those levels and shorts have successfully defended each attempt. Not today. Each of those 200- dmas coincided closely with the daily pivot matrix levels we have been posting in the Index Trader Wrap. The daily R2 in the SPX was 892, the daily R1 in the OEX was 449.9 and the daily R2 in the Dow was 8433. All of those 200-dmas were broken decisively on today's rally. Once those levels broke, we stalled for a while and then found legs for another run higher. The Dow cruised all the way past 8500 and has now made up 2 moths of losses in seven sessions. The pace certainly seems unsustainable, but we have yet to see any signs of weakness. This was the largest one-week percentage gain in the Dow since 1982 and the first time since 1998 we have seen eight straight gains. There were undoubtedly plenty of bears picking tops and thinking there had to be a pullback, with that type of history to look back on. For those traders following the point and figure charts, they will note that the rally over the past week took us through the bearish resistance lines in the Dow, SPX and OEX. We not only crossed those lines, but established full breakthroughs with additional boxes above them. With earnings reports still several weeks away, there may be time for some of the fuel cost savings to make its way into the bottom lines. However, it is more likely that we will get a wake up call that the economy has not all of a sudden turned around. The key will once again be future guidance. In January, we began to get fourth quarter earnings reports that in many cases were much better than expectations. It was the accompanying outlooks that sent us rolling downhill. This time around we could see the reverse if companies say they are seeing a turnaround beginning to develop. Once the war is past, we should also see a pick-up in consumer confidence, which is hovering at ten-year lows. Traders can jump on if they like, but the extreme bullishness of the past week will be hard to match. With a quick war now a foregone conclusion, what will fuel the rally further? Maybe the conclusion to the war over the weekend will continue to drive us higher on Monday. But it seems that any complications at all would take some shine off the enthusiasm. So far it looks like there will be few complications and that Baghdad will be a cakewalk. However, it seems too easy and it is likely Saddam Hussein will have some type of surprise waiting as troops close in (whether he is still alive, which is uncertain at this point, or not). By the time this article is published, the conflict may be over and there may be no reason to be cautious about that situation. However, even if things do go exactly as planned, there are still some economic landmines out there and once the war is over, we'll be faced with assessing the health of business within our own borders. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 8522 Moving Averages: (Simple) 10-dma: 7974 50-dma: 8070 200-dma: 8440 chart link: S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 896 Moving Averages: (Simple) 10-dma: 845 50-dma: 855 200-dma: 893 chart link: Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 1093 Moving Averages: (Simple) 10-dma: 1036 50-dma: 1010 200-dma: 993 chart link: ----------------------------------------------------------------- The Software Index (GSO): The GSO was one of the few weak spots in today's broad market rally. For those investors/traders holding calls on recent winners such as ADBE, SYMC and INTU, the culprit for today's sell-off was the last in that line. Intuit lowered its second-half growth outlook and reduced its full year 2003 guidance from a range of $1.38-$1.42 to $1.30-$1.35 on revenue that was dropped from $1.71-1.77 billion to $1.65-1.69 billion. The stock was pummeled losing $12.17. It was also downgraded by Prudential, which said the early signs of sales of its tax software have been weaker than expected and that IRS website might actually be taking some of its business. It was enough to put an anchor on the entire sector and turned the GSO into a 2.2% loser. 52-week High: 180 52-week Low : 77 Current: 101 Moving Averages: (Simple) 21-dma: 103 50-dma:105 200-dma: 101 ----------------------------------------------------------------- The Market Volatility Index (VIX) has finally indicated a significant drain of fear out of the market. After holding up above 34% on a closing basis since January 24 (with the exception of a close of 33.98 on Feb 3), it finally broke down on today's rally, finishing the day at 33.28. It had been giving us mixed signals all week as the fear of something going wrong on the war front has kept option premiums pumped up. However, now that a quick end to the war seems to have been priced into the equity market, we are getting similar signals from the support break in the VIX. CBOE Market Volatility Index (VIX) = 33.62 -1.64 Nasdaq-100 Volatility Index (VXN) = 45.78 -2.70 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.63 1,228,293 775,231 Equity Only 0.42 982,344 415,052 OEX 0.93 70,515 65,771 QQQ 0.72 112,180 80,403 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 40.4 + 2 Bull Correction NASDAQ-100 48.0 + 3 Bull Alert Dow Indust. 40.0 +10 Bull Alert S&P 500 41.2 + 5 Bull Confirmed S&P 100 43.0 + 8 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 0.57 10-Day Arms Index 1.29 21-Day Arms Index 1.32 55-Day Arms Index 1.28 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 2093 774 NASDAQ 2005 1080 New Highs New Lows NYSE 87 32 NASDAQ 85 39 Volume (in millions) NYSE 2,149 NASDAQ 1,851 ----------------------------------------------------------------- Commitments Of Traders Report: 03/18/02 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 reduced the short position significantly, adding 43K long contracts and only 5K shorts, also registering the most bullish reading of the year. Small traders took the opposite approach, adding 15K long contracts and 51K shorts for the most bearish reading of the year. Notice, however, small traders seemed better equipped coming into the rally. Commercials Long Short Net % Of OI 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%) 03/18/03 483,224 490,582 ( 7,358) (0.1%) Most bearish reading of the year: (111,956) - 3/6/02 Most bullish reading of the year: ( 7,358) - 3/21/03 Small Traders Long Short Net % of OI 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% 03/18/03 184,907 153,400 31,507 9.3% Most bearish reading of the year: 31,507 - 3/21/03 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 Commercials reduced the short position here, as well, adding 15K longs and 8K shorts. Small traders reduced overall long positions, adding 10K long contracts, but also adding 17K shorts. Commercials Long Short Net % of OI 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%) 03/18/03 58,877 64,302 ( 5,425) ( 4.4%) 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 02/25/03 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% 03/18/03 37,097 26,951 10,146 15.8% 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 left the overall position close to unchanged by adding 5K long contracts and 4K shorts. Small traders reduced the overall short position slightly by adding 1K long contracts and only 600 shorts. Commercials Long Short Net % of OI 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% 03/18/03 26,880 18,853 8,027 17.6% 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 02/25/03 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%) 03/18/03 6,589 8,343 (1,754) (11.7%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************Advertisement************************* "If you haven't traded options online – you haven't really traded options," claims author Larry Spears in his new compact guide book: "7 Steps to Success – Trading Options Online". Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *************** ASK THE ANALYST *************** Take it or leave it? I paid $2176 for a Mar15 call on VRTY. I can take the stock, put a stop loss on it and hope for improvement, or I could sell the call ($1.40) and take the loss. Is there something else? Hope? Hope for improvement? Hope it will turn in our favor? Let's first scratch that word from our investment/trader vocabulary. It's the word "hope" that has turned a lot of investors/traders in Enron and many other stocks into harder working, delayed-retirement, Treasury bond-holding, certificate of deposit-loving, money market-stashing, cash hording "investors" that now make up the better part of the U.S. population. I'm not trying to knock anyone here, but it is the truth. We looked an Enron's p/f chart in the past and there were a lot of sell signals given before the rats were revealed. Now that I've got that off my chest and we've scratched the word "hope" from our vocabulary, lets address the question at hand. While stock option expiration passed on Friday, I responded back to the subscriber, but with some questions of my own that only he could answer. However, I'm going to walk through the process, that I think is a process that EVERY trader/investor hold a stock or option should do at least once a week when reviewing their account. Don't think of my response as it pertains to a stock option and exercising the option to take possession of the stock. I did like the fact that that the trader evidently didn't OVERLEVERAGE in the option and now has the ability to take possession of the stock should he wish to and is still able to let the trade work if the stock still fits his initial criteria for purchasing the call option. I couldn't ascertain when or how many calls the trader had purchased. I'm assuming that he bought 10 contracts (1,000 shares) and paid $2.176 or the calls, so if he chooses to exercise his option, which gives him the RIGHT, but not the OBLIGATION to buy 1,000 shares of VRTY at $15.00. The first question I always ask myself when reviewing a trade/position is. Why did I buy this call? Was it for fundamental reasons (revenues, earnings, products)? Was it for technical reasons (the chart)? Then I ask the most important question..... ARE THE REASONS THAT I BOUGHT THE CALL OPTION STILL INTACT? Since I (Jeff Bailey) believe more in technical analysis than I do fundamental (the chart doesn't lie, but sometimes the fundamentals will), I tried to answer the traders question from the technical side of things. I should probably preface my comments regarding "the cart doesn't lie" with my belief that a chart won't lie as the stocks chart should reflect the MARKET'S knowledge of facts as it relates to the stock or underlying company's fundamentals that the stock represents. So lets start with the FACTS and the trader's position. The fact is, that when he paid $2.18 for that call option, he thought the stock would be worth a MINIMUM of $17.18 by March expiration, which was on Friday, March 21, 2001. On March 21,2003 shares of Verity Inc. (NASDAQ:VRTY) $16.89 +3.93% is just under where the trader/investor thought the stock might be. Not bad! Not bad at all! Good forecast in my opinion. What does Verity do? They make infrastructure software that powers corporate portals and e-commerce sites, as well as business applications. To me (Jeff Bailey) they sound a bit like an "internet/software" type of company. Keep this in mind, and perhaps review last week's "Ask the Analyst" column when assessing what "sector" you might try and link VRTY with. Since I'm a "technician" and believe in the charts, I'd first have to check the p/f chart of VRTY and see if it is worth holding a stock that I'm going to end up holding with a cost basis of $17.18, or should I take my loss in the option and move on. In essence, is there a better opportunity for my money elsewhere? Dorsey/Wright and Associates has Verity (VRTY) classified as a "software" stock and places VRTY's chart in its Software Bullish % (BPSOFT) which is currently "bull correction" status at 30%. Since this isn't a "really bullish" phase at this point I'm rather lukewarm on the sector or stock's associated with the software sector at this point. However, as noted above, the company's software also seems to have an "internet" theme to it and I would be swayed a bit toward the bullish side with that sector's bullish % (BPINET) in "bull confirmed" status. Still, what do you think VRTY's chart would look like considering the SECTOR is "bull correction?" I associate "bull correction" in my minds eye with a stock that should be pulling back from a recent relative high, which should have been found in December (red C on a point/figure chart) when the software sector bullish % reversed lower from 50% to 44%, and has continued lower to 30% as more and more "software" stocks have been generating sell signals. I say this now, then look at the chart to see if the MARKET agrees with this type of thought. Verity Inc. (VERTY) - $0.50 and $1.00 box Either I don't understand what "bull correction" status is for the software sector bullish %, or the MARKET finds something bullish in VRTY, as the supply/demand chart of VRTY looks nothing like a stock that would be in a bull correction phase. In mid- December (after red C) the software sector entered "bull correction" phase, but VRTY shows that demand is still in control of the stock. Now... do you sell the option, take the loss, or is their still reason to "hang in there?" In the lower left corner of the chart, I establish a risk/reward profile for the trade. The bullish vertical count of $26.50, which was established back in November currently hints at $26.50. With a cost basis of $17.18, risk/reward is still about $1/$3 and I deem that pretty good. Check your own business plan for MINIMUM risk/reward, but general rule is that a stock must have at LEAST $1/$2 for most traders/investor to be interested. With the software sector still "bull correction" status, I can't really use Professor Davis' study of probabilities, which found the triple-top buy signal (see it at $16.50?) being profitable 87.9% of the time for an average gain of 28.7% in 6.8 months. If the software sector bullish % (BPSOFT) from Dorsey/Wright and Associates will reverse up to 36%, then I'd feel even more bullish for VRTY and could begin targeting a 28.7% gain from $16.50, which would be $21.23. So... my conclusion based on Jeff Bailey's risk/reward profile, would be to exercise my option to buy the stock at $15, establish a cost basis of $17.18. I deem VRTY to be a LEADING stock in a rather WEAK sector at this point. Now... the p/f chart looks compelling for a bull. Doesn't it? The only thing "wrong" I see is that VRTY is associated with the software sector and the sector seems to be "holding it back" a bit. Doesn't every bull wish they owned a stock that was moving higher when the sector and the market was more bearish from December-March? I might not want to own a "full position" of VRTY in a still weak sector at this point, but this week's reversals up in the NASDAQ- 100 Bullish % ($BPNDX) and S&P 500 Bullish % ($BPSPX) now have the MARKETS showing internal strength building. There's nothing that says a trader might not look to SELL a covered call on 1/2 (500 shares) or 1/4 (200 or 300 shares) of the position if the trader decided to take possession of the stock, at least until the sector reverses back up into the most bullish phase of "bull confirmed." Think about this when you near option expiration and need to make a decision on either taking possession of a stock or closing out the option position. Is there anything that says you can't take possession of the stock if it still meets your bullish or bearish criteria, and then begin selling options against it to perhaps work down your cost basis, while continuing to give the trade time to work? This can be an important strategy, especially in the above example and trader's predicament. Should he consign a loss in his options? Or should he take possession of the stock, and perhaps write a covered call, work down his cost basis and perhaps end with a "break-even" or profit? The VRTY April $15 calls (YQVDC) are bid $2.10, while the VRTY April $17.50 calls (YQVDW) are bid $0.55. I tell you what.... I "like this stock" for a bull. I do, I really do. I don't like it "full position," but I like this stock. I have to use the point and figure chart to properly ascertain risk/reward in the stock and the bullish % to ascertain risk in the sector. But there's some things in the bar chart that would also have me looking to at least take possession of the stock upon option expiration. Check this out.... When I first started learning technical analysis, I was taught to look for volume spikes at the longer-term 200-day SMA. I still look for them today. It will often times hint of some type of longer-term shift in sentiment toward a stock and it works both ways.... up and down! Verity Bar Chart - Daily Interval The "long column of X" in the point and figure chart, which gives us the bullish vertical count of $26.50, is well represented in the bar chart too. On November 14th shares of VRTY gapped higher above its longer-term 200-day SMA on impressive volume of 2.04 million shares. Did you know that the point and figure vertical counts are derived by the science of ballistics? Think of that volume spike and price action being a "powder keg" that was lit and the "explosive" upward price action, being the projectile "price" being launched. The "density" of the air, which is the SECTOR and MARKET bullish % has been rather thick or more bearish since November, but as things appear to be "lightening up" a bit and getting more bullish, at least for the MARKET, the air should be thinning and have the PRICE/Projectile of VRTY's price making further gains. I like to look at bar charts and will often times focus on what a stock traded on the volume side when it crossed above or below a longer-term SMA like the 200-day. The "gap" from the lows hints of a "break away" gap, where shares of VRTY got some market participants interest. There's an old trader's saying that "volume exceeds price movement." Now... just recently, on March 13th, after the close of trading, VRTY reported Q3 earnings of $0.13 per share, which was 2-cents better than consensus estimates. Earnings didn't appear to be solely attributed to cutting of costs as revenues rose 11.2% year-over-year. Oracle (ORCL) recently reported that its revenues rose just 2.4% year-over-year. On March 14th, VRTY traded heavy volume in a range of $16.97- $15.82. That day's price action saw the stock open at $16.96, trade $16.97, fall to $15.05 before closing back at $15.82. This gives the impression that there was definitely some "selling the news" and may indeed have been by some of those fortunate bulls from November 14th. I've looked at a lot of stock charts in recent months, and to find many that have been trending higher above short-term 21-day SMA and intermediate-term 50-day SMA, not to mention longer-term 200-day SMA has been far and few between. I've also pointed to the "gap" from November 14th, and this looks to be that of a "break away" gap, where the stock "breaks away" from a rather large base of consolidation from $9-$13. With the stock certainly looking like its been in a zone of consolidation from $14-$17, a bull might eventually look for a "running gap" where an event takes place that sees the stock gap higher from consolidation, and begin a second leg of run higher. This would be looking down the road at some point. I also mention an "exhaustion gap." This is a gap higher that a stock will sometimes makes as a third and final leg of its bullish run when the "last bit of good news" comes into the stock. Trader/investors that have been watching the stock for months as it trades higher and higher eventually get on the bandwagon as the news is so good. However, it can be at that time that bulls that actually bought the stock in the first two legs say "goodbye" as all the good news is out and time to move on. If you see a "exhaustion gap" (third gap from consolidation) anywhere close to a bullish vertical count, a bull might look to take some profits off the table. Especially if the sector/market bullish % is overbought! Lessons learned? Critiques: I don't know when the trader bought these calls. However, if they were bought less than a month ago, maybe we can see how the trader may not have bought enough time to allow the trade two work, or give the sector bullish % time to turn higher. My guess is that the trader had wisely identified the stock as bullish, perhaps took action in the $15 calls when the stock triggered a triple-top buy signal at $16.50. Again, problem being that at that time, not enough time was given consider MARKET/SECTOR bullish % were/are showing weakness at time of trade entry. Right NOW the MARKET bullish % are bullish, while the sector bullish % is still weak. Success: If entry was indeed taken when stock traded $16.50, then the purchase of in-the-money options gave the trader/investor the OPPORTUNITY to at least have an OPTION to take possession of the stock, now that the MARKET bullish % are showing signs of internal strength. If the out-the-money $17.50's were purchased, I wouldn't have received the trader's question. By NOT OVERLEVERAGING, the trader can take full possession of the underlying stock with funds available. With the stock still looking bullish and demand in control, how frustrating would it be to have to consign a loss in the option, simply because the trader over leveraged on the trade and is forced to sell a loss as time has run out? Congratulations are in order to the options trader that doesn't allow his actions to be dictated by improper account/trade management. Strong stocks in a weak market are the better "bets" for a bullish trader than are weak stocks in a weak market. In late February, when VRTY was breaking to a new relative high at $16.50, the GSTI Software Index (GSO.X) was setting new relative lows as was the broader S&P 500 Index (SPX.X). Here is the subscriber's reply to my e-mail, which was not nearly as comprehensive as the above. Jeff: Thanks for your comments. I appreciate your ability to correlate the technical with the business plan (which I sometimes lose sight of in the fear of the moment). Hey! We all get emotional from time to time. Keep that business plan by you and review it from time to time. It will instill in you the "conviction" you need and provides the continued "tests" that you put every trade/investment in your account against as the trade unfolds. By my count, there are 9 more option expirations this year many more over our trading/investment careers. Hang in there and have a greet weekend! Jeff Bailey ************* COMING EVENTS ************* ========================================== Market Watch for the week of March 24th ========================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- UL Unilever PLC Mon, Mar 24 During the Market 0.54 WAG Walgreen Mon, Mar 24 -----N/A----- 0.36 ------------------------- TUESDAY ------------------------------ APOL Apollo Group Tue, Mar 25 -----N/A----- 0.20 L Liberty Media Group Tue, Mar 25 -----N/A----- -0.09 LNR LNR Property Tue, Mar 25 After the Bell 1.04 MKC McCormick & Company Tue, Mar 25 Before the Bell 0.26 RHAT Red Hat, Inc. Tue, Mar 25 After the Bell 0.01 ----------------------- WEDNESDAY ----------------------------- CEO China Natl Offshr Oil Wed, Mar 26 -----N/A----- N/A SID Comp Sider Nacional Wed, Mar 26 After the Bell 1.34 ERJ Emb-Emp Brasil Aero Wed, Mar 26 After the Bell 0.50 SIGY Signet Group Wed, Mar 26 Before the Bell 2.57 SCM Swisscom AG Wed, Mar 26 Before the Bell N/A ------------------------- THURSDAY ----------------------------- CAG ConAgra Foods, Inc. Thu, Mar 27 Before the Bell 0.30 EN Enel S.p.A. Thu, Mar 27 -----N/A----- N/A FIA Fiat S.p.A. Thu, Mar 27 -----N/A----- N/A GUC Gucci Group NV Thu, Mar 27 -----N/A----- 0.80 TKA Telekom Austria AG Thu, Mar 27 Before the Bell N/A VIP Vimpel Communications Thu, Mar 27 During the Market N/A ------------------------- FRIDAY ------------------------------- BNG Benetton Group Fri, Mar 28 -----N/A----- N/A ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable ANPI Angiotech Pharm 2:1 Mar. 21st Mar. 14th PSS Payless Shoe 3:1 Mar. 27th Mar. 28th UGI UGI Corp. 3:2 Apr. 1st Apr. 2nd CTSH Cognizant Technology 3:1 Apr. 1st Apr. 2nd -------------------------- Economic Reports This Week -------------------------- Can you imagine Wall Street watching any else but the War Coverage on Iraq next week? Maybe during a lull in the T.V. coverage analysts will key in on the Consumer Confidence numbers, home sales, and Personal income and spending reports. ============================================================== -For- Monday, 03/24/02 ---------------- None Tuesday, 03/25/02 ----------------- Consumer Confidence(DM) Mar Forecast: 63.0 Previous: 64.0 Existing Home Sales(DM) Feb Forecast: 5.85M Previous: 6.09M Wednesday, 03/26/02 ------------------- Durable Orders (BB) Feb Forecast: -1.0% Previous: 2.9% New Home Sales (DM) Feb Forecast: 928K Previous: 914K Thursday, 03/27/02 ------------------ Initial Claims (BB) 03/22 Forecast: N/A Previous: 421K GDP-Final (BB) Q4 Forecast: 1.4% Previous: 1.4% Chain Deflator-Final(BB) Q4 Forecast: 1.6% Previous: 1.6% Help Wanted Index (DM) Feb Forecast: 40 Previous: 40 Friday, 03/28/02 ---------------- Personal Income (BB) Feb Forecast: 0.2% Previous: 0.3% Personal Spending (BB) Feb Forecast: -0.1% Previous: -0.1% Mich Sentiment-Rev.(DM) Mar Forecast: 75.0 Previous: 75.0 Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************* SWING TRADE GAME PLAN ********************* No Sign of Weakness The massive rally of the past week continued forcefully Friday, in anticipation of a quick U.S. victory in Iraq. Oil and gold futures continued their steep drop and the Dow/SPX/OEX and COMP all continued through significant levels of resistance. If there was any doubt about whether the Dow could run higher, after a gain of more than 800 points in 7 sessions, Friday's action answered with a decisive "YES!" 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 49.95. The quarterly price is 129.95 which is almost $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 03-23-2003 Sunday 2 of 5 In Section Two: Daily Results Call Play of the Day: BLL Put Play of the Day: OTEX Dropped Calls: ERTS Dropped Puts: LLY ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS Mon Tue Wed Thu Week BCR 63.56 1.29 1.31 0.30 0.95 5.11 Adding On BLL 55.87 1.56 0.32 0.46 -0.52 3.76 New, Quad top BRL 55.67 1.92 -1.03 0.72 1.00 5.20 $56 next BVF 40.30 0.64 -0.09 0.20 -0.15 1.23 Back over $40 ERTS 59.22 2.11 -0.10 0.22 0.45 2.80 Drop, Profits MME 39.50 1.76 -0.18 1.16 -0.36 3.55 Above Nov top MXIM 40.51 2.25 0.44 -0.03 0.00 3.29 Close over $40 STN 21.62 0.70 -0.13 0.28 0.61 1.82 10% so far PUTS LLY 58.20 1.90 0.68 0.55 -0.17 4.80 Drop, stopped NOC 82.35 1.77 -0.19 -0.20 -2.50 -2.05 Nice start OTEX 28.21 1.74 -0.01 -0.43 0.36 1.46 New, weak GSO ************************Advertisement************************* "If you haven't traded options online – you haven’t really traded options," claims author Larry Spears in his new compact guide book: "7 Steps to Success – Trading Options Online". Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* BLL - Ball Corporation $55.87 (+3.76 last week) See details in play list Put Play of the Day: ******************** OTEX - Open Text Corp - $28.21 -0.45 (+0.96 for the week) See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ ERTS $59.22 (+2.74) It's been a quick run since we added ERTS to our Call list last week. Propelled higher with the surging market, the stock has moved up to the $60 level faster than we expected. Providing the final burst this morning was a Bear Stearns upgrade. That sent the stock surging as high as $59.99, but the combined effect of the descending trendline, the bearish resistance line and the 200-dma clustered at that level managed to keep a lid on the stock all day. Had ERTS been able to break through this level on Friday, we might have considered keeping it alive into next week. But the fact that a strongly positive market couldn't produce a breakout has us thinking the stock is vulnerable to a rollover here next week. Take advantage of any strength early on Monday to exit open positions. PUTS ^^^^ LLY $58.20 (+4.22) So much for resistance. After creeping through resistance first at $55 and then $56 last week, our LLY play gapped up through strong resistance at $57 and our $57.10 stop at the open on Friday. After a brief pullback to find support at $57 in the morning, the stock turned north and plowed substantially higher right into the closing bell. We knew that $57 level was going to be important and apparently we weren't the only ones as the breakout today was likely fueled by other shorts pulling the plug after that level was broken to the upside. As noted on Thursday, the close above our stop has us dropping our LLY play this weekend. *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 03-23-2003 Sunday 3 of 5 In Section Three: New Calls: BLL Current Calls: BRL, BCR, BVF, MME, MXIM, STN New Puts: OTEX Current Put Plays: NOC ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** NEW CALL PLAYS ************** BLL - Ball Corporation $55.87 (+3.76 last week) Ball Corp. is a manufacturer of metal and plastic packaging, primarily for beverages and foods, and a supplier of aerospace and other technologies and services to commercial and governmental customers. Ball's principal business is the manufacture and sale of rigid packaging products, primarily for beverages and foods. Polyethylene terephthalate packaging is the company's newest product line. The aerospace and technologies segment includes civil space systems, defense operations and commercial space operations. The defense operations business unit includes defense systems, systems engineering services and advanced antenna and video systems, as well as electro-optics and cryogenic systems and components. Why We Like It: The past 2 weeks have seen some impressive moves in the equity markets, first with a plunge near the October lows and the resultant war rally that has erased the losses of the past 2 months. Many stocks saw severe selling and then explosive rallies off the recent bottoms, making them very difficult to trade with any kind of control of risk. But our new play on BLL is different. Despite the volatility in the broad market, this stock has been consolidating between $49-54 since early January. The recent lift in the markets pushed BLL up to the top of that range by early last week and then things began to change. Rather than rolling over from resistance like it has for the past few months, BLL inched through the $54 level and then broke out with conviction on Friday, ending at the high of the day. The trade at $55 generated a quad-top Buy signal on the PnF chart, along with a tentative bullish price target of $66. Since Friday's price represented a new all-time high, this looks like a good setup for momentum traders, as a continuation of Friday's strong buying volume (50% above the ADV) should continue to drive the stock to new highs. Consider new momentum entries on a break above the $56 level. More cautious traders will want to look for a pullback near the $53.50-54.00 support level for a lower risk entry on the subsequent rebound. We're initially setting our stop at $52.50, just below the upturned 10-dma ($52.71) and 20-dma ($52.55). BUY CALL APR-55*BLL-DK OI= 453 at $2.50 SL=1.25 BUY CALL APR-60 BLL-DL OI= 0 at $0.55 SL=0.25 BUY CALL MAY-55 BLL-EK OI=5100 at $3.30 SL=1.75 BUY CALL MAY-60 BLL-EL OI= 225 at $1.05 SL=0.50 Average Daily Volume = 398 K ************************Advertisement************************* "If you haven’t traded options online – you haven't really traded options," claims author Larry Spears in his new compact guide book: "7 Steps to Success – Trading Options Online". Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ****************** CURRENT CALL PLAYS ****************** BRL - Barr Labs - $55.67 +1.86 (+5.04 for the week) Company Summary: Barr Laboratories, Inc. is a specialty pharmaceutical company engaged in the development, manufacture and marketing of generic and proprietary pharmaceuticals. Why We Like It: We got a nice start to the BRL play with a $1.86 gain on Friday. While there is a bad tick on the charts with a high of $56.60, the high of the day was actually $56. That trade was still enough to add another box to the point and figure chart and add to the bullish pennant breakout. While the rising tide lifted most boats today, BRL actually out performed the major indexes, as well as the Biotech Index (BTK) and Pharmaceutical Index (DRG) with its 3.45% gain. A look at the intraday chart shows repeated tests of that $56.00 ceiling, giving us another level of resistance to target for new entries. The pullback of only $0.33 from its high shows that while it was unable to get over the next hump, the bulls kept it supported after a gain of almost $2. Today's boost also came on the second straight day of increased volume, following the gains yesterday. New entries can target a momentum move with a trigger of $56.25, or wait for a pullback to support above $54. We are raising our stop on the play to $51.75, just below Thursday's low of the day. BUY CALL APR-50 *IOB-DJ OI=48 at $6.30 SL=3.00 BUY CALL APR-53 IOB-DY OI=352 at $3.50 SL=1.75 BUY CALL MAY-53 IOB-EY OI=1032 at $4.40 SL=2.20 BUY CALL MAY-55 IOB-EK OI=15 at $3.20 SL=1.60 Average Daily Volume = 965 K --- BCR - C. R. Bard, Inc. $63.56 (+5.16 last 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: Now that's a powerful breakout. Remember a few days ago when we were looking for BCR to push through the $61.25 level for new bullish entries into the play? Once that level cracked, the bulls really got adventurous, propelling the stock higher on ever-increasing volume. Friday's session was no exception to that rule, with a gap up open, and then a continuous march up the chart from there. BCR is now closing in on its all-time highs, just shy of the $65 level and after the strong rally last week, it seems likely that there will be some profit-taking once that level is reached. So for those traders already in the play, harvesting some gains in the $64-65 area seems to be the prudent course of action. We don't want to consider new momentum-based entries until BCR trades new highs above $65.25. After such a sharp rise, managing the gains in the play should be our primary consideration, as we don't want to give back those gains. We're getting aggressive with our stop this weekend, raising it to $61.40, Wednesday's closing price and just above our initial trigger into the play. A shallow pullback to the $62.00-62.50 area is really the only possibility we see for a fresh entry into the play early next week, but make sure not to catch a falling knife if the selling is more severe than would be indicated by simple profit taking. BUY CALL APR-60 BCR-DL OI=2244 at $4.20 SL=2.50 BUY CALL APR-65*BCR-DM OI= 265 at $1.05 SL=0.50 BUY CALL JUL-60 BCR-GL OI=1302 at $5.40 SL=3.50 BUY CALL JUL-65 BCR-GM OI= 75 at $2.55 SL=1.25 Average Daily Volume = 285 K --- BVF – Biovail Corporation $40.30 (+1.24 last week) Company Summary: Biovail Corporation is a full-service pharmaceutical company that applies its proprietary drug delivery technologies in developing "oral controlled-release" products throughout North America. The company applies its proprietary drug delivery technologies to successful drug compounds that are free of patent protection to develop both branded and generic oral controlled-release products. BVF has applied its technologies to develop 18 products to date and currently has 16 others under development. Why We Like It: After a tenuous breakout over the $40 level early last week, our BVF play needed to gather its strength for a sustained move through that level by consolidating above the $39 support level (prior resistance). The bulls needed the help of a strongly positive broad market to get the job done, but by midday on Friday, BCR had climbed back over that $40 level and this time it closed there. Can it keep going? It certainly looks that way, with only mild resistance between here and the bottom of the late April gap at $43.66. We've been targeting new entries near the bottom of the recent consolidation range and another pullback into the $39.00-39.50 area may be the last chance to get on board before this train leaves the station. Should BVF push higher out of the gate on Monday, momentum traders can consider entries on a push above $40.75. Friday's gains in the broad market seem to have factored in the belief that the Iraq war will end this weekend, and if it does, we could get a powerful follow-through rally both in the broad market, as well as our BVF play. The 5-week ascending trendline has now risen to $38.30, and that trendline should hold on any significant pullback. So let's raise the stop to $38 this weekend. BUY CALL APR-40*BVF-DH OI=6800 at $2.00 SL=1.00 BUY CALL APR-45 BVF-DI OI= 725 at $0.45 SL=0.25 BUY CALL JUL-40 BVF-GH OI=1696 at $4.10 SL=2.50 BUY CALL JUL-45 BVF-GI OI= 889 at $1.90 SL=1.00 Average Daily Volume = 1.05 mln --- MME – Mid Atlantic Medical Services $39.50 (+3.50 last week) Company Summary: Mid Atlantic Medical Services is a holding company for subsidiaries active in managed healthcare and other life and health insurance related activities. MME and its subsidiaries offer a broad range of managed healthcare coverage and related ancillary insurance and other products and deliver these services through health maintenance organizations, a preferred provider organization, and a life and health insurance company. MME owns a home healthcare company, a pharmaceutical services company and a hospice company. The company also owns a collections company and maintains a partnership interest in an outpatient surgery center. Why We Like It: Our MME play had a pretty good week, after finding support just below the $36 level. Further supported by the rising 20-dma, the stock participated in the broad market rally, first cresting the $38 level on Wednesday and then pushing through the $39 level on Friday. Pullbacks during the week were brief and came on relatively light volume, while the price advances came on relatively strong volume, bringing the stock within striking distance of our initial target of $40 by the close on Friday. If the bulls' hopes of an end to the Iraq war this weekend come true, then MME could get a nice shove through the $40 level on Monday. The strength of that move will tell us whether it makes sense to harvest gains or if we ought to hold on for a continued move up to the next level of resistance in the $42-43 area. MME is up significantly since our initial entry trigger down at $35.25, so it seems prudent to tighten our stop so as to preserve a portion of those gains, while at the same time leaving room for some mild consolidation ahead of another move up the chart. We're raising the stop to $37.50 (just below Wednesday's intraday low) this weekend, as a break below that level would indicate the trend is weakening. On the other hand, a brief dip near the $38 level could be just the ticket for initiating new bullish positions ahead of the anticipated breakout over the $40 level. If buying the dip though, look for light volume on the pullback to confirm that the weakness is only profit taking and not more concerted selling. BUY CALL APR-35 MME-DG OI= 35 at $5.20 SL=3.25 BUY CALL APR-40*MME-DH OI= 193 at $1.70 SL=0.75 BUY CALL JUN-40 MME-FH OI= 145 at $3.20 SL=1.50 BUY CALL JUN-45 MME-FI OI= 101 at $1.40 SL=0.75 Average Daily Volume = 439 K --- MXIM – Maxim Integrated Products $40.51 (+2.98 last week) Company Summary: MXIM designs, develops, manufactures and markets a broad range of linear and mixed-signal integrated circuits, commonly referred to as analog circuits. The company also provides a range of high-frequency design processes and capabilities that can be used in custom design. MXIM's objective is to develop and market both proprietary and industry-standard analog integrated circuits that meet the increasingly stringent quality standards demanded by customers. Why We Like It: Relaxing a bit from its recent leadership role, the Semiconductor index (SOX.X) posted a rather sedate gain of just over 2% on Friday, as it is now coming up on the $340-345 resistance level. Should the optimists get their wish for a swift end to the war this weekend, then momentum bulls will likely focus their efforts on the SOX again early next week. The SOX is now solidly over the 200-dma ($314) and all of the shorter-term moving averages are turning up in bullish fashion. Our MXIM play certainly struggled with the $40 level on Friday. After an early surge to $40.66 (satisfying our $40.50 entry trigger), the stock pulled back a bit. But the $40 level served as support on that pullback, and the afternoon push took the stock up to close just below its high of the day. Now that MXIM has moved through our trigger point, aggressive traders will want to wait for a breakout over the $41 level before playing. Conversely, those traders looking for a "bargain" will want to watch for an intraday pullback into the $39-40 level, entering on the rebound from support. Continued strength in the sector will be key to the play, so confirm strength in the SOX before initiating new positions. We're raising our stop just slightly this weekend to $37.50, just below the 10-dma ($37.64). BUY CALL APR-40*XIQ-DH OI=3316 at $3.00 SL=1.50 BUY CALL APR-45 XIQ-DI OI=1586 at $0.90 SL=0.40 BUY CALL MAY-40 XIQ-EH OI=4471 at $4.10 SL=2.50 BUY CALL MAY-45 XIQ-EI OI=3564 at $1.90 SL=1.00 Average Daily Volume = 7.64 mln --- STN - Station Casinos- $21.62 +0.41 (+1.76 for the week) Company Summary: Station Casinos, Inc. is the leading provider of gaming and entertainment to the residents of Las Vegas, Nevada. Station's properties are regional entertainment destinations and include various amenities, including numerous restaurants, entertainment venues, movie theaters, bowling and convention/banquet space, as well as traditional casino gaming offerings such as video poker, slot machines, table games, bingo and race and sports wagering. Station owns and operates Palace Station Hotel & Casino, Boulder Station Hotel & Casino, Santa Fe Station Hotel & Casino and Wild Wild West Gambling Hall & Hotel in Las Vegas, Nevada, Texas Station Gambling Hall & Hotel and Fiesta Rancho Casino Hotel in North Las Vegas, Nevada, and Sunset Station Hotel & Casino and Fiesta Henderson Casino Hotel in Henderson, Nevada. Station also owns a 50 percent interest in both Barley's Casino & Brewing Company and Green Valley Ranch Station Casino in Henderson, Nevada. (source: company release) Why We Like It: STN has been steadily climbing since breaking through the $20 mark. The stock actually lagged the market early on, but bounced nicely after a morning pullback, and eventually added to its recent 10% gain. The sector remains strong, with MMG adding to recent gains, as well and entering a gap that took all of the stocks in the sector down on that company's warning. Other stocks in the sector showing decent gains were IGT and MBG. The sector continues to follow the 1991 blueprint, where it posted a 28% gain following the beginning of the Persian Gulf War. We are using a target of $25 on this play, which amounts to a gain of 25%. It may take more than just a couple of days to achieve that target (the PnF count is $30), so we will leave our stop below the 21-dma at $18.75. However, more conservative traders can either target an exit at $22 with a 10% gain, or place stops just below $20, which was multi-year resistance and should hold up as support on a pullback. BUY CALL APR-17.50 STN-DW OI=105 at $2.85 SL=1.45 BUY CALL APR-20 STN-DD OI=302 at $1.15 SL=0.60 BUY CALL JUL-17.50 STN-GW OI=926 at $3.70 SL=1.85 BUY CALL JUL-20 STN-GD OI=326 at $2.10 SL=1.05 Average Daily Volume = 381 K ************* NEW PUT PLAYS ************* OTEX - Open Text Corp - $28.21 -0.45 (+0.96 for the week) Company Summary: Since 1991, Open Text Corporation has delivered innovative software that brings people together to share knowledge, achieve excellence, deliver innovation, and enhance processes. Its legacy of innovation began with the successful deployment of the world's first search engine technology for the Internet. Today, as the leading global supplier of collaboration and knowledge management software for the enterprise, Open Text supports six million seats across 4,500 corporations in 31 countries and 12 languages throughout the world. As a publicly traded company, Open Text manages and maximizes its resources and relationships to ensure the success of great minds working together. (source: company release) Why We Like It: It was tough to find weakness in today's market, with the Dow gaining almost 3% and the COMP jumping through its 200-ema and adding 1.3%. However, one sector that was noticeably weak was the software sector. The GSO dropped more than 2% after a profit and revenue warning from Intuit (INTU), which was taken to the woodshed with a $12 loss. That warning was ominous, as the company said, "We're disappointed to see a sluggish economy worsening in the past few weeks with a further decrease in customer spending in all our categories. This is not an issue with just one of our businesses -- all our businesses have been affected." This is not good news for software makers that had enjoyed a nice gain last week, but already had begun to show cracks the past few days. OTEX was one of those stocks that seemed to find a top and had already begun to roll over from previous resistance at $30. The stock made its most recent run at $30 in late February, but saw its last bounce end at $29 over the past few days. It has been setting a series of lower highs the last three sessions (today's high at $29.67 was a bad tick) and stochastics have rolled over into a sell signal from overbought territory. The most recent analyst rating came from Fulcrum on February 27. The firm reiterated its sell rating with a $13 price target, citing OTEX's acquisition of Corechange. It said the acquisition was one with a low quality of earnings and unsustainable growth. It also said OTEX trades at a premium to more established companies that won't be impacted by increased competition in the collaboration space, and said that OTEX shares justify a discount to peers because its 2003 estimates are at substantial risk. If INTU was the first domino to fall, then based on that rating, OTEX's future could certainly be tenuous. Our pick is based more on relative weakness in the stock and the sector and the rollover from resistance, than an analyst recommendation, but in a world in which most analysts are pumping stocks that are weak, it's encouraging for bears to see some honesty. We like entries in the play below today's low of $28.15, with a trigger of $27.98; but more conservative traders will want to wait for a break below the 21-dma (currently $27.68), where the stock bounced on Thursday. Our initial target will be a move to $25, where there is strong support from January and the beginning of the march. However, a move below that level could be seen as a head and shoulders breakdown and would likely lead to a test of the 200-dma (currently at $23.18). Our stop will be placed at $30.55, just above recent highs. BUY PUT APR-30*QFT-PF OI=72 at $2.65 SL=1.30 BUY PUT APR-30*QFT-QF OI=25 at $3.30 SL=1.75 Average Daily Volume = 304 K ***************** CURRENT PUT PLAYS ***************** NOC - Northrup Grumman Corp. $82.35 (-2.05 last week) Company Summary: Northrup Grumman is a defense company that provides products, services and solutions in defense and commercial electronic, systems integration, information technology and nuclear and non-nuclear shipbuilding and systems. NOC has operations in 44 states and 25 countries, serving United States and international military, government and commercial customers. In December 2002, the company merged with TRW, a provider of technology products and services for the aerospace, information systems and automotive markets. As a result, TRW became a wholly owned subsidiary of NOC and in March 2003, the company sold the automotive business of TRW, while retaining a 19.6% equity interest. Why We Like It: That sure didn't take long! With the initial weakness that appeared in Defense stocks on Thursday as the Iraq war kicked off in earnest, we initiated bearish coverage of NOC with the view that a smooth war operation could have the stock testing its recent lows over the next couple weeks. That move got started first thing on Friday morning, with the stock plunging under the $84 level at the open and continuing down to an intraday low just above $80, as reports continued to roll in concerning the impressive "Shock and Awe" war campaign. The speed of the military advance seems to confirm that the war will fail to have a significant impact to the revenue stream of the major defense contractors, and that pressured the Defense index (DFI.X) as low as the $441 level. By midday though, buyers appeared, helping to lift the DFI index and NOC off their lows into the close. While it was definitely a bearish day for NOC, it is interesting to note how the stock found support above the $80 level, and despite the rollover in daily Stochastics, we need to at least consider the possibility that the stock won't be able to break down below that level. Clearly, momentum entries don't make sense right now, and our best shot at new entries will dome on a rollover from the $84-85 resistance zone. The rollover in the stock this week came right at the descending trendline (currently $87.50) connecting the January and February highs, giving us a perfect location to set our stop. But for traders that entered the play on Friday's breakdown, that's too much risk to take, and we are suggesting those traders use an alternate stop at $85.50. Remember, NOC's bearish price target from the PnF chart is $79, and we aren't expecting a significant break below that level. Use a drop near that level to lock in gains and then wait for a new entry point. BUY PUT APR-85*NOC-PQ OI=2650 at $4.80 SL=3.00 BUY PUT APR-80 NOC-PP OI=1150 at $2.30 SL=1.25 Average Daily Volume = 2.82 mln ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 03-23-2003 Sunday 4 of 5 In Section Four: Leaps: Shock and Awe Traders Corner: 1,800 McChicken Sandwiches For Our War Chest Traders Corner: Where is the Dow Going? Traders Corner: The Characteristics of Elliott Waves Futures Corner: Harmonic Trading With Gartley Patterns ************************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 ************************************************************** ***** LEAPS ***** "Shock and Awe" By Mark Phillips mphillips@OptionInvestor.com Anticipating a successful war campaign in Iraq, the bulls launched their own "Shock and Awe" campaign against the bears last week, and from the broad market's relentless advance right up to the closing bell on Friday, we can only assume that the bears are feeling rather shell-shocked. It is hard to make an argument that there is much short-covering propelling this current rise, as any bearish positions should have been shaken out several hundred DOW points ago. As I noted in my Options 101 article on Wednesday, I expect that this bullish move still has some room to run. That said, I have to confess my own amazement at how far the market has advanced in such a short period of time. I heard a report on Friday after the close that last week's advance in the DOW was the largest for one week since 1982. Now that's powerful! This is a perfect example of what is meant when we talk about the bears holding most of the risk with the bullish percents so deep in oversold territory. The slightest catalyst can set off an asset allocation shift from bonds back into equities, and that seems to be what has been going on since the bottom on March 12th. Bonds have seen heavy selling, corresponding to the heavy buying in equities. Now we have all the bullish percent charts reversing sharply higher, PnF Buy signals across all the major indices, and the bulls are clearly in charge. That said, I don't want anyone to lose sight of the fact that this is just the latest bear market rally. The catalyst may be different than what we witnessed last July and October, but I believe the eventual outcome will be the same - failure. I don't expect that failure to come anytime soon, due primarily to the internal strengthening that is seen in the bullish percent charts. Let's see what we can infer about the potential upside from here, based on the rally off the October lows. After the bottom from the October lows, the DOW advanced 1300 points in almost a straight line in 8 days. Then it took another 6 weeks for the DOW to gain an additional 500 points to its December high just over 9000. In the past 8 days, the DOW has advanced just under 1100 points, and while additional gains are certainly likely, I expect the market to be more grudging in giving up the next 400-500 points to the 8900-9000 resistance level. We're likely to see an upside bias continue as long as the war effort goes well, and we near the end of the first quarter of 2003. But then we have the looming April earnings season, and investors will have to once again confront economic reality, which really hasn't improved at all. This rally has been driven by both technical and emotional factors, but fundamentals can only be ignored for just so long. But until reality comes back to the forefront of investors' minds, up is the direction of least resistance. One notable difference between this and the past 2 bear-market rallies is the fact that all the major indices (DOW, SPX, NDX) have plowed through their respective 200-dmas. That is a powerful sign that there is actually some strength to this rally. How far can it extend? I've got some targets in mind, but of course, it is just my best guess based on chart patterns and other technical studies. Looking first at the SPX, I view the $940-950 area to be major overhead resistance. The most recent top in early December occurred at 954, and the January move topped out near 935. Add in the August high of 965, and we can draw a descending trendline that equates to roughly 920. That trendline will be the first area of strong resistance from this point forward. I expect the bulls will eventually clear that level, but will expend a lot of energy in doing so. We'll then have that much more difficulty when we reach the 940-950 area, which is now the site of the top of that long-term descending channel I've been talking about for over a year now. The picture is similar over on the DOW, with Friday's surge breaking through the 200-dma and the first area of solid resistance will be the corresponding trendline (connecting the highs in August, December and January), which is currently near the 8750 level. Looming just above that level is the year-long descending trendline at 8900 and the double top (August and December) just over 9000. By the time these upper levels are tested (if at all), we'll likely see the bullish percents topping out in overbought again and it will be time to repeat the whole process. Any bets on whether that setup will coincide with the heart of earnings season, when investors are forced to confront another dismal set of corporate results? GRIN That brings us to the NASDAQ, and here I'm looking at the COMPX, rather than the NDX, because of its greater breadth. In contrast to the other broad indices, the COMPX broke through its year-long descending trendline line last week, another measure of its improving relative strength. As a side note, I sure wish I had added the QQQ Watch List play a couple weeks earlier! Resistance for the COMPX comes first at the January high (1467) and then at the December high (1521). If the COMPX can clear these two levels, then we'll have a real difficult job for the bulls in challenging very strong resistance at 1600, which is both strong historical resistance, as well as the site of the descending trendline (actually 1575 now) that began in May of 2001. So what do the PnF charts have to say about any of this? In short, all the PnF charts (via their current bullish price targets) are telling me that I'm being far too conservative in my estimates for the market's potential upside. The DOW has a tentative price target of 10650, while the SPX has a target of 1110, and the COMPX has a target 2250. Pull up a PnF chart of any of these indices on Stockcharts.com and you'll see that trying to short into this market right here makes about as much sense as Don Quixote tilting at windmills. As I said on Wednesday, the bears will get their chance again, but now is not that time. I personally don't expect any of those bullish targets to be achieved during the life of this rally, but eager bears should be forewarned of the power of this rally. The one rogue element in this whole equation is the VIX, which is still stubbornly holding well above the 30 level. First the VIX refused to move higher as the broad market sold off, and now the VIX is refusing to drop while the market strings together an impressive rally. Sure the VIX has fallen back from the 40 level, but look at the drops in the VIX following the bottoms in July and October of last year, and even in September of 2001. The rebounds off of each of those lows in the broad market produced a sharp drop in the VIX, which we just haven't seen this time around. Part of the cause is (I believe) the elevated level of the 200-dma, but I view this as abnormal right now. If this war rally is going to continue, then the VIX needs to break down, preferably below the 30 level. Just remember from our prior conversations that I view the current floor for the VIX near the 29 level, based on the position of its 200-dma. Another interesting note is the large consolidation wedge that is building in the VIX. we've been talking for some months now about the descending trendline connecting the VIX highs from last July and October. But there's another important trendline to look at too. That's the trendline connecting the lows since last March. Together, these trendlines describe a large neutral triangle that comes to a point at 30 right around the end of May. I don't have an opinion about which way the VIX will break out of this pattern, but I think it will prove quite instructive as to the longer term future, both for the equity markets, as well as our interpretation of the VIX. Putting it all together, my short-term view is up, the intermediate-term is down, and the long-term is that the bears will come out for another feast when this rally has run its course. So that tells us that the current bullish bias in our Portfolio and Watch List continue to make sense. So without further ado, let's go check out the plays. Portfolio: QCOM - While I would have liked to have seen QCOM able to break above the $40 level, given the strength in the rest of the market, I'm pretty happy with the way it broke over its descending trendline last Monday and then held that level ($38) as support on Thursday. Clearly the $40 level is the next major obstacle on the upside, as it is both historical resistance, as well as bearish resistance on the PnF chart. While a trade at $40 will put the PnF chart back on a Buy signal, QCOM won't be completely out of the bears' clutches until it can clear the December highs near $43. For now, we'll rely on the 50-dma ($36.57) and 20-dma ($36.03) to provide support on any subsequent pullbacks, although we'd prefer to see the $38 level do that job. Weekly Stochastics are now into a nice bullish ascent, and with the NASDAQ in strong rally mode, QCOM ought to have more room to run on the upside before running out of steam. But just in case of the unexpected, let's raise our stop to $36, ensuring that we can't lose on the play. DJX - Talk about being saved by the bell! Well actually, we were saved by the fact that the bell DID NOT ring on Wednesday, March 12th, when the DJX was bouncing from just above the $74 level. At that time our closing stop was set at $74.50 and I was pretty sure we were going to be stopped out. Oh contraire! The past 7 market days have been truly astounding, with the play reversing from a pretty substantial loss to now showing a gain of more than 35%, even on the '05 LEAP. That's pretty decent, considering the abysmally early entry we took. For those of you that got a better entry, your bottom line is looking even better. Take this war rally as a big gift and don't allow those gains to slip away. I'm raising our official stop to $81 this weekend to ensure that we can't lose on the play. If your position reaches the point where you're looking at a 100% (or greater) gain early next week, I would highly recommend harvesting those gains and looking to re-enter on a pullback to support, now in the vicinity of $82-83. MSFT - Mr. Softee isn't setting any land speed records, but it is consistently moving in the right direction. After a bit of indecision when the stock flirted with the $23 level after we initiated the position a few weeks back, MSFT finally pushed back above the ascending trendline and then launched higher with the rest of the market over the past 7 days. The stock is now back over the 50-dma ($24.77), critical resistance at $25 and the 200-dma ($25.47). Friday's session was pretty encouraging with the stock bucking the weakness throughout the Software sector to move into the gap left behind on January 17th. There's still lots of overhead resistance and we'll need to see a trade at $30 before the PnF chart will issue a Buy signal, but things are looking good so far. Weekly Stochastics are really getting with the program, in their bullish ascent, and a brief pullback near the $25 level can be used by late-comers to enter the play. Since we're targeting a move into the $30-35 range, I don't want to get too aggressive with the stop just yet, but we will raise it to $24.50 this weekend. That is just below the 50-dma, but above our entry point, keeping us from taking the risk of losing on the play. ADBE - I was starting to wonder when that meteoric rise was ever going to end. After a pretty impressive earnings report on March 13th, ADBE soared through resistance near the $30 level and by last Thursday was sitting above the $34 level. We may not have gotten the BEST entry, but right about now, it is looking like it was good enough. Of course, things were looking a lot better Thursday night before the Friday morning downgrade to Hold from WR Hambrecht, complete with a price target of $29. That took the wind out of the bulls' sails, and ADBE led the Software sector lower throughout the day, losing nearly 6% on volume that more than tripled the ADV. So is the selling frenzy over, or will we need to endure some more pain. I actually think we've got some more weakness to deal with, but expect another higher low to keep the trend bullish. There are multiple levels of support to help us out, with historical support just above $30, the top of the March 14th gap ($30.28) and the 10-dma ($30.36). So we'll raise our stop to $30, guaranteeing that we keep at least a portion of the gains, even if things completely fall apart from here. That isn't an event I anticipate, but it never hurts to be prepared. BEAS - I wouldn't call last week's action in our BEAS play a breakout, as the stock is still languishing under the $12 level, but the upward move certainly was bullish. After taking our entry point at $10, BEAS surged through the 20-dma, which is now attempting to turn back up and provide support. The next challenge will be for the stock to get through the $12 level enroute to the real milestone of $13.50. You see, BEAS needs to reach that level before the PnF chart will be back on a Buy signal, erasing the current bearish price target of $5.50. A big part of the stock's weakness on Friday was sector related, with the Software index notably weak in the wake of ORCL' earnings and the downgrade to ADBE. But in the big picture, the stock held up fairly well, building that intraday support near the $11 level. It's going to take some time to get through overhead resistance, but it now seems safe to tighten our stop at least to break even. The official stop moves to $10.25 this weekend. AA - What happened?? If you recall from my initial writeup on AA, I characterized this play as a speculative bottom-fishing play, and therefore carrying higher risk. Well, it looks like that extra risk paid off for those willing to take it! The listed 2004 LEAP is up a whopping 160% since AA moved to the Portfolio 8 short market days ago. In that time, the stock has only moved up about $3, but that's what you get when you play with out of favor options just ahead of a significant move. And I see no reason why AA can't make a run at least up to the 200-dma just below $24. Of course, if you've got a better than 100% gain in the trade and don't want to risk giving it back, then by all means close the trade. LEAPS trades are meant for the longer term, but that doesn't mean we can't harvest those gains when they get delivered in a hurry. Our official stop moves up to $19.75 this weekend, still relatively loose in order to give the stock some room to consolidate ahead of the next upward move. Traders still wanting to enter the play should look for a dip and rebound from the vicinity of $20.25-20.50, as this is the current site of the clustered and upward-turning 10-dma, 20-dma and 50-dma. EMC - Uh-oh! Up until Friday morning, EMC looked like it was going to reclaim the top side of its ascending trendline (currently $7.85), but that was before Deutsche Securities downgraded the stock to Hold, based on valuation and uncertainties in business trends. The firm issued an $8 price target and that was enough to knock the legs out from under the bulls. EMC slid back more than 5% by the close, but did manage to hold above both the 10-dma and 20-dma. Any follow-through selling early next week will likely have the stock retesting the 200-dma, and another rebound from that level can still be used as a solid entry into the play. While the downgrade on Friday can be ostensibly blamed for Friday's decline, I don't think it is a coincidence that the reversal came right at the descending trendline that began back in November of 2001. We knew that barrier was going to be a tough one to cross, and didn't expect to break through it on the first attempt. We'll let this decline run its course and as long as our $5.50 stop isn't violated, the next rebound from support (ideally near the 200-dma again) should make for a winning entry point. Watch List: NVDA - As proof that you can't win them all, NVDA has continued to evade our attempts at gaining a decent entry into the play, consistently rebounding from above our entry target. But that isn't a reason to chase it higher. While the stock has continued to move higher along with the rest of the market, with weekly Stochastics now topped out in overbought territory, we need to be cognizant of the higher risk associated with new entries at this point. The stock pushed through the 200-dma last week and the PnF chart is now flashing a new Buy signal, with a tentative bullish price target of $25. While encountering some resistance near the $15 level, the real battle for the bulls will come near the $18 level, the site of both the bearish resistance line, as well as the December highs. While it may not occur early next week, NVDA is due for some profit taking and we'll continue to look for attractive entries on a pullback near support. Ideally, that will occur with a pullback and rebound from the $13.00-13.50 area. The top of the most recent gap is $12.90, with further support from the 20-dma ($13.03) and 10-dma ($13.51). NEM - As the broad market continues its amazing advance, "safe" money is flowing out of gold and gold-related stocks, exactly as we expected. We wanted to wait for the Iraq war to get underway before entering this play, and with that process going smoothly so far, gold futures have come under pressure, falling to $326 (basis the April contract) and breaking below the 200-dma ($331.05) on Friday. Following this trend, NEM has fallen back under the $25 support level and is nearing the long-term rising trendline at $23.85. I'm looking for continued good news from the war front to drop the gold futures near the $320 level (strong support) which ought to correspond to NEM falling into our entry zone of $23.50-24.00. Remember, we don't want to enter the play, just because that price level is achieved, as we don't want to catch a falling knife. We will need to see confirmation of buying interest via a bounce in price from support before entering the play. The primary reason for this caution is that the PnF chart is now back on a Sell signal, currently showing risk to the $19 level. Our primary premise here is that once the momentum traders in this area of the market have been shaken out, the strong hands will step forward to defend both gold and gold stocks at important support. QQQ - As pointed out in several articles in recent months, the NASDAQ is really starting to show its relative strength, as compared to the rest of the market. Unfortunately, I waited a week too long to list this QQQ call play, as it surged sharply higher at the open last Monday, leaving us standing on the sidelines. That's no reason to go chasing it higher though. The market is due for a bit of a pullback and with so many nice winners on the Portfolio right now, if we don't get an entry into this play, then so be it. With last week's strong upward move, the QQQ now appears to have strong support in the $25.00-25.50 area. The 20-dma at $25.18, the 50-dma just below at $25.12 and the historical support at $25.30, should all work to support the stock on the next significant pullback. We'll raise our entry target to $25.00-25.50, and gladly take an entry into the play on a dip and rebound from that area. Initial stops after entry will be set at $23, just below the February lows. LEAPS are normally a tool used to capture outsized gains over a period of time measured in months, not weeks or even days. But the broad market action of the past couple weeks has demonstrated how this vehicle can truly provide a pleasant surprise. We caught some great entry points into several bullish plays near major levels of support, just in time to participate in an explosive war-related rally. The broad market action looks very bullish and could very well continue for awhile, at least based on the PnF cha Bullish Percent charts. But I have no illusions that this rally represents any sort of long-term market bottom. For that reason, traders should be aggressive about protecting gains accrued over the past 2 weeks. After a more than 1000 point DOW rally in 8 days, we are overdue for some profit taking, so caution is definitely warranted here. As noted above, I certainly wouldn't argue with any trader that wants to harvest gains on plays that have performed well so far. At a minimum, those stops ought to be tightened up to the point that none of those gains can turn into a loss. That is reflected by the tightened stops in our Portfolio. 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 $ 6.40 +39.13% $35.50 '05 $ 40 ZLU-AH $ 7.90 $ 9.80 +24.05% $35.50 DJX 02/25/03 '03 $ 80 DJX-LB $ 6.40 $ 9.40 +46.88% $81 '04 $ 80 YDJ-LB $ 9.30 $12.50 +34.41% $81 MSFT 02/27/03 '04 $ 25 LMF-AE $ 3.20 $ 4.80 +50.00% $24.50 '05 $ 25 ZMF-AE $ 5.10 $ 7.10 +39.22% $24.50 ADBE 02/28/03 '04 $ 30 LAE-AF $ 4.70 $ 7.30 +55.32% $30 '05 $ 30 ZAE-AF $ 7.50 $10.40 +38.67% $30 AA 03/12/03 '04 $ 22 KJP-AX $ 1.15 $ 3.00 +160.9% $19.75 '05 $ 25 XAP-AE $ 1.50 $ 3.30 +120.0% $19.75 BEAS 03/12/03 '04 $ 12 LZP-AV $ 1.55 $ 2.50 +61.29% $10.25 '05 $ 12 ZWP-AV $ 2.75 $ 3.90 +41.82% $10.25 EMC 03/12/03 '04 $ 7 LUE-AU $ 1.40 $ 1.70 +21.43% $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 $25.00-25.50 JAN-2004 $ 26 KLF-AZ CC JAN-2004 $ 22 LKF-AU JAN-2005 $ 26 ZWQ-AZ CC JAN-2005 $ 22 ZWQ-AU GD 03/23/03 $49-50 JAN-2004 $ 60 KJD-AL CC JAN-2004 $ 50 KJD-AJ JAN-2005 $ 60 ZZJ-AL CC JAN-2005 $ 50 ZZJ-AJ PUTS: None New Portfolio Plays None New Watchlist Plays GD - General Dynamics $57.12 **Call Play** Going against the crowd has been working well for us lately, so we might as well continue that behavior pattern. As the Iraq war effort has gotten underway, there are few areas of the market that look as week as the Defense sector (DFI.X), as investors have fled that sector on the belief that the war will have little or no material impact to the bottom line of the major defense contractors. Last week's rebound in the DFI index from the $415 level showed us where the likely bottom for the sector, and I think now is the time to go bottom-fishing in this sector. We were clearly early when we started looking bullish on shares of GD a few months ago, as that consolidation pattern between $75-85 was clearly a continuation pattern of the initial drop from $110-80. The measuring objective once that consolidation pattern broke to the downside was equivalent to an equal move to the downside as the original move. Doing the math, $30 from $80 gives a downside target of $50, and isn't it interesting that the intraday low on March 12th was exactly $50! You see, this looks like a case of the worst case being factored into this stock and sector ahead of the Iraq war, and this bottoming process should give us a solid entry over the next few weeks ahead of the expected recovery. GD's P/E ratio has now fallen to only 11, yet revenue and earnings have not shown the sort of deterioration that would be expected, given the stock being cut in half over the past 9 months. In fact, revenue has continued to grow. With weekly Stochastics starting to turn up, the next time the daily Stochastics bottom, we ought to get a slightly higher low and a great entry point. The very long-term (12 year) ascending trendline for GD is currently at $49.50, adding to the strength of that support. This play will likely take much longer to come to fruition than some of our other recent bullish plays, but that's how LEAPS plays are supposed to play out. We're looking to grab an attractive entry point when the stock and sector are out of favor. Our initial entry zone will be $50-52 (although we may have to modify it over the next couple weeks. Look for the DFI index to hold above its recent low to confirm the wisdom in going bottom-fishing in this area of the market. After entry, we'll set a rather tight stop at $48.50. BUY LEAP JAN-2004 $60 KJD-AL BUY LEAP JAN-2004 $50 KJD-AJ **Covered Call** BUY LEAP JAN-2005 $60 ZZJ-AL BUY LEAP JAN-2005 $50 ZZJ-AJ **Covered Call** LEAP Drops None ************** TRADERS CORNER ************** 1,800 McChicken Sandwiches For Our War Chest By Mike Parnos, Investing With Attitude OK, so our war chest looks a lot like a refrigerator. Counting our chips is my favorite time of the month – both Pringles and poker chips. This month we're going to see if new Couch Potato Trading Institute members can count to 1,800 profit without taking off their shoes. Established CPTI students are old hands at it. Hell, most of them don't even wear shoes anymore. Our running profit balance is now $16,010. Let's round it off to an even $16,000. CPTI students have reputations as big tippers. Just ask the Hungry Howie's delivery guy. Well, the market had its best week in years – up about 900 points. This is euphoria. It borders on insanity (and Turkey). This will be known as the war bubble. This week investors were hitching their wagon to a Tomahawk missile -- and no matter where it lands, it will be in a sand trap of some sort. It may take Tiger Woods to get investors out of this kind of trap. I hope they're buying protection, because short sellers are out there salivating – just waiting for the market to roll over. Profits, as we all know, can dissipate faster than flatulence in an Iraqui sand storm. Who is kidding whom? The economy hasn't changed. It's still lousy. But look at the people who, this week, have been throwing their money at just about everything. They don't want to miss the next bull market. Maybe we'll let them throw some our way. In this month's new trades, we're going to position ourselves to take advantage of a pullback. ____________________________________________________________ RECAP OF MARCH POSITIONS Position #1 – OEX Bull Put Spread – Trading at $456.37. Believing the market was not likely to go down to retest its July and October lows near 400, we sold 10 contracts of the OEX March 400 puts and bought 10 contracts of the OEX March 390 puts for a credit of $1,400. The OEX tested the 400 level last week, but bounced up nicely and the entire position expired worthless – which was the objective. Our profit: $1,400. ____________________________________________________________ Position #2 – XAU Iron Condor – Trading at $63.15. We created an Iron Condor with a 15-point range $65 to $80 for March. We placed spread orders and took in $1,400 for our 10- contract position. The objective is for the underlying, at expiration, to finish anywhere within the spread. We closed this position early because XAU broke down through support. We still managed at small $400 profit. For traders who didn't close the position, XAU had been hovering around the sold strike for awhile. The breakeven level was $63.60. With a $63.15 close, CPTI students who hung in there till the bitter end may have experienced a small loss. _________________________________________________________________ Position #3 -- OIH -- Diagonal Calendar Spread – Trading at $55.31. (See discussion below under "Ongoing Positions") ____________________________________________________________ Position #4 -- QQQ ITM Strangle – Currently trading at $27.16. (See discussion below under "Ongoing Positions") ____________________________________________________________ Position #5 – MMM Iron Condor – Currently trading at $134.37. (See discussion below under "Ongoing Positions") ____________________________________________________________ NEW POSITIONS FOR APRIL Position #1 – OEX Iron Condor – closed Friday at $456.37. We're going to create an Iron Condor with a 70-point range of 420 to 490 for April. The objective is for the OEX, at April expiration, to finish anywhere within the spread. Sell 10 contracts of the April 420 puts for $4.00 Buy 10 contracts of the April 410 puts for $3.10 The posted credit is $.90, but place a spread order for a credit of $1.20. The bid/ask spreads are wide enough to be able to work inside of them. Sell 10 contracts of the April 490 calls for $2.80 Buy 10 contracts of the April 500 calls for $1.70 The posted credit is $1.10, but place a spread order for a credit of $1.30. Again, the bid/ask spreads are wide enough to be able to work inside them. The total credit for the Iron Condor should be about $2.50. If you come within $.10 or $.15 of the $2.50, it's still a good trade. Our profit target is $2,500 for 10 contracts. Our safety range is 417.50 to 492.50. Position #2 – BRCM Short Straddle – Trading at $15.96 While the market has been enjoying this war-driven ride up the flagpole, Broadcom (BRCM) has lagged. They lost a lawsuit last week and it looks like BRCM will open closer to $15. It's been trading in a range and it looks like it should remain there. We're going to: Sell 10 contracts of BRCM April $15 call @ $1.80 Sell 10 contracts of BRCM April $15 put @ $.80 The total credit will be about $2.60. Remember, there's a good chance BRCM will open closer to $15 on Monday. It's the total credit we're looking for. If we take in $2.60, our safety range is from $12.40 to $17.60. We make the most if BRCM finishes at $15. Our maximum profit potential is $2,600. Maintenance requirement should be about $4,000. You have to have a higher trading approval level at your brokerage firm to trade this strategy. Contact your broker before you attempt to place the trade to confirm your trading level. I'll go over the entire Short Straddle strategy – including the potential adjustments -- in this week's column. _________________________________________________________ ONGOING POSITIONS Ongoing Position #1 – MMM Iron Condor – Trading at $134.37. We created an Iron Condor with a 15-point range $115 to $130 for April. We were able to take in $1,550 for our 10-contract position. The objective is for the underlying, at expiration, to finish anywhere within the spread. With the pre-war and war rally, MMM has violated our $130 short call. I'm prepared to be a little patient with this position. The market has gone up much too far and much to fast. We have a month for calmer heads to hopefully prevail and return MMM, among many other stocks, to a more reasonable level. This entire move up has been purely emotional. The companies haven't changed a bit. The companies didn't warrant higher prices before and their financial stories haven't changed a bit. What goes up must come down. Let's just hope that it will happen by April expiration. Ongoing Position #2 -- QQQ ITM Strangle – Trading at $27.16. This is a long-term position we created four months ago. We own the January 2005 $21 LEAPS calls and the January 2005 $29 LEAPS puts. We sold 10 contracts of the QQQ April $28 the QQQ April $22. We moved our short sells in by one point to generate some extra premium. Our new cost basis for the position is $5.30. Ongoing Position #3 -- OIH -- Diagonal Calendar Spread – Trading at $55.31. We thought that there was about $8-10 of uncertainty built into the price of a barrel of oil. When, and if, the war is resolved, the price of oil should work its way down, along with the price of oil stocks. We bought 10 contracts of the July OIH $55 puts and sold 10 contracts of the March OIH $50 put at a debit of $3.85. According to our plan, the March $50 put expired worthless. A week ago OIH was trading $53.20. We were sitting with $1.00 profit with OIH seemingly on its way down – which would have generated substantially more profit. We didn't take the profit at the time. Well, so much for logic. OIH bounced up to about $57.50. As of Friday's close, the July $55 put can be sold for $4.40. Our cost basis is $3.85. That would give us a profit of $.55 or $550 for the month. Not bad. But, for a couple of reasons, we're going to sell the April $50 put for $.70 and bring our cost basis down to $3.15. Why? Because there was no good reason for the run-up last week and because, in addition to making money, continuing with this trade will provide a good learning experience to the legions of CPTI students. We have CPTI students in Germany, the UK, and Australia. I guess you could call them our Foreign Legion. ____________________________________________________________ Food For Thought – Dog Food "Outside of a dog, a book is man's best friend. Inside of a dog, it's too dark to read." ____________________________________________________________ A Reminder Remember that I'm out of town. I will be able to respond to my backlog of emails on Wednesday. Don't hesitate to send them. I want to address any questions you may have. If you're interested in organizing your trading life, don't forget to send me your requests for the trading spreadsheet I discussed in Thursday evening's column. I'll be sending them out soon. For CPTI students, this spreadsheet is a must. It's right up there with your Doritos, your Salsa dip, your Atkins diet book and, of course, your subscription to OI. ___________________________________________________________ Happy trading! Remember the CPTI credo: May our remote batteries and self-discipline last forever, but mierde happens. Be prepared! In trading, as in life, it's not the cards we're dealt. It's how we play them. Your questions and comments are always welcome. Mike Parnos CPTI Instructor ************************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 ************************************************************** ************** TRADERS CORNER ************** Where is the Dow Going? By Steve Gould The Swiss Army has a saying. It goes like this: if the map and the terrain don't agree, go with the terrain. Sage advice. Up until the last 8 trading days, the Dow was behaving in a classic Elliott Wave basic 5 wave pattern. (See Introduction to Elliott Waves.) This is what the Dow looked like on 3/14/2003. Chart of the Dow Jones Industrials (#1): From its high in March until its low in October, the Dow progressed perfectly through a basic 5 wave pattern. From October until December, the Dow traced out a classic A-B-C correction. Starting in December, the Dow has unfolded another classic start to a 5 wave pattern. Even with the 500 point gain over the last two days, the 3 wave was still intact. Ah, but what a difference a week makes. This is why we don't place trades in 3 waves. Over the next 5 days, the Dow gained another 700 points. Although our map says we are in a wave 3 down, the terrain speaks otherwise. Here is what the Dow looks like as of 3/21/2003. Chart of the Dow Jones Industrials (#2) Let's take a step back, look at the bigger picture and discuss two possible scenarios. Scenario 1 Chart of the Dow Jones Industrials (#3): The move down from March until October is still a 5 wave basic pattern, but now let's considered it the 1 wave of a larger wave. The move from October until 3/21/2003 has been relabeled a 2 wave going through an A-B-C correction. If this is the case, then the move we are in right now is the completion of the C wave and could go as high as 9500. Then the 2 wave will be complete and the Dow will continue to head down as it starts the 3 wave. Scenario 2 Chart of the Dow Jones Industrials (#4): Again, the move down from March through October is a wave 1. In this scenario, just the move from October through December is a wave 2. At this point, the Dow began a wave 3. Since each 1, 3 and 5 wave will subdivide into a 5 wave basic pattern, the Dow just completed the 1 wave (green) of the overall 3 wave (red). The Dow will finish its wave 2 up (green) by completing the A-B-C correction (blue) and then start the wave 3 down (green and blue). I believe this is the more likely scenario. So what will happen next? Well, until proven otherwise, it looks like the Dow is going to retrace the last gains we had, perhaps around 380-620 points (wave B) and rally again to complete the wave C. After that rally, the Dow will head back down. How to play it. As stated in this week's Trader's Corner on The Characteristics of Elliott Waves, it is best not to make a play here. But for those who are a bit more on the aggressive side, anticipate a 500 point (plus or minus 120 point) move of the Dow (either scenario) and then another rally. If any rally (perhaps on news like we find Saddam dead) breaches the top of the wave 2 (9043) then scenario 1 is in effect. We get a bigger rally but the Dow still continues down. Just a little bit later. The correction should take a week or so. This is a very short term play. We do not want to go so far out that we are paying for only time, yet we don't want to be so near that we lose any profit to theta decay. A three month out option with a delta just above .25 should work nicely. Symbol Strike Type Bid Ask Delta Volume OI DJXRB June 80 Put 2.300 2.400 -27.3 669 10573 What if we are right If we are correct, the option will be worth about $3.70 after a 400 point move down. That is the exit price. Options Toolbox Screenshot: What if we are wrong Exit the trade if the option falls to 1.60. This gives us a 1.6 reward/risk ratio. Reward 1.30 ---- = ---- Risk .80 As of this writing, the war in Iraq is going quite well. If I may take a moment to be political here, I just want to say, that we have, beyond a shadow of a doubt, the strongest military in the world capable of defeating any enemy. I heard critics say that there is no way we could win a war in Iraq. Comments such as the military is not capable of fighting in the Iraqi desert heat, the Republican Guard is better trained and highly motivated, and we would suffer devastating losses should we engage the Iraqi Army are just trash talk. I just want to express my appreciation for the men and women of the US Military who are defending this country. My hat is off to you. (Try not to notice the bald spot.) ************** TRADERS CORNER ************** The Characteristics of Elliott Waves by Steve Gould I am the proud father of two wonderful children ages 13 and 11. I also serve as a counselor for the 4th, 5th and 6th graders during our church's summer camp. Surprise, surprise. Children in this age group constantly try to pull things over on me. It rarely works. They get busted and walk away flabbergasted that their little schemes failed. You see, I have a secret that they just do not know about. I will tell you what it is, but please, if you are under 18 years old, skip the next paragraph. Knowing this insider secret would give you a tremendous edge. What these precious little darlings don't know is that I used to be 11 years old. I know what it is like. I was there. I did those stunts. I can accurately predict their behavior based on my past experiences. I can easily identify certain actions that are pathognomonic of devious activity. Elliott Waves are no different. Each wave segment has a particular characteristic and behavior. Once I am able to understand it and identify it, I can accurately predict what the future movement will be based on past experience. Let's quickly review the basics of Elliott Waves. As the market progresses, it will unfold in waves. A wave is a specific series of up and down movements in a particular direction. Bull waves traverse up, bear waves traverse down. Each basic wave is segmented into five parts. For a bull wave, three segments move up and two segments move down. The net movement is up. The opposite is true for bear waves. The basic 5 wave pattern looks like this: Note that waves 1, 3 and 5 move up. These are called motive waves. Waves 2 and 4 move counter trend and are called corrective waves. A complete cycle is made up of 8 waves: a five wave motive wave and a 3 wave corrective wave. The complete cycle looks something like this. Wave Cycle (chart): If we just look at the waves themselves, we can never be quite sure where we are until after the waves have completely numbered. By that time it is way too late. We need some type of internal indicator to tell us just how strong each movement is and give us a better indication as to what wave segment we are in. The charting program that I use was specifically developed to analyze stocks using Elliott Waves. It has a proprietary oscillator that is basically a MACD. I played around with it a bit and could come up with an approximation that will work. If you wish to tweak it a bit and discover a more accurate representation, I would appreciate knowing the values you used. Chart of the Dow Jones Industrials: The blue histogram is the official oscillator. The green histogram is a MACD set at 20, 136, 20. In the meantime, I will use the oscillator provided by the program to interpret the wave. I was searching for a bull market example, but could not find the perfect chart. It is important to learn on the classic example so that you can see exactly how the wave is supposed to behave. The best example I could find is the Dow over the last year. (See chart below.) I have actually printed this one out, measured it, marked it and annotated it as a reference as to how all Elliott Waves should ideally behave. Chart of the Industrials with Wave identifiers: It is easy in retrospect to look at this graph say, "look, on July 25, we are in a wave 4." The trick is to be able to look at July 25 on July 25 and know how to say we are in a wave 4. I want to step through the five wave progression and point out the wave structure and characteristics as it develops in "real time". Waves can fool you and you have to wait until you can be reasonably sure where you are to place a high percentage trade. Keep in mind the completed chart above as we progress through each wave. Wave Five image: On 3/19/2002 the Dow completed a wave 5. At this point, I will not go into the characteristics of the end of a 5 wave. Suffice it to say that we suspect that the direction is about to change and we are watching to see if we are starting a 5-wave pattern down or just an A-B-C correction. Note that the oscillator peaked a few days earlier and is starting to show signs of losing momentum. This is a Type 2 set up and a possible tradable moment. Type 2 Set up (chart): This is what the wave labeling would be like on 5/20/2002. As the Dow continues to trade lower, look at the oscillator under wave C. It has peaked and reversed, crossing the zero line. Currently the retracement from wave C to the current bar is at 62%. Although this is a perfect set up for a wave 1 - wave 2 combo, we just do not know which way the Dow will move next. An argument could be made either way and both would be correct without further information. Chart: Well, as it turned out, the Dow did continue lower after a perfect 62% retracement. As wave 3 progresses, see how the oscillator increases in force and depth. Eventually, the rally (or anti-rally in this case as we are in bear market mode) loses steam and will retrace. Chart: On 6/25/2002, we can be confident that our wave count is correct based on several factors. 1. Wave 1 segmented very nicely into a 5 wave basic pattern. 2. The oscillator peaked at wave 1 and retraced as wave 2 started. 3. Wave 2 segmented into a 3 wave correction pattern. 4. Wave 2 retraced 62%. 5. The oscillator retraced and peaked around the peak of wave 2. 6. Wave 3 is starting to segment into a 5 wave basic pattern. (Remember that each 1, 3 and 5 wave will segment into a 5 wave basic pattern.) Unfortunately, it is too late to make a trade. We just do not know how much further wave 3 will go. 3 Waves will be anywhere from 1X the length (in price) of wave 1 to 2.62X the length. 75% of the time it will be somewhere between 1.6X and 2.62X. At this point in time, the Dow is only 1.5X the length of wave 1. The Dow could reverse into a wave 4 now or at 8079. There is really no way to know. If you are aggressive, you can take that chance. But, it is best to wait. Here is the chart as it looks on 7/8/2002: At this point, it looks like wave 3 has peaked and we are entering wave 4. The first clue is that the oscillator has peaked and is starting to retrace. To be officially classified as a wave 4, the oscillator must retrace to the zero line (+90%, -38%). The second clue is that wave 3 has segmented into a nice 5 wave basic pattern. Now let's look at a chart at 7/29/2002: For all the same reasons, we can point to 7/25/2002 as the end of the 3 wave. I showed this to illustrate that we really can not know where the wave 3 will end and although it is painful to miss a 1000 point move in the Dow, until it is confirmed, we just want to wait until we know where that sweet spot is. Chart: A Type 1 trade occurs after the 4 wave is complete. A wave 4 will have three important characteristics. First, it will retrace 38-62% of wave 3. Second, the oscillator will retrace somewhere between +90 and -38% of the wave 3 peak. Lastly, a wave 4 will segment into a nice A-B-C correction. Look at what the Dow did. 1. It retraced about 53%. 2. The oscillator retraced 1.382% or -38.2%. It is a minus because, it crossed the zero line. Although it is a little hard to read, the 90% retracement is the purple line just below the zero line. The oscillator needs to fall within that range to satisfy an orderly profit taking requirement. 3. We see an almost perfect A-B-C correction. This is such a perfect set up, I get goose bumps just writing about it. At the end of the day on 8/28/2002, we would buy puts. We would expect a move to at least the low of the wave 3, possibly lower. Chart: The Dow continued down until 9/30/2002. At this point we reached several important milestones. First, the wave 5 price broke through the wave 3 low. (Remember we are talking bear here. It would be just the opposite for a bull move.) Second, the peak of the wave 5 oscillator is lower (smaller) than the wave 3. This is critical. 3 Waves will ALWAYS have the tallest oscillator peak. This is called oscillator divergence and is a vital clue to tell us when the 5 wave is actually complete. Third, we can count a definitive 5 wave basic pattern within the 5 wave. Right here would be a good time to take some profits. The Dow may continue lower, or it may reverse. We just don't know. Let's not be greedy. A good rule of thumb would be to sell half the positions and see what happens. Chart: Well as it turns out, the Dow did go lower, but then came roaring back. Note the same characteristics listed above. It is time to sell the remaining positions. Each wave displays unique and identifiable characteristics. However, it is only the 4 wave and 5 wave that allow us to be sure of our count and place trades. Aggressive traders may try to second guess the market by placing trades at less than optimal positions. If so, I would highly recommend keeping a close watch on your stops. It really isn't necessary though. There are over 2000 optionable stocks. At any time, we can find some stock that is at the wave 4 sweet spot. Stocks are like buses. If you miss the first one, another one will come along. ************** FUTURES CORNER ************** Harmonic Trading With Gartley Patterns Options traders have their various butterflies, and as it happens, so does the technical charting world. Known as Harmonic Price Patterns, these are different from basic trading patterns like wedges and flags. There is a visual pattern, but there is also some math involved. Fibonacci ratios are applied to the shape in order to verify its authenticy. During the 1930's, this technique was developed by H.M. Gartley, and has recently been somewhat popularized by Larry Pesavento and Scott Carney. While there are several different patterns, today we will discuss the Bearish and Bullish Gartley Pattern. These patterns can be quite powerful, and often give you straightforward entry and exit points when the patterns begin to form.. We are looking to apply specific fibonacci retracements and extensions to a price structure. At first it may seem like a dark magic, needful of long robes and strange shoes to practice, but if you've ever seen large swings in price and wished you could put a 'face' on it, then you may be surprised at what appears from the price swings. It's really not very difficult, it just requires a few specific steps. Since this is something that can't really be discussed in the abstract, let's just jump in and see how to spot and build one of these patterns. Build a Bullish Gartley: We'll look at a recent Bullish Gartley on the Dow. The first step is to spot an impulsive move upwards in a given stock or index. Prefereably, this move should be from a true move down, rather than from a rangebound market, but it is not necessary. We label the bottom of the move as 'X' and the top of the move as 'A'. Once this impulsive move up has a pullback, and then starts to rise again, we label that low 'B'. Here is what you initially see: Chart of the Dow Industrials: Then put in X to A. Chart of the Industrials (#2) The pullback is labeled 'B'. The Gartley pattern is strengthened if the move from A to B is retraced at the 50% fibonacci level. Here, the move was not a perfect .500 retrace of the move from X to A but it was close enough to label it as such. Chart of the Industrials (#3) Now, as price rises off of B we look to build leg 'C'. In order to build a valid Leg C it will need to retrace the fall from A to B with one of the key fibonacci levels: (.382, .500, .618, or .786). In this case, C was equal to .786 of the move from A to B. Chart of the Industrials (#4) And the pullback of C is a perfect .786 retrace. Chart of the Industrials (#5) Perhaps the first thing you are thinking is, why is this a Bullish pattern? Looks like the retrace of C might give you a good short entry once C starts to breakdown. I, in fact, use it this way. When you see a 50% retrace of an impulse move which then retraces at .618 or .786 and fails, and you have a fairly good probability of a short. It is not how this pattern is meant to be viewed or traded, but this in itself is a useful setup. To continue, you now assume that prices are going to trade below B, and you are going to calculate the range of where the decline may stop, which we will label 'D'. Don't let the following scare you, It's just a few simple math calculations. Range for possible lows is calculated by multiplying the difference from B to C by key Fibonacci Derived Ratios numbers [1.27, 1.41, 1.618, 1.786] and [2.0, 2.24, 2.618, 3.14, 3.618]. Range = (C-B) * derived_ratio(1...n) and then subract Range from the C high. So first you calculate the range of potential lows like this: C = 8869 B = 8242 C-B = 630 C - (630* 1.27) = 8069 C - (630* 1.414) = 7979 . . C – (630* 2.0) = 7609 C – (630* 2.27) = 7438 Once you have these numbers, you look at fibonacci retrace numbers for the run from X to A. The .786 retrace of the run from X to A happens to be around 7593, which is near enough to the 2.0 extension calculated above, so now we can finish drawing the Bullish Gartley: Chart of the Industrials (#6) Finished Bullish Gartley: Chart of the Industrials (#7) Not too bad, with the projected value being off by 19 points. At this point we would consider the Gartley complete. The reason this is considered a Bullish Gartley is that now one can consider going long, and sure enough price bounced up 448 points to 8076, which itself is almost .382 retrace of the move from C to D. A bounce of over 400 points is not to be sneezed at, however, for this particular example, we can see that nothing is perfect, because price turned back over and made new lows to 7416. If you look at our calculations above, you can see that the calculated extension of 2.27 of BC was 7438, again off only by 22 points. Updated Gartley: Chart of the Industrials (#8) I hope I haven't lost you. As you can see, building these is actually fairly simple, all you need to do is snap fibonacci levels onto price, and do a few calculations. I can see virtual brows furrowed out there in the readers, and believe me, I too was skeptical when I first came upon these. I ignored them for quite some time, but I'm slowly becoming a true believer. Let's look at the NDX during this same period. Chart of the Industrials (#9) Here is one of the Dollar from last July. Chart of the Dollar: These patterns work on everything from Monthly charts to 5 minute charts. You can play the short side off the C retrace, or even on a break of B for a shorter term signal. Sixty minute charts can be used for shorter swing trades. The Bearish Gartley is just the inverse of the Bullish Gartley discussed above. The shape is just inverted, the calculations are the same. Here is a 15 minute chart of the ES from 2/7/03 to 2/11/03. 15-minute chart of the ES: You can see how XA is from a high to a low, the reverse from the Bullish Gartley, and that there is a nearly perfect retrace of .618 to form B, then a nearly perfect .618 retrace to form C. The calculation to form D was (C + ((B-C) * 1.618)) = 842.15, which was nearly perfect for the high which peaked at 842.75. The only thing which did not line up so well, was the actual retrace of XA which was a full two points over .786, but it does show us how we cannot look for absolute perfection. Overthrows and underthrows are common on any chart pattern one follows, and the Gartleys are no exception. This is merely the tip of the iceburg when discussing Harmonic Trading patterns. Other patterns include the Butterfly, Crab and Bat, as well as the Three Drives pattern. There are multiple patterns which build on top of, or next to each other and form strong turning points for both bulls and bears. Look through your charts and see if you can spot any Bullish or Bearish Gartleys, draw a few lines and Fibonacci levels, and see if they work out. You may be surprised at what you find. Vlada Raicevic ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 03-23-2003 Sunday 5 of 5 In Section Five: Covered Calls: Covered-Call Adjustments Naked Puts: Naked-Put Entry Strategies Spreads/Straddles/Combos: Stocks Soar Amid Rockets' Red Glare Updated In The Site Tonight: Watch List: Breakouts Everwhere. Market Posture: Resistance Falls ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************* COVERED CALLS ************* Trading 101: Covered-Call Adjustments By Mark Wnetrzak The bearish market activity earlier this month inspired one of our readers to ask about a speculative strategy for adjusting covered-call positions. Attn: Covered-calls editor Subject: Covering a losing position Hi Mark, I have been trading stocks for a few years and writing "covered" calls is one of the foundation strategies in my long-term stock portfolio. I also buy and sell calls and puts and roll into spreads when necessary for losing plays. With that in mind, I had an idea about a fairly aggressive method to bail out of a covered-call that has gone bad. I plan to sell the stock when it falls below the sold strike price, but leave the short call open. I would buy the stock back if and when it moves above the strike price? What do you think about this approach? Would it work in the current bearish conditions or is the volatility too great to risk the potential upside loss? Thanks for your thoughts! TR Hello TR, There are a few things to consider. First, getting approval to write cash-secured (naked) calls usually requires a substantial account size ($100,000 at Preferred) and the highest experience level. Many brokerages, E-trade for example, do not even offer the option to sell naked calls because of the high risk involved. After you sell the stock and the calls become uncovered (naked), your risk becomes unlimited as the stock can climb to infinity. Obviously, the primary purpose of an exit or adjustment strategy is to reduce or limit risk, not increase it. In most cases, when you become bearish on an issue, it is better to simply close the play and devote your capital to more deserving positions. Also, if the stock price declines to the cost basis and the calls are "out-of-the-money," they will be relatively inexpensive to buy back, thus allowing you to sell the stock without any additional obligation. Another thing to consider is that the cost basis in a conservative covered-call is generally within or just below a technical support area (in a perfect world, this is an area where you would expect the stock to stop falling and resume its bullish trend), there is a high probability of being whip-sawed, possibly more than once. Of course, there are other techniques to adjust a losing play or take protective action in a suspect issue, such as buying puts. This method can protect against further downside movement in the stock price and it works well in most situations, depending on how badly you want to hold on to the issue and how much insurance (the cost of the puts) you're willing to pay for. Rolling down (buying back the sold calls and selling lower strike calls) and/or forward (moving to a future expiration period) can lower your basis in an issue for the current correction but could also lock-in a loss if the issue rebounds before the option expires. Rolling down generally reduces the maximum profit potential of the covered write, but this is not a crucial drawback when obtaining additional downside protection is the more pressing concern. The use of a distant expiration month (including LEAPS) should also be considered when planning a roll-out strategy and some investors may want to adjust only a portion of the covered call position, to allow for increased profit potential in future trades. The problem, of course, is that by using a distant expiration option, an investor reduces his profit potential for a longer period of time. Again, that could be of secondary concern, depending on the situation, and a combination of the two time-frames; rolling down one-half of the position near term and the other half to a longer-term option will allow an investor to obtain maximum protection on at least part of his investment and still retain reasonable upside potential. In all of these situations, one generally has a bullish long-term outlook for the underlying issue and keep in mind, these adjustment strategies require choices that only you can make, depending on what you believe is best for your investment portfolio. Trade Wisely! SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Note: Margin not used in calculations. Stock Price Last Option Price Gain Potential Symbol Picked Price Series Sold /Loss Mon. Yield ADLR 13.07 12.70 MAR 12.50 1.80 1.23* 11.9% CBST 7.57 8.11 MAR 7.50 0.75 0.68* 10.8% IMCL 13.33 16.22 MAR 12.50 1.50 0.67* 8.2% MSTR 21.28 25.45 MAR 20.00 2.60 1.32* 7.7% IMCL 13.72 16.22 MAR 12.50 2.00 0.78* 7.2% FEIC 15.70 17.16 MAR 15.00 1.40 0.70* 7.1% CD 12.51 13.95 MAR 12.50 0.40 0.39* 7.0% JDSU 2.68 3.09 MAR 2.50 0.40 0.22* 7.0% GLW 5.18 6.12 MAR 5.00 0.55 0.37* 6.9% SEPR 11.17 14.65 MAR 10.00 1.90 0.73* 6.8% RSAS 5.90 8.02 MAR 5.00 1.25 0.35* 6.5% CMCSA 28.14 30.80 MAR 27.50 1.40 0.76* 6.2% ASKJ 5.86 6.70 MAR 5.00 1.25 0.39* 6.1% MCDT 8.42 9.37 MAR 7.50 1.30 0.38* 5.8% MRVL 20.60 20.21 MAR 20.00 1.35 0.75* 5.6% OVTI 19.00 23.45 MAR 17.50 2.15 0.65* 5.6% ANPI 20.10 22.33 MAR 20.00 0.60 0.50* 5.6% ** OVTI 16.83 23.45 MAR 15.00 2.55 0.72* 5.5% RMBS 14.76 13.90 MAR 12.50 2.85 0.59* 5.4% MVL 12.70 13.40 MAR 12.50 0.50 0.30* 5.3% NFLX 14.24 18.55 MAR 12.50 2.30 0.56* 4.1% DISH 28.75 30.40 MAR 27.50 1.75 0.50* 4.0% MANU 2.56 2.77 APR 2.50 0.35 0.29* 9.5% OAKT 3.23 4.01 APR 2.50 0.90 0.17* 5.3% EP 5.20 6.13 APR 5.00 0.70 0.50* 9.7% SONE 5.20 5.29 APR 5.00 0.55 0.35* 6.5% CPN 2.93 3.25 APR 2.50 0.60 0.17* 6.3% VECO 15.91 17.40 APR 15.00 1.70 0.79* 4.8% PEGS 10.90 11.10 APR 10.00 1.40 0.50* 4.6% SNDK 19.11 20.47 APR 17.50 2.40 0.79* 4.1% ALTR 13.84 15.20 APR 12.50 1.80 0.46* 3.3% * Stock price is above the sold striking price. ** Adjusted for a 2-1 split. Comments: The major averages continue to explode higher as the bulls run wild down Wall Street. Too much bullish exuberance can become a call-writer's bane: the pain of capped profits can cause a lapse in discipline and a move towards "aggressive" positions. Generally, seeking higher rewards requires higher risk. As for the model covered-call portfolio, even a couple of the previously closed March positions returned to profitability at expiration. It happens! As for April, even Manugistics (NASDAQ:MANU) has moved out of danger, at least for the time being. In any case, let's hope they get the job done in IRAQ and get everyone home safe and soon! Positions Closed: Dendreon (NASDAQ:DNDN), Cryolife (NYSE:CRY), Emisphere Technologies (NASDAQ:EMIS), Alacatel (NYSE:ALA), Arris Group (NASDAQ:ARRS), Symbol Technologies (NYSE:SBL), and Hurricane Hydrocarbons (NYSE:HHL). NEW CANDIDATES ********* Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield NWAC 8.30 APR 7.50 NAQ DU 1.30 1441 7.00 28 7.8% DAL 11.25 APR 10.00 DAL DB 1.90 10406 9.35 28 7.6% RSAS 8.02 APR 7.50 QSD DU 0.95 862 7.07 28 6.6% DCLK 7.69 APR 7.50 QWE DU 0.55 682 7.14 28 5.5% IDCC 19.99 APR 17.50 DAQ DW 3.30 346 16.69 28 5.3% ILXO 8.40 APR 7.50 IUE DU 1.20 70 7.20 28 4.5% BCGI 16.14 APR 15.00 QGB DC 1.70 150 14.44 28 4.2% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** NWAC - Northwest $8.30 *** Bottom Fishing Airlines: Part I *** Northwest Airlines (NASDAQ:NWAC) is engaged in the business of transporting passengers and cargo. Northwest's business focuses on the development of a global airline network through its strategic assets, including domestic hubs in Detroit, Michigan; Minneapolis/St. Paul, Minnesota, and Memphis, Tennessee; an extensive Pacific route system with a hub in Tokyo, Japan; a trans-Atlantic alliance with KLM Royal Dutch Airlines, which operates through a hub in Amsterdam, the Netherlands, and a global alliance with Continental Airlines, Inc. Northwest has been forging a Stage I base for several months and it appears to have made a successful test of the October low. A speculative position that offers a favorable reward at the risk of owning the stock near recent technical support. APR 7.50 NAQ DU LB=1.30 OI=1441 CB=7.00 DE=28 TY=7.8% ***** DAL - Delta $11.25 *** Bottom Fishing Airlines: Part II *** Delta Air Lines (NYSE:DAL) is a major air carrier that provides scheduled air transportation for passengers and freight throughout the U.S. and around the world. As of February 1, 2002, Delta, including its subsidiaries Atlantic Southeast Airlines and Comair, served 208 domestic cities in 45 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands, as well as 46 cities in 31 countries in Europe, Latin America, the Caribbean, Canada and Asia. For the year ended December 31, 2001, passenger revenues accounted for 93% of Delta's consolidated operating revenues. Cargo revenues and other sources accounted for 7% of Delta's consolidated operating revenues for the same period. Delta has been forging a Stage I base for several months and it appears to have made a successful test of the October low. A speculative position that offers a favorable reward at the risk of owning the stock near recent technical support. APR 10.00 DAL DB LB=1.90 OI=10406 CB=9.35 DE=28 TY=7.6% ***** RSAS - RSA Security $8.02 *** Electronic Security *** RSA Security (NASDAQ:RSAS) is a provider of electronic security (e-security) solutions that are designed to help organizations ensure the authenticity of the people, devices and transactions involved in e-business. The company's core competencies are in two-factor user authentication solutions, Web access management software, digital certificate management solutions and encryption software. Through its RSA SecurID, RSA ClearTrust, RSA Keon and RSA BSAFE product lines, the company directly addresses critical e-security requirements for e-business. Shares of RSAS slumped in late January after the company announced losses for the fourth quarter and all of 2002. However, the E-security company also posted a sequential growth in revenue and a favorable order rate as bookings exceeded revenue by approximately 10% for the fourth quarter. The current technical outlook is recovering and our position offers excellent reward potential at the risk of owning this industry-leading issue at a favorable cost basis. APR 7.50 QSD DU LB=0.95 OI=862 CB=7.07 DE=28 TY=6.6% ***** DCLK - DoubleClick $7.69 *** On The Move! *** DoubleClick (NASDAQ:DCLK) is a provider of products and services that enable direct marketers, publishers, advertisers and agencies to market to consumers in the digital world. DCLK's products and services help its customers optimize their advertising and marketing campaigns on the Internet and through other media. The company offers a broad range of technology, media, data and research products and services to its customers to allow them to address all facets of the digital marketing process, from pre- campaign planning and testing to execution, measurement and campaign refinements. DoubleClick operates three business units: TechSolutions, Media, and Data; all of which work with thousands of publishers, advertisers and direct marketers every day. DCLK has been stuck in a trading range since October and the recent rally on heavy volume has pierced near-term resistance. Traders can speculate on the near-term performance of the issue with this conservative position. APR 7.50 QWE DU LB=0.55 OI=682 CB=7.14 DE=28 TY=5.5% ***** IDCC - InterDigital $19.99 *** Patent Victory Celebration *** InterDigital Communications (NASDAQ:IDCC) specializes in the architecture, design and delivery of wireless technology and product platforms. Over the course of its corporate history, the company has amassed a substantial and significant library of digital wireless systems experience and know-how, and holds an extensive worldwide portfolio of patents in the wireless systems field. InterDigital markets its technologies and solutions primarily to wireless communications equipment producers and related suppliers. In addition, the company licenses its Time Division Multiple Access and Code Division Multiple Access patents to equipment manufacturers worldwide. On Monday, shares of InterDigital soared after the company said it reached a patent and royalty settlement with Ericsson. The agreement calls for Ericsson and Sony Ericsson Mobile Communications AB to pay about $34 million through the end of 2002. Sony Ericsson will pay a royalty on each licensed product sold through 2006. The recent price history of IDCC reveals one of the better charts we've seen and the jump to a 2-year high on extremely heavy volume suggests further upside potential. APR 17.50 DAQ DW LB=3.30 OI=346 CB=16.69 DE=28 TY=5.3% ***** ILXO - ILEX Oncology $8.40 *** Rally Mode! *** ILEX Oncology (NASDAQ:ILXO) is a product-driven oncology-focused pharmaceutical company that develops and commercializes a portfolio of novel treatments for both early and late stage cancers. The company is leveraging its core competencies in clinical drug development to identify, develop and commercialize its proprietary product candidates. The company's lead product, Campath, has been approved in the United States and Europe for treating patients with refractory chronic lymphocytic leukemia, and is distributed by Schering AG and its U.S. subsidiary, Berlex Laboratories, Inc. In addition, the ILEX has five oncology product candidates in clinical trials and three others that it is considering for further clinical development, as well as several active preclinical programs. ILEX was upgraded on Tuesday by Lehman Brothers to "overweight" and the stock promptly jumped out of its recent consolidation phase. The move above the 150-dma on heavy volume bodes well for the future and this position offers a method to participate in the movement of the issue with relatively low risk. APR 7.50 IUE DU LB=1.20 OI=70 CB=7.20 DE=28 TY=4.5% ***** BCGI - Boston Comm. $16.14 *** Own This One! *** Boston Communications Group (NASDAQ:BCGI) provides real-time subscriber management services to the wireless industry. The company's real-time subscriber management products include the following: proprietary software applications, which include extensive software suite to manage subscribers; hosting environment, which is a real-time, large scale, micro-payment transaction processing platform; Intelligent Voice Services Network, which includes edge-of-network voice services and Signaling System 7 call control; and Distribution Technology Partnership Program, which is a national payment network for cash collection. Boston Communications exceeded earnings estimates in early February and said "We have ended 2002 with the momentum necessary to deliver strong growth and earnings in 2003." We simply favor the bullish breakout above near-term resistance (on heavy volume) and investors who want a long-term position in an industry-leading company can use this play to establish a low risk cost basis in the issue. APR 15.00 QGB DC LB=1.70 OI=150 CB=14.44 DE=28 TY=4.2% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield ADLR 12.70 APR 10.00 UAH DB 3.50 306 9.20 28 9.4% NFLX 18.55 APR 17.50 QNQ DW 2.15 213 16.40 28 7.3% EP 6.13 APR 5.00 EP DA 1.40 28596 4.73 28 6.2% MSCC 10.57 APR 10.00 QMS DB 1.10 168 9.47 28 6.1% OVTI 23.45 APR 20.00 UCM DD 4.50 493 18.95 28 6.0% GT 5.35 APR 5.00 GT DA 0.60 5110 4.75 28 5.7% ASML 8.35 APR 7.50 MFQ DU 1.20 1275 7.15 28 5.3% ATYT 5.38 APR 5.00 QFY DA 0.60 339 4.78 28 5.0% ALXN 13.42 APR 12.50 XQN DV 1.45 97 11.97 28 4.8% SONE 5.29 APR 5.00 FBZ DA 0.50 597 4.79 28 4.8% SMTC 16.61 APR 15.00 QTU DC 2.20 990 14.41 28 4.4% JCOM 27.54 APR 25.00 JQF DE 3.50 142 24.04 28 4.3% ADIC 7.97 APR 7.50 QXG DU 0.75 572 7.22 28 4.2% ***************** NAKED PUT SECTION ***************** Options 101: Naked-Put Entry Strategies By Ray Cummins With the recent bullish activity in the stock market, selling puts in once again a popular strategy and this week's guest writer has some helpful hints for using this technique to earn consistent profits. On any day when I meet someone new and tell him or her I am an Investment Broker, they always ask me when the market is going to get better. For the most part, I explain the current environment and realize, as their eyes glaze over, that they don’t understand or believe a word I'm saying. The average person out there doesn’t believe that there are securities on the rise and methods to make money. Because many don’t understand the strategies, they think I am "full of it" and don’t believe that making money is possible. The investing public doesn’t realize what many of you do; that there are various investment strategies to take full advantage of markets that are "stuck in the mud" and there are many stocks or indexes that defy the market’s drowning effect. Why am I talking about selling "naked" Puts, a traditionally bullish strategy? Because there are still some up-trending and/or consolidating stocks and indexes out there. I am also determined to educate investors so they can earn consistent profits in any environment. I prefer to sell Puts "out-of-the-money" as a precautionary manner. I usually sell the strike price at or below a support level. Some may choose to sell in-the-money in order to gain the "delta" effect. Before you do this, always calculate the margin requirement versus the cash requirement of buying the stock or in-the-money Calls. I sell Puts with the preconceived notion that I want to actually own the stock but just because you have a different reason for selling options, don’t stop reading. I plan on covering entry strategies that will help no matter what your trading preference. In keeping with my KISS (Keep it Simple Silly) approach, I will give just a few indicators to follow. Everyone has different parameters that they use and someone out there might even have "tweaked" the numbers better than me. I prefer to use Bollinger Bands with 20 periods and a standard deviation of 2. Many charting programs use this as the default. I also use Fast Stochastics with an 8:3:3 for the basic (Period:SK;SD) settings. I find these two indicators work well together and confirm tops and bottoms more frequently than other indicators. Many of the other indicators are hard to read and can be interpreted to support one’s emotional perception instead of the actual reading. For oversold conditions, I look for the Stochastics to break below 20 and the stock price must also drop to the bottom Bollinger envelope line (preferred) or the 20-day moving average and bounce. Both indicators must hold up. A near-term bottom must be confirmed by the security’s price moving up from the lower Bollinger Band while the Stochastics line moves back up through the 20 level. Some up-trending security’s Stochastics lines don’t always drop down to 20 or lower. Look for the average low. This is also true with the Bollinger Bands. When the above indicators reach "oversold" conditions, I look for upward confirmation and then sell the Puts. As I stated before, because I believe the security is oversold, I may choose to sell in-, at-, or out-of-the-money Puts. I can always "buy-to-close" if I am right and lock-in the profit (preferred). The latter technique is a good practice in an uncertain market. It frees up cash, which may be applied to the same security, if it drops down again and there is still sufficient premium to warrant a new position. In some cases, it is better to look for a completely different security. The important thing to remember when selling naked Puts is finding a security that is either consolidating or up-trending over the long term. Exit strategies are also important. If the stock moves up and then gives a "head fake" and goes down past the recent low, close the position! Another exit strategy on out-of-the-money Puts is to close the position if it doubles in price. This means taking a loss, but it usually preserves capital. If the Put is in-the-money, then the premium received is usually larger than the out-of-the-money premium and a different approach is needed. The stop-loss amount depends on one’s personal risk tolerance and investment goals. For example, one could place a percentage (buy-to-close) stop on the Put at 10%, 20% or 30% etc. To illustrate, let’s assume you write an in-the-money Put for $15 per contract and place a 25% stop-loss on it. You would close out the position if the Offer (Ask) hit $18.75. As stated before, if the stock moves up, the option may move down in price enough to close it out at a decent profit. The key is to always protect your profits and limit your losses... Happy Trading! Robert J. Ogilvie, ROP SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Stock Price Last Option Price Gain Max Simple Symbol Picked Price Series Sold /Loss Yield Yield MSTR 20.83 25.45 MAR 17.50 0.80 0.80* 12.0% 4.2% RMBS 15.18 13.90 MAR 12.50 0.25 0.25* 9.9% 3.0% MSTR 22.60 25.45 MAR 20.00 0.30 0.30* 9.7% 3.3% CGNX 22.62 24.10 MAR 17.50 0.55 0.55* 9.4% 2.8% MSTR 20.69 25.45 MAR 17.50 0.75 0.75* 9.3% 3.2% CELG 24.00 26.66 MAR 22.50 0.35 0.35* 9.0% 3.4% SRNA 15.07 16.35 MAR 12.50 0.30 0.30* 8.7% 2.7% RMBS 13.69 13.90 MAR 10.00 0.30 0.30* 8.6% 2.7% OVTI 16.55 23.45 MAR 12.50 0.35 0.35* 8.3% 2.5% AFFX 26.92 27.82 MAR 25.00 0.35 0.35* 8.3% 3.1% IART 19.39 23.56 MAR 17.50 0.35 0.35* 8.2% 3.0% XLNX 23.04 26.73 MAR 20.00 0.50 0.50* 8.1% 2.8% MDCO 16.92 19.45 MAR 15.00 0.60 0.60* 8.0% 3.0% LRCX 12.56 13.56 MAR 10.00 0.25 0.25* 7.9% 2.2% ANSS 22.20 24.11 MAR 20.00 0.80 0.80* 7.7% 3.0% XLNX 22.90 26.73 MAR 20.00 0.35 0.35* 7.7% 2.6% IRF 20.39 23.26 MAR 17.50 0.50 0.50* 7.5% 2.6% MACR 15.22 12.99 MAR 12.50 0.25 0.25* 7.5% 2.2% OVTI 16.83 23.45 MAR 12.50 0.25 0.25* 7.5% 2.2% DIGE 15.54 15.54 MAR 12.50 0.30 0.30* 7.5% 2.1% GILD 36.80 41.53 MAR 35.00 0.45 0.45* 7.3% 2.8% CGNX 21.84 24.10 MAR 20.00 0.75 0.75* 7.1% 2.8% ERES 22.46 25.40 MAR 17.50 0.30 0.30* 6.8% 1.9% MDCO 18.94 19.45 MAR 17.50 0.30 0.30* 6.7% 2.5% HHL 11.56 10.65 MAR 10.00 0.20 0.20* 6.7% 2.2% SLAB 27.12 28.05 MAR 22.50 0.30 0.30* 6.7% 2.0% CKFR 20.66 23.26 MAR 17.50 0.30 0.30* 6.0% 1.9% EPIQ 19.10 18.88 MAR 17.50 0.25 0.25* 5.8% 2.1% OTEX 27.14 28.21 MAR 25.00 0.75 0.75* 5.7% 2.2% ADBE 27.43 32.07 MAR 22.50 0.40 0.40* 5.4% 1.6% FAF 23.10 23.49 MAR 22.50 0.30 0.30* 4.9% 2.0% AVCT 27.82 24.09 MAR 25.00 0.35 -0.56 0.0% 0.0% IMCL 15.70 16.22 APR 12.50 0.50 0.50* 9.9% 3.0% MOGN 10.96 12.36 APR 10.00 0.50 0.50* 9.2% 3.8% XLNX 25.38 26.73 APR 22.50 0.75 0.75* 8.1% 3.0% AMZN 24.71 27.93 APR 22.50 0.65 0.65* 6.8% 2.6% MATK 25.32 27.91 APR 22.50 0.55 0.55* 6.1% 2.2% CYBX 19.15 20.00 APR 17.50 0.45 0.45* 6.1% 2.3% OVTI 21.18 23.45 APR 15.00 0.30 0.30* 5.7% 1.8% LLTC 32.58 34.91 APR 27.50 0.55 0.55* 5.6% 1.8% EXPE 37.14 54.09 APR 30.00 0.50 0.50* 5.3% 1.5% PSUN 19.73 20.90 APR 17.50 0.35 0.35* 5.1% 1.8% MEDI 30.68 33.44 APR 27.50 0.65 0.65* 4.8% 1.8% * Stock price is above the sold striking price. Comments: The onset of war, however appalling it might be, brought the market out of its recent doldrums and the resultant rally was the best bullish activity seen in months. The optimism among investors turned to ebullience on Friday afternoon and stocks soared amid the tremendous upside bias. Our portfolio was a beneficiary of the bullish trend with all of the March plays finishing positive save one; Avocent Corporation (NASDAQ:AVCT). In addition, there are no issues on the "early exit" watch-list. Previously Closed Positions: Possis Medical (NASDAQ:POSS) and American Pharmaceutical Partners (NASDAQ:APPX), which are both currently positive. WARNING: THE RISK IN SELLING NAKED OPTIONS IS SUBSTANTIAL! ***** The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. MARGIN REQUIREMENTS The Initial Margin is the amount of collateral you must have in your account to initiate the position. In specific terms, margin refers to cash or securities required of an option writer by his brokerage firm as collateral for the writer's obligation to buy or sell the underlying interest if assigned through an exercise. The Maintenance Margin is the amount of cash (or securities) required to offset the changing collateral requirements of the written options in your portfolio. As the price of the option and the underlying stock changes, so does the maintenance margin. With (short) put options, the margin requirements can increase when the underlying stock price declines and also when it rises significantly. The reason is the manner in which the collateral amount is determined (with the formula listed above) and traders should always consider not only the initial margin requirement, but also the maximum margin needed for the life of the position. Option writers occasionally have to meet calls for additional margin during adverse market movements and even when there is enough equity in the account to avoid a margin call, the need for increased collateral will make that equity unavailable for other purposes. Please consider these facts carefully before you initiate any "naked" option positions. For more information on margin requirements, please refer to: http://www.cboe.com/LearnCenter/pdf/MarginManual2000.pdf MONTHLY YIELD: MAXIMUM & SIMPLE The Maximum Monthly Yield (listed in the summary and with each new candidate) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The Simple Monthly Yield is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the position. NEW CANDIDATES ***** Sequenced by Maximum Yield (monthly basis - margin) ****** Stock Last Option Option Last Open Cost Days Max Simple Symbol Price Series Symbol Bid Int Basis Exp. Yield Yield CREE 20.54 APR 17.50 CVO PW 0.50 303 17.00 28 9.6% 3.2% IRF 23.26 APR 20.00 IRF PD 0.40 152 19.60 28 6.7% 2.2% NVLS 30.87 APR 25.00 NLQ PE 0.40 7596 24.60 28 6.3% 1.8% AMZN 27.93 APR 22.50 ZQN PS 0.35 7426 22.15 28 6.2% 1.7% CVC 20.30 APR 17.50 CVC PW 0.30 3499 17.20 28 5.8% 1.9% CMCSA 30.80 APR 27.50 CCQ PY 0.50 3587 27.00 28 5.7% 2.0% YHOO 23.97 APR 20.00 YHZ PD 0.30 21119 19.70 28 5.5% 1.7% JCOM 27.54 APR 22.50 JQF PX 0.30 57 22.20 28 5.2% 1.5% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MY-Maximum Yield (monthly basis - using margin), SY-Simple Yield (monthly basis - without margin). ***** CREE - Cree Incorporated $20.54 *** No Dip In The Chips! *** Cree (NASDAQ:CREE) is engaged in the development and manufacture of compound semiconductor materials and electronic devices made from silicon carbide (SiC), and a developer and manufacturer of optoelectronic and electronic devices made from gallium nitride and related materials. The company also produces radio frequency power transistor components and modules for wireless infrastructure applications using silicon-based bipolar and laterally diffused metal oxide semiconductor process technologies. Cree operates its business in two segments, the Cree segment, which consists of its SiC-based products and research contracts, and the Cree Microwave segment, which consists of RF transistors and RF transistor modules based on a silicon platform. Chip-equipment stocks are in "rally mode" and the volume-supported ascent in CREE's share value has helped the issue emerge near the top of a number of our technical analysis scans. Traders who agree with a bullish outlook for the stock can profit form further upside activity in the issue with this position. APR 17.50 PUT CVO-PW LB=0.50 OI=303 CB=17.00 DE=28 MY=9.6% SY=3.2% ***** IRF - International Rectifier $23.26 *** New Trading Range? *** International Rectifier (NYSE:IRF) is a designer, manufacturer and marketer of power management products and a global supplier of a unique type of power semiconductor, MOSFET (a metal oxide semiconductor field effect transistor). Power semiconductors process electricity into a more usable form for electrical products. The company's products are divided among three broad product categories: analog integrated circuits and advanced circuit devices, power systems and power components. Its many products are used in a range of end markets, including consumer electronics, information technology, automotive, aerospace and defense, communications and industrial systems. Despite the recent bearish trend in the stock market, shares of IRF have remained in a relatively stable trading range from $19 to $22 since late last year. Now the issue is testing the upper limits of its lateral price pattern and the current technical indications suggest further upside potential in the near-term. APR 20.00 PUT IRF-PD LB=0.40 OI=152 CB=19.60 DE=28 MY=6.7% SY=2.2% ***** NVLS - Novellus Systems $30.87 *** Premium Selling! *** Novellus Systems (NASDAQ:NVLS) manufactures, sells and services semiconductor processing equipment. The company's products are comprised primarily of advanced systems used to deposit thin conductive and insulating films on semiconductor devices, as well as equipment for preparing the device surface prior to these deposition processes. Novellus is a supplier of high productivity deposition and surface preparation systems used in the fabrication of integrated circuits. Chemical Vapor Deposition systems employ a chemical plasma to deposit all of the dielectric (insulating) layers and certain of the metal (conductive) layers on the surface of a semiconductor wafer. Physical Vapor Deposition systems are used to deposit conductive metal layers by sputtering metallic atoms from the surface of a target source via high DC power. Electrofill systems are used for depositing copper conductive layers in a dual damascene design architecture using an aqueous solution. Novellus is one of the more volatile issues in the chip equipment segment, thus its options premiums are always robust. This position offers excellent reward potential at the risk of owning an industry-leading issue near a cost basis of $25. APR 25.00 PUT NLQ-PE LB=0.40 OI=7596 CB=24.60 DE=28 MY=6.3% SY=1.8% ***** AMZN - Amazon.com $27.93 *** Another Multi-Year High! *** Amazon.com (NASDAQ:AMZN) is a website where customers can find and discover anything they may want to buy online. The company lists millions of items in categories such as books, music, DVDs, videos, consumer electronics, toys, camera and photo items, PC software, computer and video games, tools and hardware, outdoor living items, kitchen and house-wares products, toys, baby and baby registry, travel services and magazine subscriptions. At its Amazon Marketplace, Auctions and zShops services, businesses and individuals can sell virtually any product to millions of customers, and with Amazon.com Payments, sellers are able to accept credit card transactions in addition to other methods of payment. The company operates a U.S.-based Website: amazon.com, and four internationally focused Websites: www.amazon.co.uk, www.amazon.de, www.amazon.fr and www.amazon.co.jp. Amazon.com shares continued to rally this week after an impressive technical break-out amid anticipation of the company's presentation at the Merrill Lynch Retailing Leaders Conference in New York. Traders who foresee further upside activity for the issue should consider this position. APR 22.50 PUT ZQN-PS LB=0.35 OI=7426 CB=22.15 DE=28 MY=6.2% SY=1.7% ***** CVC - Cablevision $20.30 *** Media Sector Rally! *** Cablevision Systems (NYSE:CVC) is a cable operator in the U.S. through its wholly owned subsidiary, CSC Holdings. CVC also has investments in cable programming networks, entertainment businesses and telecommunications companies. Through Rainbow Media Holdings, the company owns interests in and manages numerous national and regional programming networks, the Madison Square Garden sports and entertainment business, and cable television advertising sales companies. With Cablevision Lightpath, the company provides switched telephone services and high-speed Internet access to the business market. The company also owns or has interests in several complementary businesses and companies that include The WIZ, Clearview Cinemas, and Northcoast Communications. After a long consolidation in the $17 range, CVC shares are once again in an up-trend and the bullish activity in the media-cable TV sector should help the issue move higher in the coming weeks. APR 17.50 PUT CVC-PW LB=0.30 OI=3499 CB=17.20 DE=28 MY=5.8% SY=1.9% ***** CMCSA - Comcast $30.80 *** Rally Mode! *** Comcast (NASDAQ:CMCSA) is a cable operator involved in three principal lines of business: cable, through the development, management and operation of broadband communications networks; commerce, through QVC, its electronic retailing subsidiary; and content, through its consolidated subsidiaries Comcast Spectacor, Comcast SportsNet, Comcast SportsNet Mid-Atlantic, Comcast Sports Southeast, E! Entertainment Television, The Golf Channel, Outdoor Life Network, G4 Media, and through other programming investments. The company has deployed digital cable applications and high-speed Internet service to most of its cable communications systems. The media-cable TV sector is "hot" and Comcast has been one of the best performing issues in the group over the past week. Investors who wouldn't mind owning this bullish issue near a basis of $27 should consider this position. APR 27.50 PUT CCQ-PY LB=0.50 OI=3587 CB=27.00 DE=28 MY=5.7% SY=2.0% ***** YHOO - Yahoo! $23.97 *** New 2-Year High! *** Yahoo! (NASDAQ:YHOO) is a global Internet business and consumer services company that offers a comprehensive branded network of properties and services to more than 200 million individuals worldwide. The company offers an online navigational guide to the Internet via its www.yahoo.com Website, which is a guide in terms of traffic, advertising and household and business user reach. Through Yahoo! Enterprise Solutions, the firm also provides many business services designed to enhance the productivity and Web presence of its clients. Yahoo! has offices in the United States, Europe, Asia, Latin America, Australia and Canada. Shares of YHOO are "on the move" with a recent surge in buying interest on heavy volume and the technical support area near the cost basis of this position offers a reasonable downside margin for any near-term bearish activity. APR 20.00 PUT YHZ-PD LB=0.30 OI=21119 CB=19.70 DE=28 MY=5.5% SY=1.7% ***** JCOM - j2 Global Communications $27.54 *** All-Time Highs! *** j2 Global Communications (NASDAQ:JCOM) provides outsourced value added messaging and communications services to individuals and businesses throughout the world. The company offers faxing and voicemail solutions, Web initiated conference calling, document management solutions and unified messaging services. j2 Global markets its services principally under the brand names eFax and jConnect. The company delivers its services through its global telephony/Internet protocol network, which spans more than 600 cities in 18 countries across five continents, including four capital cities in Latin America where j2 Global is in the process of launching its unique service. In February, j2 Global set new annual and quarterly records for revenue, net income and earnings per share as it announced its 23rd consecutive quarter of growth. For the full year 2002, revenue increased 45% to $48.2 million compared to $33.3 million in fiscal 2001. Investors were elated with the news and the buying activity has pushed the issue to a test of its all-time highs near $28. Traders who believe the rally will continue can profit from that outcome with this play. APR 22.50 PUT JQF-PX LB=0.30 OI=57 CB=22.20 DE=28 MY=5.2% SY=1.5% ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Maximum Yield (monthly basis - margin) ****** Stock Last Option Option Last Open Cost Days Max Simple Symbol Price Series Symbol Bid Int Basis Exp. Yield Yield NFLX 18.55 APR 15.00 QNQ PC 0.45 103 14.55 28 11.3% 3.4% SRNA 16.35 APR 15.00 NHU PC 0.55 0 14.45 28 10.4% 4.1% MSTR 25.45 APR 22.50 EOU PX 0.70 418 21.80 28 9.6% 3.5% NAV 27.51 APR 25.00 NAV PE 0.80 2208 24.20 28 9.4% 3.6% IMCL 16.22 APR 12.50 QCI PV 0.30 408 12.20 28 9.2% 2.7% OVTI 23.45 APR 17.50 UCM PW 0.40 418 17.10 28 8.5% 2.5% PHG 18.68 APR 15.00 PHG PC 0.30 1526 14.70 28 8.0% 2.2% CKFR 23.26 APR 20.00 FCQ PD 0.45 62 19.55 28 7.5% 2.5% RECN 21.40 APR 20.00 QRG PD 0.45 33 19.55 28 6.4% 2.5% ************************ SPREADS/STRADDLES/COMBOS ************************ Stocks Soar Amid Rockets' Red Glare By Ray Cummins The major equity averages surged higher Friday as optimism for a quick and decisive victory in Iraq boosted investor confidence about the recent recovery in share values. The Dow jumped 235 points to 8,522, its highest level since early January, on strength in DuPont (NYSE:DD), Caterpillar (NYSE:CAT), General Electric (NYSE:GE), JP Morgan (NYSE:JPM) and Walt Disney (NYSE:DIS). The NASDAQ added 18 points to 1,421, despite sizeable losses in Intuit (NASDAQ:INTU), which warned of a sales slowdown, and Adobe Systems (NASDAQ:ADBE), which was downgraded by analysts at WR Hambrecht. The S&P 500-stock index added 19 points to 895 with airline and healthcare companies among the best performers. In the major commodities, gold continued to decline and crude oil prices fell below $27 a barrel for the first time in three months. Advancing issues outpaced losing issues by roughly 2-to-1 on both the NYSE and the technology exchange. Trading volume was robust with over 1.8 billion shares changing hands on both the Big Board and the NASDAQ. The benchmark 10-year Treasury note fell almost a point to yield 4.09%, up from 3.95% in the previous session. Trim Tabs reported Thursday that $900 million flowed into equities in the week ended March 19, reversing a portion of outflows totaling $4.9 billion seen during the prior week. Equity funds that invest primarily in U.S. stocks had outflows of $500 million, compared with outflows of $4.3 billion the prior week. ***************** PORTFOLIO SUMMARY ***************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. PUT CREDIT SPREADS ****************** Symbol Pick Last Month LP SP Credit CB G/L Status SYMC 46.09 42.56 MAR 35 40 0.50 39.50 $0.50 Closed COP 48.72 51.65 MAR 42 45 0.25 44.75 $0.25 Closed NKE 45.14 53.30 MAR 40 42 0.20 42.30 $0.20 Closed CAM 53.03 49.68 MAR 45 50 0.65 49.35 $0.33 Closed SII 35.34 34.10 MAR 30 32 0.25 32.25 $0.25 Closed CMCSA 29.22 30.80 MAR 25 27 0.30 27.20 $0.30 Closed FIC 48.84 47.38 MAR 40 45 0.50 44.50 $0.50 Closed AMGN 55.70 58.56 APR 47 50 0.25 49.75 $0.25 Open EXPE 35.19 54.09 APR 27 30 0.30 29.70 $0.30 Open APOL 47.44 50.78 APR 40 45 0.50 44.50 $0.50 Open MMM 125.55 134.37 APR 110 115 0.50 114.50 $0.50 Open FLR 32.11 34.99 APR 25 30 0.50 29.50 $0.50 Open OEX 424.07 456.36 APR 375 380 0.45 379.55 $0.45 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss Previously closed positions in Cooper Cameron (NYSE:COO) and Smith International (NYSE:SII) finished the expiration period profitably. CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status BSC 59.90 67.74 MAR 70 65 0.50 65.50 ($2.24) Closed * BUD 47.70 48.40 MAR 55 50 0.45 50.45 $0.45 Closed MDT 44.15 47.42 MAR 50 47 0.25 47.75 $0.25 Closed PEP 39.86 41.50 MAR 45 42 0.25 42.75 $0.25 Closed BSC 61.69 67.74 MAR 70 65 0.55 65.55 ($2.19) Closed * NEM 27.51 24.37 MAR 32 30 0.25 30.25 $0.25 Closed PG 81.86 88.90 MAR 90 85 0.45 85.45 ($3.45) Closed * TRMS 40.02 42.26 MAR 50 45 0.50 45.50 $0.50 Closed CHIR 35.80 39.66 APR 42 40 0.25 40.25 $0.25 Closed IP 34.30 37.99 APR 40 37 0.25 37.75 ($0.24) Closed UNH 83.64 89.90 APR 95 90 0.55 90.55 $0.55 Closed TOT 65.30 64.15 APR 75 70 0.60 70.60 $0.60 Open XAU 67.44 63.15 APR 80 75 0.50 75.50 $0.50 Open ACS 44.26 48.02 APR 55 50 0.55 50.55 $0.55 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss The losses published in the summary do not reflect timely exit trades in Bear Stearns (NYSE:BSC) and Proctor & Gamble (NYSE:PG), both of which were identified as "early exit" candidates. The position in H&R Block (NYSE:HRB) has been previously closed to limit potential losses and based on the bullish market activity, conservative traders should likely do the same with International Paper (NYSE:IP), Chiron (NASDAQ:CHIR) and United Health (NYSE:UNH). CALL DEBIT SPREADS ****************** Symbol Pick Last Month LC SC Debit B/E G/L Status AMGN 52.09 58.56 MAR 45 47 2.20 47.20 0.30 Closed EXPE 33.29 54.09 MAR 27 30 2.18 29.68 0.32 Closed NBR 40.13 38.80 MAR 35 37 2.20 37.20 0.30 Closed STN 19.40 21.62 APR 17 20 1.60 19.10 0.90 Open EBAY 83.91 89.79 APR 70 75 4.50 74.50 0.50 Open LC = Long Call SC = Short Call B/E = Break-Even G/L = Gain/Loss PUT DEBIT SPREADS ***************** Symbol Pick Last Month LP SP Debit B/E G/L Status FDX 50.84 57.26 APR 60 55 4.50 55.50 (1.76) Closed * The loss published in the summary does not reflect a timely exit trade in the position. LP = Long Put SP = Short Put B/E = Break-Even G/L = Gain/Loss SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status AFFX 27.14 27.10 MAR 30 25 0.15 0.45 Closed UOPX 37.38 38.89 MAR 40 35 (0.10) 3.50 Closed MEDI 32.65 33.44 APR 35 30 0.10 0.50 Open University of Phoenix Online (NASDAQ:UOPX) soared this week and the bullish position achieved an outstanding profit as the issue vaulted above $40. Affymetrix (NASDAQ:AFFX) reached profitability during Tuesday's upside activity and the new position in Mediimune (NASDAQ:MEDI) has already posted a favorable gain. The previously closed position in Watson Pharmaceuticals (NYSE:WPI) was a winner earlier in the month after the company won U.S. FDA approval for Oxytrol, a patch to treat urinary incontinence. The position in Ultra Petroleum (NYSE:UPL) slumped in conjunction with Oil Service stocks and the play was closed early to limit losses. CALENDAR & DIAGONAL SPREADS *************************** Stock Pick Last Long Short Current Max Play Symbol Price Price Option Option Debit Value Status CI 43.02 46.28 APR-45C MAR-45C 0.85 1.30 Closed BMET 28.52 31.00 JUL-30C APR-30C 0.80 1.00 Open OTEX 29.29 28.21 MAY-25C APR-30C 3.60 3.50 Open CMVT 10.20 12.05 APR-7.5C MAR-10C 2.20 2.50 Closed ICST 23.86 23.50 APR-22C MAR-25C 2.10 2.00 Open Cigna (NYSE:CI) finally broke to the upside and after closing the short option (MAR-$45C), the net value of the long call offered a favorable profit for conservative traders. The previously closed position in American Express (NYSE:AXP) yielded short-term gains earlier in the month as did Weatherford (NYSE:WFT), which was also closed early due to the slump in oil service stocks. The bullish spread in Biomet (NASDAQ:BMET) was rolled to April options in the short call (MAR-$30). Open Text (NASDAQ:OTEX) climbed to a recent high Friday, offering a great opportunity to transition to April options (short) in the bullish diagonal spread. The position in Comverse Technology (NASDAQ:CMVT) finished at maximum profit, but Integrated Circuit Systems (NASDAQ:ICST) needs to move higher in the coming month to achieve profitability. DEBIT STRADDLES *************** Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status ROOM 40.14 60.05 MAR 40 40 6.50 20.00 Closed ETM 45.45 45.76 MAR 45 45 1.30 1.10 Closed BAX 19.65 20.47 MAR 20 20 1.35 1.15 Closed The Hotels.com (NASDAQ:ROOM) straddle was the biggest winner in this section in recent months, with a 300%+ profit on the initial investment. However, the speculative "Reader's Request" plays did not fare well at all, despite the volatility in the broader equity markets. Questions & comments on spreads/combos to Contact Support ************* NEW POSITIONS ************* This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. ************** CREDIT SPREADS ************** These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may be higher than other plays in the same strategy, due to small disparities in option pricing. Current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its outcome. ***** CAT - Caterpillar $52.55 *** New 10-Month High! *** Caterpillar (NYSE:CAT) manufactures and markets construction, mining, agricultural and forest machinery; engines for on-highway use and locomotives, as well as for electrical power generation systems and other applications, and provides financing for the purchase and lease of its equipment. The company operates three principal lines of business: machinery, engines and financial products. The company designs, manufactures, markets, finances and provides support for its Caterpillar, Cat, Solar, Perkins, FG Wilson, MaK, and Olympian brands. CAT - Caterpillar $52.55 PLAY (conservative - bullish/credit spread): BUY PUT APR-45.00 CAT-PI OI=1393 A=$0.50 SELL PUT APR-47.50 CAT-PW OI=1728 B=$0.75 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$47.25 ***** EXPD - Expeditors Intl. $37.68 *** Transport Sector Rally! *** Expeditors International of Washington (NASDAQ:EXPD) is engaged in the business of providing global logistics services. The company offers its customers a seamless international network supporting the movement and strategic positioning of goods. The company's services include the consolidation or forwarding of air and ocean freight. In each U.S. office, and in many overseas offices, the company acts as a customs broker. The company also provides additional services including distribution management, vendor consolidation, cargo insurance, purchase order management and customized logistics information. EXPD - Expeditors Intl. $37.68 PLAY (conservative - bullish/credit spread): BUY PUT APR-30.00 URP-PF OI=0 A=$0.15 SELL PUT APR-35.00 URP-PG OI=13 B=$0.60 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$34.50 ***** GILD - Gilead Sciences $41.53 *** Drug Stock Speculation! *** Gilead Sciences (NASDAQ:GILD) is an independent biopharmaceutical company that discovers, develops and commercializes therapeutics to advance the care of patients suffering from life-threatening diseases. The company has five products that are marketed in the United States and in other countries worldwide. These are Viread, a drug for treating HIV infection; AmBisome, a drug for treating and preventing life-threatening fungal infections; Tamiflu, a drug for treating and preventing influenza; Vistide, a drug for treating cytomegalovirus (or CMV) retinitis in AIDS patients, and DaunoXome, a drug for treating AIDS-related Kaposi's sarcoma. GILD - Gilead Sciences $41.53 PLAY (less conservative - bullish/credit spread): BUY PUT APR-35.00 GDQ-PG OI=328 A=$0.50 SELL PUT APR-37.50 GDQ-PU OI=569 B=$0.80 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$37.20 ***** NOC - Northrop Grumman $82.35 *** Sector Slump! *** Northrop Grumman (NYSE:NOC) is a global defense firm that provides unique technologically advanced products, services and solutions in defense and commercial electronics, defense systems integration, information technology and nuclear and non-nuclear shipbuilding and systems. Northrop Grumman has operations in 44 states and 25 countries, serving U.S. and international military, government and commercial customers. Northrop Grumman is aligned into six main business sectors: Electronic Systems, Information Technology, Integrated Systems, Ship Systems, Newport News and Component Technologies. NOC - Northrop Grumman $82.35 PLAY (conservative - bearish/credit spread): BUY CALL APR-95.00 NOC-DS OI=2850 A=$0.30 SELL CALL APR-90.00 NOC-DR OI=2321 B=$0.70 INITIAL NET-CREDIT TARGET=$0.45-$0.60 POTENTIAL PROFIT(max)=9% B/E=$90.45 ***** SII - Smith International $34.10 *** Trading Range? *** Smith International (NYSE:SII) is a worldwide supplier of premium services to the oil and gas exploration and production industry, the petrochemical industry and other industrial markets. The firm provides a comprehensive line of technologically-advanced products and engineering services, including drilling and completion fluid systems, solids-control equipment, waste-management services, three-cone and diamond drill bits, fishing services, underreamers, casing exit and multilateral systems, packers and liner hangers. The company also offers supply-chain management solutions through an extensive branch network providing pipe, valve, tool, safety and other maintenance products. SII - Smith International $34.10 PLAY (conservative - bearish/credit spread): BUY CALL APR-40.00 SII-DH OI=653 A=$0.20 SELL CALL APR-37.50 SII-DU OI=676 B=$0.45 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$37.75 ************* DEBIT SPREADS ************* These candidates offer a risk/reward outlook similar to credit spreads, however there is no margin requirement as the initial debit for the position is also the maximum loss. Since these positions are based primarily on technical indications, traders should review the current news and market sentiment surrounding each issue and make their own decision about the outcome of the position. ***** PPD - Pre-Paid Legal Services $18.16 *** Bottom Fishing! *** Pre-Paid Legal Services (NYSE:PPD) designs, underwrites and markets legal expense plans. The company's legal expense plans (referred to as Memberships) provide for a variety of legal services in a manner similar to medical plans. In most states and provinces, standard plan benefits include preventive legal services, motor vehicle legal defense services, trial defense services, IRS audit services and a 25% discount for most legal services. Additionally, in approximately 37 states, the Legal Shield rider can provide members with 24-hour access to a toll free number for attorney assistance if the member is arrested or detained. Pre-Paid's other services include Canadian Family Plan, Specialty Legal Service Plans, Business Owners' Legal Solutions Plan, Law Officers Legal Plan, Commercial Driver Legal Plan, Home-Based Business Rider and Comprehensive Group Legal Services Plan. PPD - Pre-Paid Legal Services $18.16 PLAY (aggressive - bullish/debit spread): BUY CALL APR-15.00 PPD-DC OI=82 A=$3.50 SELL CALL APR-17.50 PPD-DW OI=921 B=$1.60 INITIAL NET-DEBIT TARGET=$1.75-$1.90 POTENTIAL PROFIT(max)=31% B/E=$16.90 ***** QLGC - QLogic $39.98 *** Rally...What Rally? *** QLogic Corporation (NASDAQ:QLGC) designs and supplies storage network infrastructure components and software for server and storage subsystem manufacturers. The company's products are based on SCSI, iSCSI, Fibre Channel and Infiniband standards. The company is the only end-to-end supplier of Fibre Channel network infrastructure components that aid in the transfer and acquisition of data within the SAN. Their products include its SANblade HBAs, SANbox Fibre Channel Switches and SANsurfer Tool Kit management software. QLogic is the only HBA vendor that supports SCSI, Internet Protocol, Virtual Interface and FICON protocols with the same Fibre Channel HBA. In addition, the company designs and supplies controller chips used in a variety of hard drives and tape drives as well as enclosure management and baseboard management chip solutions that monitor the health of the physical environment within a server or storage enclosure. QLGC - QLogic $39.98 PLAY (conservative - bearish/debit spread): BUY PUT APR-47.50 QLC-PW OI=83 A=$7.90 SELL PUT APR-45.00 QLC-PI OI=610 B=$5.60 INITIAL NET-DEBIT TARGET=$2.20-$2.25 POTENTIAL PROFIT(max)=11% B/E=$45.25 **************** CALENDAR SPREADS **************** A calendar spread (or time spread) consists of the sale of one option and the simultaneous purchase of an option of the same type and strike price, but with a future expiration date. The premise in a calendar spread is simple: time erodes the value of the near-term option at a faster rate than the far-term option. The positions in this section are speculative (out-of-the-money) spreads with low initial costs and large potential profits. ***** ESI - ITT Educational Services $29.11 *** Speculation Only! *** ITT Educational Services (NASDAQ:ESI) is a provider of technology oriented postsecondary degree programs in the United States. The company offers associate, bachelor and master degree programs and non-degree diploma programs to more than 33,000 students. The company has 74 institutes located in 28 states and each of its institutes is authorized by the applicable education authorities of the states in which they operate and recruit, and accredited by an accrediting commission recognized by the United States DOE. The company currently offers a variety of degree programs as well as several diploma programs in various fields of study. All of its institutes offer degree or diploma programs for information technology and electronics, and the majority of institutes offer a degree or diploma program involving design. The company's quarterly earnings are due 4/17/03. ESI - ITT Educational Services $29.11 PLAY (very speculative - bullish/calendar spread): BUY PUT OCT-30.00 ESI-JF OI=150 A=$3.70 SELL PUT APR-30.00 ESI-DF OI=147 B=$1.25 INITIAL NET DEBIT TARGET=$2.40-$2.45 INITIAL TARGET PROFIT=$0.75-$1.10 ******************* SYNTHETIC POSITIONS ******************* These stocks have momentum-based trends and favorable option premiums. Traders with a directional outlook on the underlying issues may find the risk-reward outlook in these plays attractive. ***** ADTN - Adtran $38.14 *** Telecom-Equipment Rally! *** Adtran designs, develops, manufactures, markets and services a broad range of high-speed network access products utilized by providers of telecommunications services and corporate end users to implement advanced digital data services over both public and private networks. The company's business is arranged with two divisions, the Carrier Networks Division (CN) and the Enterprise Networks Division (EN), to enable it to quickly respond to the needs of the two important market segments that its products address. These two market segments are CN products for use in the service provider's Local Loop, including central office, remote terminal and customer premises, and EN products for use at enterprise headquarters, remote offices and telecommuting locations. Adtran offers more than 500 products built around a set of core technologies, and developed to address high-speed digital communications over the last mile of the Local Loop. The company's quarterly earnings are due on 4/15/03. ADTN - Adtran $38.14 PLAY (very speculative - bullish/synthetic position): BUY CALL MAY-45.00 RQA-EI OI=27 A=$1.00 SELL PUT MAY-30.00 RQA-QF OI=595 B=$0.80 INITIAL NET-CREDIT TARGET=$0.00-$0.10 INITIAL TARGET PROFIT=$0.45-$0.75 Note: Using options, the position is similar to being long the stock. The minimum initial margin/collateral requirement for the sold option is approximately $850 per contract. However, do not open this position if you can not afford to purchase the stock at the sold put strike price ($30). ***** MGAM - Multimedia Games $21.85 *** On The Rebound! *** Multimedia Games (NASDAQ:MGAM) is the leading U.S. supplier of interactive electronic games and player stations to the rapidly growing Native American gaming market. The company's games are delivered through a telecommunications network that links its player stations with one another both within and among gaming facilities. Multimedia Games designs and develops networks, software and content that provide its customers with unique and comprehensive gaming systems. The company's development and marketing efforts focus on Class II gaming systems and Class III video lottery systems for use by Native American tribes across the United States. MGAM - Multimedia Games $21.85 PLAY (very speculative - bullish/synthetic position): BUY CALL JUL-25.00 QMG-GE OI=250 A=$2.20 SELL PUT JUL-20.00 QMG-SD OI=62 B=$2.05 INITIAL NET-CREDIT TARGET=$0.00-$0.10 INITIAL TARGET PROFIT=$0.90-$1.25 Note: Using options, the position is similar to being long the stock. The minimum initial margin/collateral requirement for the sold option is approximately $900 per contract. However, do not open this position if you can not afford to purchase the stock at the sold put strike price ($20). ***** ************************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 ************************************************************** ************ MARKET WATCH ************ Breakouts Everywhere. Plenty to watch on the OI watch list: To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/wl_032303.asp ************** MARKET POSTURE ************** Resistance Falls Well, what can we say, other than just about everything was up on Friday. And not just up a little. Resistance levels fell like Iraqi lines of defense and that was pretty much the key to it all. As Iraqi troops surrendered and U.S. troops took control of oil fields, the market just kept climbing... To Read The Rest of The OptionInvestor.com Market Posture Click Here http://www.OptionInvestor.com/marketposture/MP_032303.asp ********** 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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