The Option Investor Newsletter Sunday 05-11-2003 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: Holding the Line Futures Market: Blinked, You Missed It Index Trader Wrap: If not stocks, what else? Editor's Plays: Strangling the Dow Market Sentiment: Keep An Ear Open Ask the Analyst: Indices End the Week with a Bang . . . or Did They? Coming Events: Earnings, Splits, Economic Events Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 5-09 WE 5-02 WE 4-25 WE 4-17 DOW 8604.60 + 18.92 8582.68 +276.33 8306.35 - 31.30 +134.24 Nasdaq 1520.15 + 17.27 1502.88 + 68.34 1434.54 - .96 + 66.65 S&P-100 472.25 + .38 471.87 + 15.77 456.10 + 2.49 + 12.74 S&P-500 933.41 + 3.33 930.08 + 31.27 898.81 + 5.23 + 25.28 W5000 8883.34 + 49.28 8834.06 +308.17 8525.89 + 59.04 +239.31 RUT 413.53 + 5.86 407.67 + 19.17 388.50 + 4.80 + 12.40 TRAN 2462.18 + 1.38 2460.80 +108.19 2352.61 - 9.58 +131.63 VIX 22.04 - 1.57 23.61 - 0.29 23.90 - .69 - 3.68 VXN 32.09 - 0.27 32.36 - 1.34 33.70 - 2.18 - 3.74 TRIN 0.83 0.66 1.95 0.50 Put/Call 0.82 0.71 0.87 0.52 ****************************************************************** On a slow news day and on light volume the markets eased back up to close the week where they started and just below the recent highs. The Dow managed to climb within 36 points of its 8641 high from Tuesday. The Nasdaq closed within 12 points of its high for the week. This was pretty bullish for an early summer Friday in May even if the move was on very light volume. Dow Chart - 240 min Nasdaq Chart - 240 min While the news was good on the surface the Friday sprint only managed to get the indexes back to where they started the week. If you added the weekly gains for the top six indexes, DOW, Compx, SPX, OEX, RUT and $TRAN you would only get a total of +47 points. That is an average of only an eight-point gain per index. While the result was bullish it still lacked conviction but nobody was complaining at the close with the Nasdaq at the high for the day. There were no material economic reports on Friday and the only release was strongly positive. The ECRI Weekly Leading Index rose to 121.8 and it was the second largest jump in a year. The +2.4 point jump was driven by an improving stock market and new mortgage applications. The S&P-500 gains helped power the rise as it gained +3.5% for the week. The six-month growth rate rose to +0.6 from zero and the highest rate since July-2002. This index is not a market mover because it is based on a combination of components, which have been previously released. It is however an indicator that shows a clearer trend and that trend is rising. Much of the gains are powered by the recent stock market rally and any selling can turn it around just as quickly. Stocks got some help from Treasury Secretary John Snow who came out against the Fed statement expressing worry about deflation. Snow said emphatically there was "no danger of significant deflation" and while the economy was sluggish it was improving. Clearly the economic reports over the next 30-60 days will be critical. The next round of reports which begins next week will be post Iraq reports and continued declines will not set well with investors. They are writing off the last couple weeks of data as prewar but that excuse will no longer fly. The sentiment on the market is changing fast or should I say changed fast? The Investors Intelligence survey shows that bulls are firmly in control. According to the survey 56% of newsletter writers are now bullish with only 24.4% bearish. According to editor Michael Burke this is extremely bearish for everybody to be so bullish. I know, it sounds strange but it is true. Burke points out that at the market top in March 2000 the rankings were 55.7% bullish and 26.4% bearish. He also pointed out that the PE ratios are higher now than in 1929 and 1987 when valuation concerns helped tank the markets. He points out that when the numbers reach these extremes there are no bears left to convert meaning there is nobody left to buy. Burke claims each time these numbers have been reached a drop occurred citing 1991, 1992, 1998, 2000 as recent examples. Unless an asteroid hits the planet soon we will get a chance to see if this historical trend repeats itself. The key point here is that it may not occur for some time. There is no magic time element where reaching a specific level instantly produces a result. It is more of a cycle than an event. Speaking of cycles, Hochberg of Elliott Wave has gone on record saying this is just another bear market rally. A good rally by his own admission but he is quick to point out that they have analyzed every financial cycle from the 1600s to the present and the pattern is the same. Cheerful thought. The thing I like about the wave guys is they can be wrong more than they are right and still claim success. They are like weathermen. It may rain or it may not. If this low pressure system, that high pressure, these clouds, that wind moves like this then it may rain. If it rains they say I told you so. If it does not then it is because one of the conditions did not occur. I still like to analyze the wave guys and we have two good ones at OptionInvestor. Steve Gould does wave analysis in his articles and on some of his stock selections. Herb Keith has been giving us the blow by blow on the Futures Monitor for the last couple weeks. Unfortunately they are both echoing the comments from Hochberg. Do you think they are looking at the same play book? A week ago Herb predicted a rise in the S&P to 934 by last Friday. He missed it by four points. I will be interested to see his comments for next week. Steve did an excellent wave article on the Dow last Sunday. Check it out. http://www.OptionInvestor.com/traderscorner/tc_050403_4.asp Back to the bullishness. Investors piled a total of $12.9 billion into stock funds in April according to AMG data. This was the largest inflow of cash since the $17 billion in April 2002. The resulting rally has pushed us to new highs. However, the first week in May has only seen an inflow of $1.1 billion to equities and taxable bond funds saw inflows of $3.4 billion. Money Market accounts saw inflows of $13.4 billion. Does anybody see the clue here? Of the nearly $18 billion of cash flowing into to investment vehicles only 6% of it actually went into stocks during the week ending May-7th. The money is there and available for instant infusion but the lack of conviction is very apparent. Part of that lack of conviction came from a Goldman Sachs survey of CIOs from large corporations that was announced on Friday. The CIO survey showed they saw no increase in tech spending in 2003 and only a +2-5% increase in 2004. They said the current overcapacity left over from the tech bubble was preventing any need to upgrade. The companies overbought during the height of the tech bubble and the massive layoffs and cutbacks over the last couple years has idled much of that equipment. With excess capacity in every area they said it would take a substantial recovery some time to require new buying. Countering the Goldman Sachs survey Intel President Paul Otellini said that they see strong demand in China and they expect a "slight" recovery in the semiconductor industry this year. He said the Centrino chip had met full expectations and Chinese demand remained strong. This is particularly strange since all other reports out of China are for a sales slump of from -5% to - 20% due to the SARS panic. Numerous chip/tech companies have already warned about slower sales and lower earnings. Either those companies are using the SARS ate my earnings excuse now that Iraq is over or Otellini has been inhaling chip dust too long. In predicting a chip recovery he said "the past year has been so bad that the semiconductor sector can only improve this year." I don't know if that is positive or not. If sales were off -50% last year and they gained a "slight" +1% this year that would be an improvement but I don't think investors are thinking in those terms. With the hysteria over deflation fears since the Fed meeting there is an entirely new round of rate cut scenarios. The current consensus is that the Fed will cut rates by 25 points at the June meeting. The odds of this cut in June are about 52%. The Fed Funds futures are predicting a 100% chance of a 25 point cut by September and a 46% chance of another 25 point cut at the September meeting. An HSBC analyst went out on a limb Friday and predicted the Fed will take drastic action at the June meeting and cut a full 50 points. The theory is that the deflation comment in the FOMC statement was code for we are going to act immediately and drastically in June if the next 30 days of prewar economic reports do not show a credible rebound in the economy. The Fed cannot take the chance that deflation will be a possibility and they would much rather have the inflation monster back with rampant demand and rising prices than be stuck in the quicksand of deflation. Deflation is much harder to stop and drains jobs, markets, profits, taxes and sentiment more thoroughly than a plague of leeches. If the coming reports do not show improvement analysts expect the Fed to act quickly and not only with rate cuts. There have been numerous comments about "other" methods at the Feds disposal including massive infusions of money and artificial support of bonds to keep real interest rates lower. The markets managed a positive close on Friday. They are either poised to explode next week or poised to crash. The Dow is marching ever upward and the short pullback last week did not even come close to uptrend support. Buyers stepped in at 8500 and market breadth improved again. The Dow closed at 8604, a level first reached on Monday. The resistance highs around 8635-8640 held all week and a new bullish wedge is forming at 8630. Should this wedge break to the upside the next real target could be as high as 8850 with a pause at 8700. The Dow is poised to explode on good news but the lack of conviction is still a problem and a problem that could be serious if we get an unexpected event. The Nasdaq still looks strong but not as strong as the Dow. The +35% gain off the October lows is finally starting to produce some drag. It is still only 12 points off the high for the week and well above real support at 1435-1450. With AMAT and Dell earnings next week there is one last chance for improved guidance that could break to a new high. The close Friday was right at the December high of 1521 and strong resistance even though it has traded as high as 1531 during the week. Again, the Nasdaq is poised for another surge if we can get enough conviction and AMAT/DELL/SCMR/NTAP/BEAS/BRCD/INTU do not disappoint with earnings this week. The sentiment is very bullish and broad based but we are very extended and a change in that sentiment could be sudden. The economic highway for next week is full of potholes with a potential washout late in the week. Monday: None Scheduled Tuesday: Chain Store Sales, International Trade Wednesday: Import/Export Prices, April Retail Sales Thursday: NY Empire Index, Jobless Claims, PPI, Business Inventories, Industrial Production, Capacity Utilization, Philadelphia Fed, Semi Book-to-Bill Friday: Housing Starts, Building Permits, CPI, Michigan Sentiment Obviously Thursday and Friday are going to be big days with the potential to either set fire to the rally rocket or watch it implode on the launching pad. The bullish sentiment may provide a buy the rumor move on Monday/Tuesday as bulls hoping for signs of a recovery continue to enter long positions. That could set the stage for a serious sell the news event if the news is less than exciting. There is a bullish case for stocks despite any negative news this week. (No rocks please) The Fed is poised to pour massive stimulus into the economy to prevent the "D" monster from getting a foothold. Believe it or not the housing bubble is still alive and well and growing. The falling mortgage rates and the arrival of spring are going to fuel yet another round of the housing boom. Auto sales are actually rising due to stronger incentives and consumers buying cars instead of mutual funds. This is the third year of a presidential term which is almost always positive with politicians promising two chickens in every pot. A tax cut package for $500 billion was passed on Friday and though a long way from done it will eventually happen. The government is spending money at record rates to prop up the economy, provide security, grow defense and replace billions in supplies used in Iraq. Oil prices are dropping with a probable glut returning. The SARS panic is easing with the disease contained in most countries. The dollar is trading at four-year lows, which makes our exports cheaper and imports less attractive. It is still bad for foreign investment in the stock market but the balance of trade will benefit from increasing demand for our products. And lastly, there is a huge amount of money waiting on the sidelines. Estimates range between $2 and $3 trillion in cash, money markets, brokerage accounts and bond funds that can be shifted back to equities on a moments notice. In layman's terms the pregame has begun. There is a pent up demand not for products but for good news. The conditions are becoming increasingly positive but the game has not yet started. The spectators are filing into the stands and milling around the parking lot while the opposing teams warm up on the field. There are storm clouds on the horizon and everyone is patiently waiting to see if they are going to dump torrential rains which will postpone the game until the end of summer make up schedule or blow over revealing sunny skies and the start of the big game. The bearish case stresses the grossly over valued market based on a historical PE compared with the average S&P PE today of 33. The historical PE value for supposedly fairly valued stocks ranges between 8-20 depending on who you talk to. Between 1990-2000 the average PE for Dow stocks was 19. The highest PE ever for the Dow was 1991 and right after the Gulf war at 31.4. The second highest was September 2001 at 30.7. Bears feel the current lack of earnings (+6% ex energy) and a high rate of warnings for the 2Q (58%) makes stocks over valued. They also feel the negative economic reports like Jobs, ISM, etc are pointing to more earnings pressure ahead. They may be right but the bulls claim the PE ratios are justified based on what the companies will earn when the recovery appears. Costs have been cut so far that profits will soar when demand picks up in the 2H of this year. Bears remind them that the recovery was supposed to come in the 2H of 2001, then the 2H of 2002, now 2H 2003 is slipping and many fear it may not appear until the 2H of 2004. Bears point to the Fed's fear of deflation as confirmation the end is near. Regardless of your market view there are two charts I want to leave with you today. The first is the McClellan Summation Index. This is the ratio adjusted chart and a reading of +1000 or -1000 points indicates an imminent direction change in the markets. It is basically an indicator of market breadth and displays the amount of bullish or bearishness in the market. Note the index closed at an extremely high level of 1077, which indicates extreme bullishness. This is a contrarian indicator and an extreme reading of bullish activity is actually bearish because that trend is due to change. Since July of 1999 the indicator has touched the -1000 level three times. This is the first time in four years it has touched the +1000 level. Note the bearish divergence already forming in the MACD. Note that when the MACD hit zero in the past the direction change was nearly immediate. NYSI Chart - Daily The last chart is a comparison of the DOW/VIX for the last three years. Note that each time the VIX moved below 20 it represented a market top. It closed at 22 on Friday and one or two more positive days should do the trick. Maybe Wednesday afternoon? Again the effect is not immediate and several days can go by before the drop. In some cases it can stay under 20 for several weeks. However, like sunrise in the morning you can always count on the eventual market turn. My gut feel is that we will see gains early in the week as traders take positions hoping for some positive economic reports on Thr/Fri. Those gains should push us to new highs and well into extreme overbought territory. If those reports are negative there could be a quick change in sentiment and a change in direction. As of Wednesday morning traders may require oxygen and a parachute to enter the markets. Oxygen for the rarefied atmosphere we could attain if the reports are favorable. The parachute may be needed if they disappoint. Buckle your seatbelt because either way it should be a thrilling ride. Enter Very Passively, Exit Very Aggressively! Jim Brown ************** FUTURES MARKET ************** Blinked, You Missed It By Jim Brown 05-11-2003 High Low DJIA 9604.60 +113.38 8612.58 8492.69 NASDAQ 1520.15 + 30.46 1520.15 1500.10 S&P 500 933.41 + 24.79 933.77 920.27 NDX 1143.55 + 24.79 1143.97 1126.13 ES03M 932.25 + 11.75 933.50 919.25 YM03M 8578.00 +100.00 8593.00 8474.00 NQ03M 1143.50 + 25.50 1146.00 1114.50 Daily Pivots (rounded to nearest point) R2 R1 Pivot S1 S2 DJIA 8690 8647 8570 8527 8450 COMPX 1534 1527 1513 1507 1493 ES03M 943 937 928 923 914 YQ03M 8667 8623 8548 8504 8429 NQ03M 1166 1155 1135 1123 1103 If you took a coffee break between 10:15-11:15 you missed the only major move of the day. The ES rallied off support at 924 to test the recent highs around 934. Other than a news dip at 2:PM that is where they stayed the rest of the day. All the indexes for the week returned to their Monday opening levels and appeared to be ready for another try at a breakout. Linda did such a good job in the Index Trader Wrap this weekend I am not going into elaborate detail about each index/future. Suffice it to say they all closed at their highs on low volume. http://www.OptionInvestor.com/itrader/indexes/marketwrap.asp The Dow has down trend resistance at 8700 and horizontal resistance at 8850 which is the top from January. With the Dec/Jan tops presenting significant resistance over 8850 the Dow will have a tough challenge hitting 9000 again during the summer doldrums. Dow Chart - Daily The Nasdaq stalled at the December top at 1520 but appears ready to try again. The uptrend channel is still intact and resistance is light until the longer term down trend hit around 1585. The current support is well below last weeks action at 1435-1465. It would take a break of 1435 to cause any serious worry and a break under 1350 to cause a panic. Nasdaq Chart - Daily The ES futures are using the longer-term uptrend support currently at 924 as a bottom as it tries to hit those highs from last week again. 938-940 should be significant psychological resistance and the uptrend channel is narrowing. There should be a significant retest of underlying support soon. We have simply gone too far without a major dip to continue this pattern. We either need to consolidate with a sideways pattern until the overbought conditions ease or we need a significant market event to take out the momentum buyers and establish a strong base at a higher level. 860-865 was the last base and we have added nearly +80 points since. We have been trading with a top in the 930s for six days and the dip back to 920 was quickly bought last week. We had a higher low on Thursday and lower high on Friday. The opposing forces are narrowing the battle lines as we approach the critical economic reports on Thr/Fri. I look for positive markets early in the week and a potential drop on negative news on Thursday. ES03M Chart - 240 min ES03M Chart - 30 min The NQ Futures are probably the most clearly defined of the group. The uptrend channel is uncluttered with clear tops and bottoms. The resistance is not until 1170 and there are multiple levels of support at 1135, 1120 and 1100. Any dip that stopped at 1100 or above would continue the trend. On Thursday after two days of declines the NQ pierced 1120 slightly followed by a gap open on Friday. This could be a dead cat bounce and needs to be watched carefully. Another break of the uptrend line at 1135 could signify a slowing of the rally and a potential failure ahead. The key number here is 1120 as the most recent support test. I would look to be short under 1120 with an exit just above 1100. Conversely a move over Friday's high of 1145 would be a long entry. NQ03M Chart - 30 min. The Dow futures have seen a very strong uptrend for the last two months. There have been very few serious dips and each was quickly bought. The length and strength of this pattern is stretching the bounds of reasonableness without a serious market even soon. The current top at 8600 followed by downtrend resistance at 8700 could be tough to break. The economic reports on Thursday/Friday could be too much weight for the Dow to carry without pausing for a rest. Even good news could prompt a sell the news event after the many weeks of strong gains. I would be looking for a short entry at 8700 or a failure below 8450. YM03M Chart - 60 min Not to repeat myself any more today but Thr/Friday are going to be critical to the markets. Any gains early in the week should be protected on Wednesday night if the Dow is still moving up. The potential for bad news outweighs the potential for good and there is greater risk in the market for bulls than bears after Wednesday. Jim Brown ******************** INDEX TRADER SUMMARY ******************** If not stocks, what else? By Leigh Stevens This is the question to ask in this market if you are scratching your head as to the sustaining nature of the current rebound. When looking at competing investments, we see low (and declining) bond yields of 3.7% and 4.7% in 10 and 30-year government bonds, respectively. Real estate, while not in a broad overall decline, is now longer way outdistancing a low inflation rate. In fact, a key story this past week was some more noises from the Fed (the Federal Reserve central bank) about concern about DE-flation. Deflation, in case you're not familiar with this rare phenomena, is when prices of goods and services are in a downward spiral. You would think falling prices are a good thing - however, if businesses can't raise their prices, their profits gets squeezed and earnings per share decline - not exactly great for stocks. If the overall market manages a 2003 gain of 2/3 of its historical average annual increase of 10%, this potential for gain can be more attractive than a 3.7% fixed rate and the money is liquid. Throw in some dividends that are not taxed or taxed less according to the tax plan at hand, and you have a case for stocks that money managers and many savvy individuals find compelling. So folks don't fight the tape if you can't trade the indexes the way you're used to doing - and we are habituated to seeing rallies fall apart at some point, with the larger money bets paying off in puts or short index futures. THE BOTTOM LINE – The tech heavy Nasdaq indices continue to lead the market higher, as traders and investors overlook the weak jobs data and recent lackluster retail sales. Continued bullish price action suggest some further upside for stocks, as business spending on computers and other tech goodies rebounds, or is expected to, later this year (and, we're almost in the second half). Investors are starting to focus on where they think earnings will be at year end, getting us back to the tendency for stocks to be priced, relative to earnings, that reflects an outlook about 6 months or so ahead of today. In terms of trading, in the Nasdaq Composite (COMPX), 1530 is near resistance - if this level is pierced, it bodes well for yet another up leg before COMPX has a deeper correction (at least look for 1520-1530 to be retested, if not 1500). Major COMPX resistance looks to 1575, then 1600. In the S&P 500 there is near resistance in the 933-938 price zone just under 940, but more significant is 960 as it looms as major resistance - this area could still mark the top end of trading range until the next round of earning reports come in. FRIDAY'S TRADING ACTIVITY – Some more bargain hunting type buying came in on Friday after a prior couple days of weakness - some bullish news from Intel (INTC) helped out. By the way, tech bellwether Intel and Cisco (CSCO), as well as IBM are all acting well. This is the thing in this latest rally as a number of charts are starting to look bullish. The Dow held its early gains, finishing up some 113 points which is a gain of 1.3%. The Nasdaq Composite was up an even more substantial 30 points or 2%, to 1520. Dow component Intel said it sees strong demand in China and expects a recovery in the semiconductor industry this year. The news drove Intel shares up 3.7%, and technology stocks higher across the board. Graphics-chip maker Nvidia jumped a whopping 33% after the company beat analysts' expectations for Q1 and provided the Street of Dreams with an upbeat outlook for Q2 - love that tech. In other major news, the House passed a bill reducing taxes by $550 billion over the next 10 years. GOP legislators said this would prop up the economy. Democrats said this measure would cause a big increase in the federal deficit. The proposal contains many of the income-tax cuts in President Bush's economic growth and jobs plan, but stocks showed little reaction as the bill falls short of the complete dividend-tax cut that was hoping for. Traders weren't able to take direction from any economic data Friday as no government reports were released during the day. OTHER MARKETS - The 10-year note was up an 1/8 of a point, to close the day with a 3.7% yield. The dollar was up to 117.19 yen, from 116.84 late Thursday, while the euro closed NY trading at 1.1490, off from 1.1500. Whew! Is it time to sell my Spanish condo and take the euros and run?? Na, I'll take the rent money instead and go take a long vacation in "euroland". MY INDEX OUTLOOKS – Longer-term chart view I've commented at times over prior weeks, that both the Composite and the S&P (500) had come to their long-term up trendlines. This is, so to speak, the long-term growth path or rate of change, for stocks. The price scale for prolonged big price moves has to be the semi-logrithmic chart, where equal percentage moves measure equal distances on the chart; e.g., a move from 200 to 400 (a 100% change) is equal to the distance traveled up the scale from 400 to 800. The short-dashed (upper) trendline on the monthly SPX chart is an "internal" trendline connecting the most number of points. However, the conventional means of an up trendline construction of connecting 2-3 extreme lows (preferably 3 at a minimum) shown by the long-dashed line also is also demonstrating the very-long term uptrend as it defines where buying interest is coming in to buoy the index. There is a common tendency for prices to come down a second time or a cluster of times to such a major trendline - so, the bottoming process if that's what it is and it's how I see it, can take some months. A transition to such a major bear market is not typically going to be a turn on a dime "V" type bottom. Nasdaq Composite Index (COMPX) – Weekly, Daily & Hourly: Since the Composite is key to the overall market, I'm starting with this index. Clearing the prior closing high in the 1480 was bullish and set up a next target to at least 1520-1521, which was reached an then some. The subsequent pullback to 1480 followed immediately by another strong rebound was quite bullish action as prior resistance "became" new support. It's still the case that with the prior top exceeded on a daily and weekly closing basis, further upside potential is to the 1600 area, which is a "measured move" objective in that it assumes that the next rally would at least be equal to the first up leg. In case its not immediately obvious, the left chart above is daily and right is the 60-minute chart. Key support noted on the hourly chart looks to be 1480. If there was daily close under 1480, the chart turns bearish. The daily stochastic has gotten to an overbought reading so it suggests the potential for a sharp correction on news or some event that is taken bearishly. For now, COMPX is back in its uptrend channel and looks to be heading back up to near resistance and the prior peak in the 1530 area. Resistance implied by the upper end of the channel comes in at 1570 currently, but this will rise daily. Sometimes prices will reach the upper trend channel boundary, sometimes it only gets near it before coming back down. If there is a move to 1575 it's a better than even bet that COMPX at least comes back down to 1530. My expected maximum price range this month for Nasdaq is 1500 on the downside, 1600 on the upside. I think we have to see Q2 earnings improve to get a sustained move to above 1600 and we won't know this for a while. As someone else said in their OIN commentary, there is willingness to buy into perceived support areas in the indices, but not enough bullish enthusiasm to take em above or much above areas of supply or price areas where sellers are likely to offer substantial stock for sale. QQQ charts - Daily & Hourly: I often will say that a 1-day close under expected support does not prove a bearish reversal until there is a second consecutive close at or below the same level again to prove the reversal so to speak. As we often see, resistance once broken becomes support and vice versa (support once pierced becomes resistance). The prior closing price peaks at $28 would be expected to provide support on pullbacks once the Q's climbed above this level. There was the 1-day close under 28 on the jobs and retails sales report of Thursday, but then the rebound as the "buy dips" crowd came back in on Friday - they're the ones looking ahead. I still think we got both a narrow and a wider trend channel going on the hourly chart so I note possible resistance in the 29 area, then again at 30-30.25. Would like to do scale up shorting in QQQ - once in the 29 area and again at 30-30.25. My downside objective is to the 27.25 area. Conversely, if prices head down again before again heading higher to possible resistance, I lean to buying the stock in the $27 area if the hourly trendline appears to define support. Given the downside momentum showing now on the daily stochastic, we have to allow for the chance of a move back down to the daily chart (up) trendline, and to prior lows, in the 25.75-26.00 area. Summing up - am prepared or predisposed to be a buyer around 27, but would watch this area if/when reached, as an "ideal" buy better sets up on a future oversold reading along with an ability to hold at or above prior lows around $26 - a 3rd. defining "touch" to the daily trendline on the close-only chart would build a better bullish case. Stay tuned. S&P 500 Index (SPX) – Weekly, Daily & Hourly charts: As anticipated at least so far, the S&P 500 has not pierced 940, but it may given this renewed momentum late last week. There is room on the upside to get to 960. Certainly, on a weekly chart basis, SPX is not overbought, but it would be if there is a more or less straight line march to 960 which would offer a retest of a line of resistance there per the weekly and daily charts. If 950 is reached at the top end of the hourly uptrend channel currently, then I look for some setback from this area although maybe not a major one - for example, SPX falls back to the 935- 938 area (from 950). The formation of an hourly bull flag on the SPX chart suggests that the index will move to a new high soon. A rally failure at or under recent highs would suggest that SPX could fall back to the 920 area however. It seems likely that 960 would be the top end of a June price range. I am watching for whether a move to whatever new high is ALSO accompanied by a similar new high in the 14-day RSI. If, instead, a bearish divergence sets up by RSI failing to "confirm" (that new high), it will suggest a bearish play in puts is setting up. S&P 100 Index (OEX) – Daily & Hourly charts: The 475 level continues to look like technical resistance based on the recent rally peak. A new high is also quite possible given the pattern I see here. The series of higher relative lows and higher highs makes for a bullish trend - OEX is stalled at making a new high however. This may be just the back and forth movement needed to "throw off" the overbought condition and fake out the bearish sellers. If OEX goes go to that new high, I anticipate the next significant technical resistance coming in around 483-485, at the top end of my projected hourly uptrend channel. If so I would at least take at least partial profits on calls in this area. 465 looks like an area for call purchases if buying interest again develops in the S&P stocks on a pullback to this area. Right now I see the hourly chart pattern suggesting a move higher first, such as to 480 at a minimum. The most bullish aspect to the indicators I rely on is the fact that traders have either shown an overall skepticism to playing equity calls and have NOT gotten overly bullish and heavily into calls, as suggested by daily call volume levels relative to put volume as shown by my Call to Put volume indicator (lower left). Just on a price pattern basis however, index traders may want to buy puts in the 485 area, if reached, assuming a top appears to develop at the top of the hourly channel, shorter-term or otherwise. It seems to me however, that if buying takes the OEX to 485 and a short squeeze develops into the June expiration, there may be an attempt to take the index to 500. There often seems to be a pull toward a big number like this. Hard to say now, but this is my speculation at the moment - stay tuned! Good trading success! ************************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 ************** If ever we were poised for a big move this is the week. The first two days of the week have no material economic reports and the last two days are killers. There is a good chance of a rally early in the week and a further rally or crash late in the week. The challenge is knowing which way the market is going. Nobody knows. With the Dow at three month highs and all the oscillators and market breadth gauges at severely overbought there is the potential for a sell the news event on Wed/Thr. Also, with those indicators so overbought every bear in the woods will be expecting that and shorting every bounce. A good news surprise could produce the fabled double whammy and off to the races we go. Since the chances for a strong move in either direction have built to a climax in an expiration week we can attempt to capture this move with very cheap options. Normally I would use the DJX options but they cease trading on Thursday. Instead I am going to use the options on the DIA which trades until the close on Friday. Thursday could be the big move day with Friday a continuation of that event. I do not want to give up that day by trading the DJX. With the cheap DIA options we can put on an 85/87 strangle on the Dow for $1.00 or less. The May $87 call closed Friday at 50 cents and the May $85 put closed Friday at 50 cents. On Monday morning, assuming we do not have a gap open the options should have decayed some over the weekend. Maybe 40/40? Either way a $1 cost of entry means any move over 200 points for the week is profitable. The DJX closed at 86 on Friday. A move to $84 would make the $85 put worth $1 and a move to $88 would make the $87 call $1.00. Can we get a directional move of over 200 points this week? The odds are very good. If you like the concept but are afraid of the short fuse you can use June options but the same play will cost you $3.70 to enter. Personally I am a little more aggressive and instead of holding the options from Monday morning until Friday's close I would probably use any gains from Mon/Tue to close the call side on Wednesday. This will reduce my total risk but also takes me out on any good news on Thursday. You could also wait until Thursday morning to sell the calls (assuming we did have an early week bounce) but 6 of the 7 economic reports are due out before the open. That means we should have either a gap up or gap down on Thursday. If you are quick at the open you could sell the calls on bad news. You must realize that a 100 point gap down could deflate any premium before the open on the call side. Same with the puts should we get good news. So many decisions. When faced on Sunday with which side to close on Wednesday you simply do not have enough facts. We need to place our bets on Monday morning and then follow the market action to decide on how to change those bets as the week progresses. Another option would be to watch the open on Monday and buy only one side. If we are moving up, buy the call only. Sell it Wednesday afternoon and buy a put for the next strike under the current market. If the DJX rose to $88 then buy the $87 put for probably around the 50 cents you could have spent for the 85 put on Monday. Another possibility would be to buy the put side when the Dow reaches 8700 which is strong resistance. Add to the position at 8800, which is stronger resistance. With so many decisions I am going to follow this play in the Market Monitor all week and make those decisions as the week progresses. Consider it a learning experience that could be profitable. May $87 DIA Call DAV-EI 50 cents (may be less at the open) May $85 DIA Put DAV-QG 50 cents (may be less at the open) DIA Chart - Daily ******************************** Play updates: I am only listing the current recommendations with a link to the initial write up and unless the play changed substantially. HLTH - Calls - $8.87 5/4/03 ($10.05 when recommended) Somebody call a doctor. We got the short squeeze all right but it came a day early. The stock gapped open to $10.50 on Monday and ran up to $10.71 by the close. The option gapped up to $1.15 at the open from 90 cents when I wrote it up over the weekend. Hopefully nobody bought the gap since the target price for an exit was $1.75 (assuming a 90 cents entry) If you did the high at the close was $1.45. Lightning struck Monday night when HLTH announced earnings that although positive were less than expected. Instead of a gap up short squeeze we got a gap down to 9.50 and a continued bleed through Thursday to 8.28. The stock is recovering slightly but this is not the play as diagrammed. The gap up open should have prevented anyone from entering and the gap down after earnings eliminated the potential for a short squeeze. IVX - Calls - $16.20 4/27/03 ($15.28 when recommended) Still no pullback to $14. We did get a dip to $15.62 but nowhere near the entry we are looking for on the rest of our contracts. We will leave the orders open just in case. http://members.OptionInvestor.com/editorplays/edply_042703_1.asp QQQ - Put - $28.40 4/20/03 ($26.82 when recommended) No change on the QQQ put and this is the last week for the option. We have a cost basis of 15 cents in this May-$25 put and I would put in a sell order for 15 cents on the hopes we get a sharp dip sometime this week. Odds are not good. http://members.OptionInvestor.com/editorplays/edply_042003_1.asp http://members.OptionInvestor.com/editorplays/edply_041303_1.asp CY - Cypress Semi Call - $10.15 ($11.15 week high) 3/2/03 ($6.41 when recommended) http://members.OptionInvestor.com/editorplays/edply_030203_1.asp EMC Call from Feb-2nd $9.47 ($10.44 week high) ($7.70 when recommended) http://members.OptionInvestor.com/editorplays/edply_020203_1.asp Powerball - no update this week. My quotes are not working today. ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** Keep An Ear Open James Brown By the looks of it, bulls are feeling pretty confident. The markets weathered another pull back on minor selling and buyers bought the dip again heading into the weekend. The positive spin that corporate America was able to put on its Q1 earnings season combined with extremely low and easy to beat prior year comparisons is continuing to attract hope. Hope that corporate earnings really have turned the corner. Maybe they have but we're still not seeing any economic evidence that earnings are going to surge higher either. During the excitement of earnings and the pre-war start to a post-war rally the S&P 500 has risen some 17 percent since March 11th while the NASDAQ has climbed 20 percent. You already know that I'm concerned about our short-term future. The markets have come too far without pausing or pulling back long enough to digest these gains. It's common knowledge that markets cycle through up and down trends and the up trend is looking too extended. Does that mean next week we'll crash? Who knows. Equity markets are known for hitting extremes and it may take climbing to another extreme before the trend reverses. Believe me, I'm well aware that we've been preaching caution and a potential market turnaround from this column for the last four to five weeks (at least). Yet at the same time I've been clear that we're to trade what we see and that has been a number of bullish trends and breakouts. Hence the preponderance of call plays on the OI play list (this Thursday excepted). An average trader can be successful as long as they limit their losses but this article isn't about stop losses but investor sentiment. I've said it before; the crowds tend to be right in the middle of the trend and wrong at both ends. I feel that we're approaching the end of the current rally. Now whether the markets go sideways or we get a sizeable pull back is unknown. Keep in mind that the VIX and the VXN have been flashing warning signs for weeks as they drift ever lower. The VXN is near its all time lows and the VIX had broken down to new relative lows and is approaching its more traditional market top signaling range of 20. However, the VIX is not at 20 yet. The bulls might be able to keep the rally alive long enough until the VIX finally reaches its apparent goal. Stocks have climbed so high in the past six to eight weeks that any potentially negative news can cause sharp bouts of profit taking. We saw that this week with a number of large gap downs on earnings news and brokers downgrading stocks. The VIX may not be showing fear but these gap downs are. Another indicator that has us concerned is the divergence in the put-call ratio. The equity pcr is down to 0.66 (there are six puts bought for every ten equity calls). Compare this to the index pcr's of 1.56 for the OEX and 1.62 for the QQQ and you'll see that index option buyers are buying more puts than calls. These aren't necessarily extreme numbers but they are indicators into investor psychology. The smaller, retail trader is buying call options on stocks because they believe stocks will continue to go up. Index option traders, of which there are many more professional or "smart" money traders for institutions are buying more puts than calls. I see this as a bearish divergence and yet another indicator that a market top may be in the near future. Contrasting these bearish ruminations are the market internals from Friday's session. The advance-decline ratio on the NYSE was 21 to 7 and on the NASDAQ it was nearly 21 to 9. New 52-week highs were 386 to 31 new 52-week lows. Up volume was almost four times down volume on the NYSE and up volume was more than 3.5 times down volume on the NASDAQ. Again, these are not extreme numbers but they are bullish for the market. Just looking at the charts and the clear bounces at rising trendlines for the major indices makes it logical to think that early next week can be bullish. Traders need to be wary of bad news and we still have the last full week of earnings with retail heavy weights like WMT on Tuesday and KSS and TGT on Thursday. Tech companies AMAT and NTAP also report on Tuesday with DELL reporting on Thursday. Plus Wall Street will be waiting for the Retail Sales report, PPI, CPI and Capacity Utilization economic reports all out this week. Also keep an ear open for any news from the two technology conferences going on this week with Salomon Smith Barney and USB Piper Jaffray both throwing conferences on Tuesday-Wednesday of this week. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10353 52-week Low : 7197 Current : 8605 Moving Averages: (Simple) 10-dma: 8527 50-dma: 8204 200-dma: 8321 S&P 500 ($SPX) 52-week High: 1107 52-week Low : 768 Current : 933 Moving Averages: (Simple) 10-dma: 924 50-dma: 876 200-dma: 881 Nasdaq-100 ($NDX) 52-week High: 1351 52-week Low : 795 Current : 1144 Moving Averages: (Simple) 10-dma: 1127 50-dma: 1060 200-dma: 1000 ----------------------------------------------------------------- The nearly 7% drop in the VIX volatility index to the 22 mark is a clear and present danger to traders willing to note the warning. Investor sentiment is too bullish and a trend change is not far away although the market may go to extremes before finally reversing and the VIX may have to hit 20. Keep those stops tight. CBOE Market Volatility Index (VIX) = 22.04 -1.65 Nasdaq-100 Volatility Index (VXN) = 32.09 -1.20 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.82 472,166 387,917 Equity Only 0.66 370,257 244,196 OEX 1.56 21,019 32,750 QQQ 1.62 16,722 27,171 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 56.4 + 1 Bull Confirmed NASDAQ-100 78.0 + 1 Bull Confirmed Dow Indust. 66.7 + 3 Bull Confirmed S&P 500 64.2 + 1 Bull Confirmed S&P 100 65.0 + 1 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.24 10-Day Arms Index 1.05 21-Day Arms Index 1.04 55-Day Arms Index 1.27 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 -NYSE- -NASDAQ- Advancers 2140 2093 Decliners 710 940 New Highs 225 161 New Lows 16 15 Up Volume 1231M 1185M Down Vol. 363M 324M Total Vol. 1613M 1526M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 05/06/03 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 We knew it would be a quiet week on Wall Street last week, aside from the FOMC meeting, and we see little change in the Commercial's net-long stance. There has also been little change in the Small Trader's net long stance either. Commercials Long Short Net % Of OI 04/15/03 424,219 409,853 14,366 1.7% 04/22/03 430,758 423,295 7,463 0.9% 04/29/03 432,710 419,245 13,465 1.6% 05/06/03 429,519 419,545 9,974 1.2% Most bearish reading of the year: (111,956) - 3/6/02 Most bullish reading of the year: 14,366 - 4/15/03 Small Traders Long Short Net % of OI 04/15/03 148,434 137,680 10,754 3.8% 04/22/03 147,068 140,153 6,915 2.4% 04/29/03 149,616 154,782 5,166 1.7% 05/06/03 150,345 148,681 1,664 0.6% Most bearish reading of the year: 10,754 - 4/15/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 It is the e-mini positions that we are seeing some shifts. The Commercials have bumped up their longs by more than 30K while reducing their shorts by about 25K. Looks like money is shifting sides here. Small Traders have also shown a small reversal with longs decreasing by almost 40K and shorts jumping by more than 10%, but they remain significantly net long while Commercials are exceedingly net short. Commercials Long Short Net % Of OI 04/15/03 119,316 390,555 (271,239) (53.2%) 04/22/03 124,200 437,597 (313,397) (55.7%) 04/29/03 134,751 472,247 (337,496) (55.6%) 05/06/03 169,388 447,330 (277,942) (45.1%) Most bearish reading of the year: (337,496) - 04/29/03 Most bullish reading of the year: (222,875) - 04/01/03 Small Traders Long Short Net % of OI 04/15/03 365,876 44,137 321,739 78.5% 04/22/03 395,596 40,480 355,116 81.4% 04/29/03 459,687 50,030 409,657 80.4% 05/06/03 423,918 55,932 367,986 76.7% Most bearish reading of the year: 283,831 - 04/08/03 Most bullish reading of the year: 409,657 - 04/29/03 NASDAQ-100 It's pretty much dead-even on the Commercials positions on the NDX. Meanwhile the Small Trader has increased their position sizes in both longs and shorts. Commercials Long Short Net % of OI 04/15/03 44,976 37,929 7,047 8.5% 04/22/03 45,647 38,531 7,116 8.5% 04/29/03 45,497 37,557 7,940 9.6% 05/06/03 46,327 38,216 8,111 9.6% 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 04/15/03 11,182 17,438 ( 6,256) (21.9%) 04/22/03 10,929 20,376 ( 9,447) (30.2%) 04/29/03 11,219 19,760 ( 8,551) (27.6%) 05/06/03 13,482 21,010 ( 7,528) (21.8%) 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 Again we're not seeing any big shifts of money or attitude in the Commercials or the Small Traders. The "smart" money is still net long the Industrials and the small guy is just barely net short. Commercials Long Short Net % of OI 04/15/03 17,881 13,124 4,757 15.3% 04/22/03 16,942 14,750 2,192 6.9% 04/29/03 17,927 14,083 3,844 12.0% 05/06/03 16,772 13,568 3,204 10.6% 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 04/15/03 7,748 8,704 ( 956) ( 5.8%) 04/22/03 8,081 8,275 ( 194) ( 1.2%) 04/29/03 7,081 8,604 (1,523) ( 9.7%) 05/06/03 7,829 8,642 ( 813) ( 4.9%) 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 *************** Indices End the Week with a Bang . . . or Did They? Unlike Thursday's weak trading, Friday's trading saw most of the indices touch or exceed their daily R2 levels. The NDX and COMPX closed above their respective R2 levels, at or near their day's highs. Although the advances occurred on volume that might be deemed passable rather than strong, some blame for the lower relative volume should be attributed to the normal Friday volume slump. Not only did most indices test their daily R2 levels, but most also closed above next week's pivots. For those interested in following daily, weekly, and monthly pivot analysis figures, I've included a matrix below. Note that the monthly numbers are Jeff's, copied from his matrix as those numbers will not have changed since he left for vacation. Pivot Analysis Matrix Indices that tested or exceeded daily R2 levels and closed above the next week's pivot levels: that's bullish. Friday's action felt bullish, too, at least for the first portion of the day before the afternoon ennui set in. Delving into the charts shows that the action might not have been as bullish as it appeared on the surface, however. I'm trying a top-down approach to this weekend's study, looking first at market internals, next studying the OEX's charts, and finally touching on the other indices. Breadth was positive all day on Friday, with advancers almost three times decliners on the NYSE and more than twice decliners on the Nasdaq. Up/down volume patterns proved even stronger, and new highs/new lows ratios trumped those in bullishness. Lately, however, I've become worried by the imbalance seen in new highs/new lows figures. Late in the day on Friday, a reader inquired about charts on Stockcharts.com that might show new highs/new lows, piquing my interest. When I turned to a chart of the NYSE new highs/new lows ratios, this is what I saw: NYSE New Highs/New Lows This chart confirmed some of the worries I've had about the imbalances seen in the new highs/new lows figures on the NYSE in particular. Since I haven't previously studied these figures in chart format, I wondered whether I could be mistaken about the import of the spikes seen in the values. After all, a stock showing this pattern would have just broken out above resistance in a bullish pattern. However, I correlated the most recent value peaks with recent tops in the indices, and my worries were confirmed. The arrows I've placed above the most recent value peaks on the ratios show times when those peaks have occurred near or at market tops. I've also noted that the weekly RSI is the highest it's been in two years, and that the weekly 5(3)3 stochastics are showing bearish divergence. Perhaps those values are the highest they've been in two years because we're coming out of a bear market and stock performances are improving. Perhaps my interpretation is 180 degrees wrong. Still, this chart alerts me that it may be time for a pullback in these new highs/new lows ratios. In this case at least, all may not be as bullish as it appears on the surface. Most market participants this week were cheered by the steadiness of the markets after the recent rally. Is that what the charts show, too? Here's the OEX weekly chart. OEX Weekly Chart: Although the lines prove somewhat difficult to discern on this chart, I've included the 10-week and 30-week exponential moving averages. According to Martin Pring, a bullish or bearish cross of these averages can indicate a change in intermediate trend, although MA crosses sometimes occur late in the movement. This week, the 10-week has just completed a bullish cross of the 30- week. As Pring warns, this bullish crossover has occurred late in the movement. How late? So late that the movement is almost concluded? The weekly ADX shows selling pressure (blue line) decreasing while buying pressure (orange line) increases, but the main line (pink) shows a less bullish aspect. It slopes down toward 20, indicating a weakening in the recent trend. The weekly candle, a doji sitting at the apex of the rising wedge and just above the long- term descending trendline, also depicts the weakening of the trend. The steadiness seen in the markets this week produced that doji, but a doji indicates something other than steadiness. It indicates indecision, and is sometimes a reversal signal. That reversal signal would need to be confirmed by an OEX move down next week. Without that confirmation, the doji shows only a natural hesitation near important resistance as the index gathers strength. The flattening 5(3)3 stochastics and RSI near or in levels that indicate overbought conditions do hint that a reversal could be near, however. Because the ADX level remains above 20, although barely so, it may be possible that rollovers in the oscillators will accompany consolidation rather than a pullback. Oscillators can stay in overbought territory for a long time, too, but these indicators hint that the risk is shifting toward those with bullish positions. While I think it possible that the OEX might still push up toward 487, the top of the 385-487 trading range, its failure to sustain a move over 475 this week makes me more doubtful of that happening. That failure to move over 475 gives more credence to the idea that the OEX may turn down at or ahead of that 487 number, remaining within its trading range. As seen on the OEX weekly chart, steadiness may not have been particularly bullish. Perhaps the daily chart shows something different. OEX Daily Chart: Although I've begun to question the relevance of the rising wedge on the daily chart since prices have moved into the apex, a couple of factors encouraged me to retain it for another week. One factor can be found in an examination of the RSI and 21(3)3 stochastics, pinned until late this week in their own triangular formations. Just as the OEX broke down out of the rising green wedge, these oscillators also broke below their own rising support lines, giving confirmation of the breakdown in the OEX price chart. Prices rose today to test the underside of that green rising wedge, finding support first on the lavender line that a reader proposed as an alternate lower trendline for the rising wedge. A retest of broken support is natural and expected. Although it's difficult to see on the chart, the RSI rises again, too, to test its own broken support. It's possible that the OEX retest could be successful, but the breakdown confirmation given by these two indicators hints otherwise. ADX may tell a different story, although a few hints of impending weakness may be showing up in that indicator, too. Selling pressure declined through mid-April and has since remained steady, but has not risen. The ADX number remains firmly above 20, indicating that the trend is still in place. Buying pressure appears to be receding, however, and the ADX line may be flattening. Selling pressure could pick up if the OEX breaks firmly below the lavender line of the rising wedge, and especially if the OEX breaks 462.75, the site of recent support. A break beneath that support would almost certainly mean a retest of the converging 21-dma and exponential 200-dma at 460.56 and 459.54, respectively. A failure there would find next light support near 456, with support layered beneath that in close succession. It's difficult to predict now how deep a pullback would be without first watching the speed with which the oscillators cycle back down toward oversold levels. On a P&F measure, at least, no real damage would be done until a trade beneath 440, and it's impossible to judge now whether a pullback could take the OEX below 440. Stockcharts.com shows the bullish percent level for the OEX ($BPOEX) at 65. A scan of the P&F chart shows that the OEX bullish percent has topped out as high as 79 or as low as 59 in recent years. This measure, too, then shows that while the OEX can continue the rally, risk begins to shift toward those in bullish positions. Before looking at the chart of the DJI, it might be instructive to view its sister index, the Dow Jones Transportation Index. Weekly Chart of the Dow Jones Transportation Index: The transports have had a great run, with this index leading the Dow Jones Industrials in crossing above its 200-dma. I've included a 40-week MA as an approximation of the 200-dma. I've also snapped a Fibonacci retracement tool on the chart. This shows that this week's doji formed approximately (because I snapped the tool and didn't calculate exact amounts) at the 50% retracement of the March '02 to March '03 move. Most rallies retrace 1/3 to 2/3 of the previous decline, according to Pring, with a 50% retracement being a common amount. This week's doji formed at important resistance, then, giving its formation extra significance. RSI and 21(3)3 stochastics also have moved into levels indicating overbought conditions. Although it's difficult to see on this chart, RSI has flattened, but has not yet turned down, and the stochastics still point upward. The 5(3)3 stochastics (not shown) have made a bearish kiss, however. Daily ADX has begun to slope down, indicating a weakening in the trend. Buying pressure has slightly flattened but selling pressure still declines, too. It may be time for the transports to pull back or consolidate while the recent gains are digested, and I wouldn't be surprised to see that happen next week. A pullback to next support near 2420 or even to the 38.2% retracement level pictured near 2360 would preserve the bullish outlook, but I would watch the behavior of the indicators to gauge whether the overbought pressure is quickly released or requires a deeper plunge. The transports often lead the Dow Jones Industrials, but the two should eventual confirm each other. Because Q-charts printed strange candles on my DJI chart, I've substituted a Stockcharts.com chart for the DJI. Daily Chart of the DJI: The daily chart shows that the DJI trades safely within an upward slanting regression channel, with today's movement bringing the price right up to the midline of that channel. The DJI could pull back to 8430 or so and remain safely within that channel. Bulls will also consider it a victory that the index closed the week over 8600 and made a higher high relative to the March 21 high. The weekly chart (not shown), however, reveals a small-bodied weekly candle that could also be indicative of indecision. Daily ADX (not shown) slopes down, indicating a weakening of the trend. As shown above, daily RSI, usually one of my favorite indicators, appears somewhat inconclusive, oscillating between 50 and 70. However, a trend of lower RSI highs can be pitted against the DJI's trend of higher highs, showing bearish divergence. Stochastics also show this bearish divergence. Although ADX slopes down, it's not yet below 20, so it's still possible that oscillator evidence can not be trusted. Stockcharts.com lists the bullish percent for the industrials ($BPINDU) at 66.67. $BPINDU has topped out as high as 80 and as low as 60 in recent years, so risk with this index also shifts toward those in bullish positions, although the bullish percent levels can still move higher. The weekly chart of the NDX shows a doji forming at resistance, just as was seen with the OEX chart. Weekly oscillators are at levels indicating overbought conditions but have not yet turned down. Bullish percent for the NDX ($BPNDX) now measures 78, with $BPNDX levels topping out as high as 82 and as low as 50 in recent years. As with the other indices, the bullish percent levels still have room to rise, but this evidence, coupled with the doji on the weekly chart, indicate the shift in risk to those with bullish positions. The daily chart proves somewhat more difficult to decipher. Daily chart of the NDX: A glance at the horizontal red lines drawn across the RSI and stochastics tops shows possible bearish divergence setting up, with the NDX making a series of higher highs while those indicators make equal highs. Yet, those same indicators show a pattern of higher lows, a pattern that has not yet been broken. In fact, RSI appeared to turn back up as it approached that ascending trendline. ADX has flattened and buying pressure may have done so, too, but selling pressure does not appear to have increased and may not as long as the NDX stays above the 1100 support. A move below that level would probably increase selling by disappointed bulls, however. Although the oscillators' directions may be difficult to discern on this small chart, stochastics have turned down, indicating that it's time to test the consolidation-or-pullback and how-deep-a-pullback theories. As with the other indices, it will be important to watch the speed with which the indicators move back toward oversold levels as the NDX consolidates or pulls back. Other indices of interest are the BIX, perhaps turning down again from the 296-297 level that has retarded advances since September; and the SOX, clawing its way back above 350 by the week's close, although not able to regain the week's high. The SOX daily chart shows definite bearish divergence with oscillators making lower highs while the price made a higher high. The SOX daily RSI shows that same pattern of higher lows that has shown up on other charts, and those higher lows have not been violated in the SOX's case. The same pattern shows up on the BIX daily chart, but in this index's case, the RSI violated that ascending trendline formed from its higher lows. All the gathered evidence shows that it's time for a pullback or consolidation. Across the indices, ADX levels slope down, indicating a weakening in the recent upward trends. None of those ADX levels are yet below 20 however, indicating that it's still possible that the rounding-over oscillators predict consolidation or a light pullback rather than deeper pullbacks. Rolling-over weekly oscillators hint that added pressure will be given to the pullbacks, but that's not certain yet. In my opinion, we'll have to watch the behavior of the oscillators while price consolidates or pulls back to gauge what happens next. My study of global markets gives me an opinion of what might happen, but the charts themselves do not necessarily back up my opinion. That's the overview, but what will happen Monday? Hourly oscillators all approach overbought levels or have begun turning down from those levels, but the movements are tentative as yet so that it's possible that they can be turned back up as indices consolidate or build on gains for another day or so. If those gains bump the indices above important levels, momentum could carry them even further, as bullish percent levels could still rise higher. Much depends on the behavior of the foreign markets on Monday. The Nikkei has been volatile, making big percentage moves, as has the DAX. Both the Japanese and Germany economies are fragile, teetering on the edge of or already dipping into another recession. Germany's index of leading indicators fell below 50 this week, indicating that it's headed into a contraction in its economy. These and other global bourses have been feeding off our gains, as we have been theirs, and a blink from any of these indices could impact them all. Linda Piazza ************* COMING EVENTS ************* ========================================== Market Watch for the week of May 12th ========================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- BNG Benetton Group Mon, May 12 -----N/A----- N/A EN Enel S.p.A. Mon, May 12 -----N/A----- N/A HTG Heritage Prop Invest Mon, May 12 -----N/A----- 0.67 MCCC Mediacom Comm Corp Mon, May 12 Before the Bell -0.28 PSUN Pac Sunwear of Cali Mon, May 12 After the Bell 0.14 PC Perez Companc S.A. Mon, May 12 -----N/A----- 0.17 PBR Petrobras Mon, May 12 -----N/A----- 1.48 KPN Royal Kpn N.V. Mon, May 12 Before the Bell N/A TEM Telefonica Moviles Mon, May 12 Before the Bell N/A VAL Valspar Mon, May 12 Before the Bell 0.62 VE Veolia Environnement Mon, May 12 -----N/A----- N/A WTW Weight Watchers Intl Mon, May 12 After the Bell 0.38 ------------------------- TUESDAY ------------------------------ ANF Abercrombie & Fitch Tue, May 13 After the Bell 0.26 ACAS Am Capital Strategies Tue, May 13 After the Bell 0.65 AMAT Applied Materials Tue, May 13 After the Bell 0.02 ATO Atmos Energy Corp Tue, May 13 After the Bell 1.05 AXA AXA Tue, May 13 -----N/A----- N/A BRG BG Group Tue, May 13 Before the Bell 0.37 BSY British Sky Broadcast Tue, May 13 Before the Bell N/A CVC Cablevision Systems Tue, May 13 Before the Bell -0.44 CPN Calpine Corporation Tue, May 13 Before the Bell 0.02 CSC Comp Sciences Corp Tue, May 13 After the Bell 0.94 DE Deere & Company Tue, May 13 Before the Bell 0.93 DGX.F Degussa AG Tue, May 13 Before the Bell N/A EP El Paso Corp. Tue, May 13 Before the Bell 0.29 FIA Fiat S.p.A. Tue, May 13 -----N/A----- N/A FOX Fox Entertainment Tue, May 13 Before the Bell 0.23 HIG Hartford Finl Serv Tue, May 13 After the Bell 1.12 HAVS Havas Advertising Tue, May 13 01:30 am ET N/A IDCC InterDig Comm Corp Tue, May 13 Before the Bell 0.03 IPR International Power Tue, May 13 Before the Bell 1.39 JCP JC Penney Tue, May 13 Before the Bell 0.18 MAC Macerich Co Tue, May 13 -----N/A----- 0.79 NTAP Network Appliance Tue, May 13 After the Bell 0.07 PCG PG&E Corporation Tue, May 13 -----N/A----- 0.43 PTP Plat Undwrite Hold Tue, May 13 After the Bell 0.42 IMI SanPaolo IMI SpA Tue, May 13 After the Bell N/A SGP Schering-Plough Tue, May 13 Before the Bell 0.10 TEF Telefonica de Espaqa Tue, May 13 Before the Bell N/A MAY The May Depart Stores Tue, May 13 -----N/A----- 0.19 NWS The News Corporation Tue, May 13 Before the Bell 0.20 TJX The TJX Companies Inc Tue, May 13 Before the Bell 0.22 UBS UBS AG Tue, May 13 Before the Bell N/A WMT Wal-Mart Stores Inc. Tue, May 13 Before the Bell 0.42 WMB Williams Companies Tue, May 13 Before the Bell 0.03 ----------------------- WEDNESDAY ----------------------------- ACXM Acxiom Wed, May 14 After the Bell 0.03 AAP Advance Auto Parts Wed, May 14 After the Bell 0.75 ADI Analog Devices Inc. Wed, May 14 After the Bell 0.18 ANN AnnTaylor Stores Wed, May 14 After the Bell 0.40 BEAS BEA Systems Wed, May 14 After the Bell 0.07 BRCD Brocade Comm Sys Wed, May 14 After the Bell 0.00 RIO Companhia Vale do Rio Wed, May 14 -----N/A----- 1.33 CA Computer Ass Intl Wed, May 14 After the Bell 0.06 FD Federated Dept Stores Wed, May 14 -----N/A----- 0.15 GALN Galen Holdings PLC Wed, May 14 Before the Bell 0.27 INTU Intuit Wed, May 14 After the Bell 1.02 JHX James Hardie Ind Wed, May 14 -----N/A----- N/A L Liberty Media Group Wed, May 14 After the Bell -0.07 MTA Matav Wed, May 14 Before the Bell N/A NAB Natl Australia Bank Wed, May 14 -----N/A----- N/A PSS PAYLESS SHOESOURCE Wed, May 14 Before the Bell 0.25 LQU Quilmes Industrial Wed, May 14 After the Bell N/A REP Repsol YPF Wed, May 14 Before the Bell 0.50 SIRI Sirius Sat Radio Wed, May 14 -----N/A----- -1.79 SCM Swisscom AG Wed, May 14 Before the Bell N/A THC Tenet Healthcare Wed, May 14 -----N/A----- 0.33 TIF Tiffany & Co. Wed, May 14 Before the Bell 0.23 UBB Unibanco Wed, May 14 -----N/A----- 0.55 UCOMA UnitedGlobalCom, Inc. Wed, May 14 -----N/A----- -0.60 ------------------------- THURSDAY ----------------------------- AEOS American Eagle Outfit Thu, May 15 Before the Bell 0.09 IRE Bank of Ireland Thu, May 15 Before the Bell N/A BOX BOC Group PLC Thu, May 15 -----N/A----- N/A CCH Coca-Cola Hllnc BottleThu, May 15 Before the Bell N/A DELL Dell Computer Corp Thu, May 15 After the Bell 0.23 DT Deutsche Telekom Thu, May 15 -----N/A----- N/A EON E.ON AG Thu, May 15 Before the Bell N/A ING ING Groupe NV Thu, May 15 -----N/A----- N/A KSS Kohl's Thu, May 15 -----N/A----- 0.35 NAV Navistar Intl Thu, May 15 Before the Bell -0.29 REXMY REXAM PLC Thu, May 15 Before the Bell N/A TGT Target Corporation Thu, May 15 Before the Bell 0.39 WR Westar Energy, Inc. Thu, May 15 -----N/A----- N/A ZLC Zale Corporation Thu, May 15 Before the Bell 0.28 ------------------------- FRIDAY ------------------------------- AZ Allianz AG Fri, May 16 -----N/A----- N/A ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable ESBF ESB Financial Corp. 6:5 May 15th Apr 29th FBC Flagstar Bancorp 2:1 May 15th May 16th NOVB North Valley Bancorp 3:2 May 15th May 16th NYB NY Bancorp 4:3 May 21st May 22nd FNF Fidelity National 5:4 May 23rd May 27th -------------------------- Economic Reports This Week -------------------------- The economic calendar starts to pick back up again and we finish off the last big round of earnings with a number of big retailers and computer-hardware giant DELL. The Retail sales report hits on Tuesday while the PPI and Capacity Utilization numbers come out on Thursday. Friday is also full with Housing starts and the CPI. ============================================================== -For- Monday, 05/12/02 ---------------- None Tuesday, 05/13/02 ----------------- Trade Balance (BB) Mar Forecast: -$40.5B Previous: -$40.3B Wednesday, 05/14/02 ------------------- Retail Sales (BB) Apr Forecast: 0.4% Previous: 2.1% Retail Sales Ex-auto(BB)Apr Forecast: 0.3% Previous: 1.2% Export Prices ex-ag.(BB)Apr Forecast: N/A Previous: 0.3% Import Prices ex-oil(BB)Apr Forecast: N/A Previous: 0.9% Thursday, 05/15/02 ------------------ Initial Claims (BB) 05/10 Forecast: N/A Previous: 425K NY Empire St Index(BB) May Forecast: -11.5 Previous: -20.4 PPI (BB) Apr Forecast: -0.5% Previous: 1.5% Core PPI (BB) Apr Forecast: 0.0% Previous: 0.7% Business Inventories(BB)Mar Forecast: 0.2% Previous: 0.6% Indstrial Production(DM)Apr Forecast: -0.3% Previous: -0.5% Capacity Utilization(DM)Apr Forecast: 74.6% Previous: 74.8% Philadelphia Fed (DM) May Forecast: -6.0 Previous: -8.8 Friday, 05/16/02 ---------------- Housing Starts (BB) Apr Forecast: 1.750M Previous: 1.780M Building Permits (BB) Apr Forecast: 1.700M Previous: 1.692M CPI (BB) Apr Forecast: -0.1% Previous: 0.3% Core CPI (BB) Apr Forecast: 0.1% Previous: 0.0% Mich Sentiment-Prel.(DM)May Forecast: 87.5 Previous: 86.0 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 ************************************************************** 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 $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 05-11-2003 Sunday 2 of 5 In Section Two: Market Watch: Still Plenty of Tech Daily Results Call Play of the Day: AMGN Dropped Calls: None Dropped Puts: None ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************ Market Watch ************ Still Plenty of Tech QUALCOMM - QCOM - close: 31.11 change: +0.72 Shares of QCOM have completely ignored the rally in techs as the stock has slipped lower on downgrades and growing concerns over competition, most recently from TXN. A failed rally at $32 or a breakdown below $30 might be entry points for bearish plays. --- Applied Materials - AMAT - close: 15.08 change: +0.49 AMAT is the largest chip wafer equipment manufacturer and shares have been underperforming the chip sector. The company is expected to announce earnings on Tuesday after the bell and we could see some action in the stock. Estimates are for 2 cents a share. --- Wal-Mart - WMT - close: 55.80 change: +0.79 WMT is the biggest retailer on the planet and the biggest component in the RLX retail index. Thankfully shares have been rising for the last several weeks. Currently the stock is near the low end of its ascending channel. However, we would not recommend new bullish plays just yet due to its earnings announcement expected before the bell on Tuesday. --- Boston Scientific - BSX - close: 46.91 change: +0.80 Medical equipment maker BSX is making its third attempt since January to break the $47.00 barrier. Prior to this year shares have failed at the $47 mark before, back in July of 1999. A breakout could spark a big round of short covering but so far bulls have been unable to push BSX higher. --- Lexmark - LXK - close: 72.50 change: -1.25 After breaking out above long-term resistance at $70.00 last month shares of LXK are headed back for a retest. Traditionally, broken resistance becomes new support and the $70 level was so tough for LXK we would expect it as support. We would watch for a bounce there and use a tight stop for potential bullish trades. ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- AZO $86.85 - A recent call play on OI, shares of AZO have continued to climb higher and look dead set on reaching resistance at $89. We're not suggesting any plays here now. IMDC $43.10 - Another recent call play on OI that has also chosen to keep climbing. The stock is at new all-time highs and appears very overbought but we'll keep an eye on it. VIA $44.44 - Viacom is about to break out above a long-time multi-year descending trendline. Or it's about to fail yet again if you look at the stock's oscillators, which tell us the rally is tired. DGX $60.81 - We keep seeing DGX show up on our watch list. The recent bounce back over $60 looks tempting. ITT $61.29 - This conglomerate actually looks pretty strong and its PnF chart is just now breaking through resistance. Of course the PnF breakout just happens to coincide with a breakout above the 200-dma on its daily chart. *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS LAST Mon Tue Wed Thu Week ADTN 45.05 0.33 -0.03 -0.08 0.24 1.35 Hitting New Hi's AMGN 61.24 -0.34 -1.41 -1.11 0.99 -1.81 NEW, at support IBM 87.55 -0.68 0.99 -0.27 -0.63 0.35 Ready to go KLAC 42.49 0.15 0.66 -0.55 -0.98 0.20 Entry point MEDI 33.98 -0.30 -0.29 -0.58 -0.32 -1.99 Updated PUTS AIG 56.25 -0.18 -0.08 -0.85 -1.09 -1.04 Not Triggered GM 35.97 -0.26 0.49 0.08 -0.30 -0.03 Still waiting GS 75.00 -0.11 0.71 0.78 -3.14 -1.60 Watch the XBD KSS 52.62 -1.15 1.69 0.65 -3.25 -2.84 Finally slipping ************************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 PLAY OF THE DAY ******************* Call Play of the Day: ******************** Amgen, Inc. - AMGN - close: 61.24 change: +0.77 stop: 58.00 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 ^^^^^ None PUTS ^^^^ None *********** 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 05-11-2003 Sunday 3 of 5 In Section Three: New Calls: AMGN Current Calls: ADTN, IBM, KLAC, MEDI New Puts: None ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** NEW CALL PLAYS ************** Amgen, Inc. - AMGN - close: 61.24 change: +0.77 stop: 58.00 Company Description: The biggest of the Biotech big guns, AMGN makes and markets therapeutic products for hematology, oncology, bone and inflammatory disorders, as well as neuroendocrine and neurodegenerative diseases. Anti-anemia drug Epogen and immune system stimulator Neupogen account for about 95% of sales. Its Infergen has been commercialized as a treatment for hepatitis C, and Stemgen is approved for stem cell therapy in Australia, Canada, and New Zealand. The company has a strong pipeline of new drugs in various stages of development as well as research and marketing alliances with Hoffman-La-Roche and Johnson & Johnson. Why we like it: Earlier this year, we successfully played AMGN to the upside, as the stock muscled through major resistance and moved up to test its multi-year descending trendline. After churning against that trendline for nearly a month, the stock showed its sector dominance, breaking free and really surging higher following its impressive earnings report on April 23rd. Not only did AMGN beat earnings estimates ($0.42 vs. $0.39 consensus), but guided significantly higher for the full year. That resulted in an upside explosion in the stock that sent it up near the $64 level and we've been looking for a favorable opportunity to play the upside once again. It looks like that opportunity is upon us, as AMGN found solid support just above $59 in the middle of last week, and rebounded smartly, pushing up to end the week right at the 20-dma ($61.28). The PnF chart continues to look impressive, as it hasn't given a Sell signal since last November. The bullish vertical count is $72, which means AMGN could still have some room to run to the upside. The recent bout of profit taking has pulled the daily Stochastics down into oversold territory and the bounce of the past couple days has them just turning up and emerging from oversold. Looking at the chart below, you can see how the strong the support looks just below where the stock bounced last week. horizontal resistance-turned support at $59 is backed up by the rising 50-dma at $58.90 and the ascending trendline from the September lows, currently at $58.60. Another pullback into the $59-60 area looks like a gift of an entry point into the play. With intraday support near the $60.40 level holding firm throughout most of the past two days, that looks like a more realistic level to target shoot new entries. Based on our experience earlier this year, the way AMGN tends to move is not conducive to momentum entries. Our best approach is to catch a dip back to support and then ride it up to the next near-term top and then harvest gains, looking to repeat the process again. So our first target on the upside will be a return to the recent highs near $64. Should the bulls get really frisky, a run to the $68-69 area is certainly a possibility, and if reached we'd be more than happy to exit the play up there, which was the site of major resistance throughout most of 2001. Because of the strong underlying support, we can place our stop at $58, with a high degree of confidence that it shouldn't be touched unless a serious bout of selling arises. Suggested Options: Shorter Term: The June 65 Call will offer short-term traders the best return on an immediate move, but this is a higher risk approach due to AMGN's slow-moving nature. Traders with less tolerance for risk will want to use the June 60 Call. Longer Term: Due to the slow and deliberate price action for which AMGN is known, traders looking to capitalize on a breakout move above $64 will want to look to the July 65 Call. This option is currently out of the money, but should provide sufficient time for the stock to move higher without time decay becoming a dominant factor over the short run. BUY CALL JUN-60 YAA-FL OI= 2470 at $3.10 SL=1.50 BUY CALL JUN-65 YAA-FM OI= 9163 at $0.95 SL=0.50 BUY CALL JUL-60 YAA-GL OI=41798 at $4.10 SL=2.50 BUY CALL JUL-65 YAA-GM OI=25806 at $1.70 SL=0.75 Annotated Chart of AMGN: Picked on May 11th at $61.24 Change since picked: +0.00 Earnings Date 07/22/03 (unconfirmed) Average Daily Volume = 10.8 mln ************************Advertisement************************* "If you haven't traded options online – you haven't really traded options," claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online". Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ****************** CURRENT CALL PLAYS ****************** ADTRAN, Inc. - ADTN - close: 45.05 change: +1.44 stop: 42.50*new* Company Description: ADTRAN, Inc. develops products and services that simplify access to telecommunications networks. The company's high-speed, digital transmission products improve the operation of, and reduce the costs associated with, building and using communications networks. Small and large telephone companies, long-distance carriers and other network service providers use the company's products to deliver high-speed data, voice, video and Internet services to their customers. Businesses, schools and government agencies use ADTN's products to connect facilities, remote offices and mobile workers, enabling corporate information services, Internet access, telecommuting and videoconferencing within their organizations. Why we like it: Amazing strength is the only way we know to describe our ADTN play. After the impressive breakout through the $41.50 level, the stock surged all the way up to test our first profit target in the $44-45 area, hitting an intraday high of $45.17 last Monday. As expected, the stock needed some time to digest those gains and gradually pulled back through the middle of the week. Amazingly, buyers stepped up to grab the bargain at $43 on Thursday and continued that spending spree on Friday, propelling ADTN back over the $45 level at the close. With daily Stochastics trying to turn a short-cycle bullish reversal, it looks like this one is going to take a run at our final target in the $48-50 area. New entries taken on the dip to $43 on Thursday look very favorable and a secondary dip to the $43-44 area should work for new entries as well. Momentum traders looking to capitalize on another breakout move can use a move above $45.25 to enter the play, targeting a quick move up to that $48 level. Given the strong support shown last week, we're raising our stop to $42.50, which is just below the rising 10-dma. Suggested Options: Shorter Term: The June 45 Call will offer short-term traders the best return on an immediate move, with manageable risk. Longer Term: Traders looking to capitalize on a sustained breakout move towards our $48-50 target zone will want to look to the August 45 Call. These options are currently out of the money, but should provide sufficient time for the stock to move higher without time decay becoming a dominant factor over the short run. BUY CALL JUN-45 RQA-FI OI=264 at $2.60 SL=1.25 BUY CALL AUG-45 RQA-HI OI=373 at $4.10 SL=2.50 BUY CALL AUG-50 RQA-HJ OI= 0 at $1.90 SL=1.00 Annotated Chart of ADTN: Picked on April 29th at $40.70 Change since picked: +4.35 Earnings Date 07/15/03 (unconfirmed) Average Daily Volume = 799 K --- Intl Business Mach - IBM - cls: 87.55 chg: +1.50 stop: 85.75*new* Company Description: Big Blue is being heralded as the world's largest technology company. Considering their massive hardware and software business across the globe it's not surprising. However, IBM's services and consulting business is growing by leaps and bounds and is a major source of revenues. Why We Like It: The tech sector rebound is alive and well. The NASDAQ is back over the 1500 level and the GHA hardware index is hitting new closing 52-week highs. Shares of IBM weathered the mid-week weakness and are poised to breakout. Recent positive comments from Intel's President about a second half recovery are good news for IBM's chip business. Plus, Big Blue is about to introduce its new mainframe the TREX on May 13th. The Gartner Group has already stated that IBM has surpassed BEAS in the sever application software market. On top of this positive backdrop analysts at SoundView met with IBM two weeks ago and came back very bullish. The PWC consulting acquisition appears to be working better than expected and IBM's own consulting business is very strong. Shares of IBM continue to climb slowly higher, much like the Dow Jones Industrials. Readers looking at a 30-minute interval chart can easily see how IBM tends to trade in a $2 range before moving to the next $2 range. Thus, we're going to raise our stop loss to $85.75, which should be below the recent support near $86. Traders who prefer to buy the dip can look for dips to $86 while momentum traders can look for a move above $88.00. Yes, it does look like there is resistance at $88-89-90 but continued strength in the markets and the hardware sector should help IBM bust through. A note of caution...market commentary on OI has been pretty clear that the recent rally is built on hopes that the bottom is behind us. This may be true but a recent IT survey from Goldman Sachs indicates IT spending could take another dip before it gets better. While we expect IBM to do better than its competitors its stock price is sure to experience plenty of ups and downs. The moral to this story? Watch your stops! Suggested Options: We listed mostly 90-strike options but that reflects our expectation of a breakout above the 89-90 level. It would not hurt to use the 85 strikes on dips or if you can afford them. BUY CALL JUN 85 IBM-FQ OI= 7721 at $4.50 SL=2.25 BUY CALL JUN 90 IBM-FR OI=11181 at $1.60 SL=0.80 BUY CALL JUL 90 IBM-GR OI=33334 at $2.70 SL=1.40 BUY CALL OCT 90 IBM-JR OI= 7791 at $5.10 SL=3.00 Annotated chart for IBM: Picked on May 4th at $87.37 Change since picked: +0.18 Earnings Date 04/14/03 (confirmed) Average Daily Volume = 8.2 Million --- KLA-Tencor - KLAC - close: 42.49 change: +1.43 stop: 40.75*new* Company Description: About KLA-Tencor: KLA-Tencor is the world leader in yield management and process control solutions for semiconductor manufacturing and related industries. Headquartered in San Jose, Calif., the company has sales and service offices around the world. An S&P 500 company, KLA-Tencor is traded on the Nasdaq National Market under the symbol KLAC. (source: company press release) Why We Like It: The entire premise of this play was to catch any aggressive rally attempts in the semiconductor sector as it tried to play catch up to the rest of the tech market. So far that hasn't happened yet. The disk drive sector, the hardware sector and the Internet sector are all at new 52-week closing highs but the SOX keeps lagging behind. Granted it was one of the biggest sector movers on Friday, up 3.82% but this was due to strong earnings guidance from graphics chip maker NIVIDIA and news that Intel's President had reaffirmed his belief in a second half recovery. In reality, the relative weakness Wednesday and Thursday for the SOX and for KLAC may have offered a better entry point for bullish traders. While the SOX pulled back shares of KLAC followed and dipped toward the $40.80 area before jumping higher on Friday. Our short-term goal is $45.00 for KLAC and market willing it should get there. We're raising our stop to $40.75, just below Thursday's low. This is to reduce our risk and apply some action to the belief that the markets look overbought and need a more significant pull back. Suggested Options: Our perspective is short-term on the chip rally so we're focused on the June call options. Traders who like more time can look to Septembers. We're not listing the $42.50 strikes but they are available if you want them. BUY CALL JUN 40.00 KCQ-FH OI=5152 at $4.00 SL=2.00 BUY CALL JUN 45.00 KCQ-FI OI=9034 at $1.40 SL=0.70 BUY CALL SEP 45.00 KCQ-II OI=2774 at $3.40 SL=1.50 Annotated Chart for KLAC Picked on May 4th at $42.15 Change since picked: +0.34 Earnings Date 04/23/03 (confirmed) Average Daily Volume = 11.4 Million --- --- --- --- LONG-TERM CALL --- --- --- --- MedImmune Inc - MEDI - close: 33.98 change: -0.20 stop: 31.99*new* Company Description: MedImmune is a leading biotechnology company focused on researching, developing and commercializing products to prevent or treat infectious disease, autoimmune disease and cancer. MedImmune currently markets three products, Synagis. (palivizumab), Ethyol. (amifostine) and CytoGam. (cytomegalovirus immune globulin intravenous (human)), and has 10 products in clinical testing. MedImmune employs approximately 1,600 people, is headquartered in Gaithersburg, Maryland, and has additional operations in Frederick, Maryland, as well as Pennsylvania, California, the United Kingdom and the Netherlands (source: company press release) Why We Like It: Strength and resiliency are what investors are looking for in a longer-term trade. We're not advocating MEDI as a core portfolio holding but it does look tempting as a three to six month speculation with options. We originally added MEDI to the OptionInvestor.com play list on April 3rd at $34.31. The company is currently working through clinical trials on its up and coming Flumist drug, the first ever influenza vaccine delivered through a nasal mist instead of a shot. Recently the company has reaffirmed investors that they expect FDA approval for Flumist by the end of June. MEDI did report their Q1 earnings on April 24th and the results were decent. The headline number beat estimates by two cents with 44 cents a share. Last year's Q1 the company lost nearly $1.1 billion due to its acquisition of the biotech company Aviron. This year MEDI earned $110 million. More importantly for investors was that MEDI's revenues rocketed 32 percent higher to $436 million. Fueling the rise was stronger than expected sales of its Synagis drug. The company actually raised its forecasts for sales of Synagis from 16 to 20 percent growth to 20 to 24 percent growth. The day after MEDI's earnings announcement Lazard Freres lowered its rating on MEDI from a "hold" to a "sell" claiming shares are overvalued. The stock did not react and continued to trade sideways above the $35 level. We like MEDI's strength and how it has been channeling higher. In the past, dips towards its 50-dma have been profitable entry points for the bulls and shares are slipping lower towards the 50-dma now. Given the upcoming FDA approval in June for the Flumist drug, investors have a reason to hold and speculators have a reason to buy. Yet this doesn't absolve an investor's responsibility to protect their capital. We're raising the stop to $31.99, which is just below the bottom of MEDI's rising channel. More conservative traders might want to put their stop under the simple 50-dma currently near 33.12. The obvious risk is that the FDA does not approve Flumist and shares react negatively. Monitor your stops! Suggested Options: As a longer-term play we would suggest the September calls, which would allow time for any appreciation from a late-June approval by the FDA. BUY CALL SEP-32.50 MEQ-IZ OI= 402 at $4.30 SL=2.00 BUY CALL SEP-35.00 MEQ-IG OI=3503 at $2.80 SL=1.40 Annotated Chart for MEDI: Picked on April 3rd at $34.31 Change since picked: -0.33 Earnings Date 04/23/03 (confirmed) Average Daily Volume = 3.9 Million ************* NEW PUT PLAYS ************* None ************************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. 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The Option Investor Newsletter Sunday 05-11-2003 Sunday 4 of 5 In Section Four: Current Put Plays: AIG, GM, GS, KSS Leaps: Edging Closer To The Precipice Traders Corner: Being Married Can Be Fun – If You're A Put Traders Corner: Six Simple Rules Traders Corner: Where Is The Dow Going? Futures Corner: Using Futures to determine Market Strength or Weakness ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************** CURRENT PUT PLAYS ***************** American Intl Group - AIG - cls: 56.25 chg: +0.79 stop: $58.00 Company Description: American International Group, Inc. (AIG) is the world's leading international insurance and financial services organization, with operations in approximately 130 countries and jurisdictions. AIG member companies serve commercial, institutional and individual customers through the most extensive worldwide property-casualty and life insurance networks of any insurer. In the United States, AIG is the largest underwriter of commercial and industrial insurance and a top-ranked life insurer through AIG American General. AIG's global businesses also include financial services, retirement savings and asset management. AIG's financial services businesses include aircraft leasing, financial products, trading and market making. AIG's growing global consumer finance business is led in the United States by American General Finance. AIG also has one of the largest U.S. retirement savings businesses through AIG SunAmerica and AIG VALIC, and is a leader in asset management for the individual and institutional markets, with specialized investment management capabilities in equities, fixed income, alternative investments and real estate. AIG's common stock is listed on the New York Stock Exchange, as well as the stock exchanges in London, Paris, Switzerland and Tokyo. (source: company press release) Why We Like It: (same update as Thursday, May 8th) Going short at failed resistance is the most tempting and least threatening opportunity for a bear. Shares of AIG are presenting just such an opportunity. Now that the markets have started to pull back a bit in profit taking traders are going to be hunting for weak stocks that have room to fall. AIG could be one of them. The stock had rallied right to its 200-dma ahead of its April 24th earnings report and then it came crashing right back down after the report, probably due to one of the earliest announcements by an American company about how SARS might affect business. Okay, "crashed" maybe an exaggeration but shares did drop strongly and have spent the last two weeks in a vain attempt to break above its descending 200-dma. The recent market weakness, albeit mild, have seen shares of AIG extend their failed rally pull back. AIG earns almost 30 percent of its revenues from Asia and the ongoing SARS threat will most certainly affect their Q2 earnings. Even if the SARS influence is reduced the perception that SARS could affect their earnings results is all it takes to have investors hitting the sell button. The company has already issued a statement that SARS will prevent its agents from visiting prospective customers in the region. To exacerbate the issue AIG already has a small number of agents under quarantine and at least one has been confirmed as a SARS patient. Potentially contributing to AIG's weakness is the IUX insurance index. The IUX has been trading higher in a relatively narrow channel since early April. We did notice it spike up and back down on AIG's earnings report but the index kept climbing while AIG went sideways after investors digested AIG's earnings numbers. The recent market weakness has pushed the IUX through the bottom of its narrow channel and the index rests precariously above its simple 200-dma. We would watch both the IUX and AIG for weakness. A move under the 200-dma for the IUX or a move under $55 for AIG might be a precursor for the other. Chart technicians will also note that the daily MACD and stochastics for AIG are rolling over from oversold. We also note that AIG's weekly chart is showing the stock at the top of a multi-month descending channel (see image below). More aggressive traders can initiate a short position here but we're going to use a trigger under $55.00 (actually $54.94) to launch us into the play. Our initial stop will be $58.00, although $58.35 would be just above recent highs. Keep in mind that AIG's chairman will be speaking at the Goldman Sachs Financial conference on May 13th and any positive comments could affect our play poorly. Weekend Update: So far we are NOT TRIGGERED in this short play for AIG. Only if shares trade at $54.94 or less will we open the play. However, that doesn't mean that more aggressive traders can try and target shoot a better entry point. If AIG attempts to bounce from the $55 level, then another failed rally at its 200-dma might be a low-risk entry with our stop loss at $58.00. The recent disasters with tornados hitting the mid-west should put a damper on the insurance index but AIG is not one of the insurers expected to pay out significant claims by these storms. Suggested Options: Stocks tend to go down faster than they go up so our focus will be on short-term options. June and August puts appear to be our best bets. BUY PUT JUN 55 AIG-RK OI=4588 at $1.80 SL=0.90 BUY PUT JUN 50 AIG-RJ OI=6314 at $0.65 SL=0.00 BUY PUT AUG 50 AIG-TJ OI=7367 at $1.55 SL=0.75 Annotated Chart: Picked on May Xth at $00.00 Change since picked: -0.00 Earnings Date 04/24/03 (confirmed) Average Daily Volume = 7.2 Million --- General Motors - GM - close: 35.97 change: +0.19 stop: 38.00*new* Company Description: General Motors Corporation provides automotive-related products and services by primarily designing, manufacturing and marketing vehicles, as well as providing communications services and financial services. The company operates in two segments, Automotive, Communications Services and Other Operations, and Financing and Insurance Operations. It's automotive business segment consists of General Motors Automotive, which encompasses four regions: GM Norma America, GM Europe, GM Latin America/Africa/Mid-East and GM Asia Pacific. The communication services include digital entertainment, information and communications services and satellite-based private business networks. The company's other operations include the design, manufacturing and marketing of locomotives and heavy-duty transmissions. GM's Financing and Insurance Operations primarily relate to General Motors Acceptance Corporation (GMAC). Why we like it: Given what appear to be rather dismal fundamental conditions and a lack of a bullish catalyst, we really expected to see GM peeling off lower last week. But it just never came to past, with the stock languishing in a very tight range between $35.50- 36.50 Despite the lack of any thrilling action, we still like the long term bearish prospects for the stock, with a return to the $30 level looking quite achievable. Failed rallies below the formidable $37.50 resistance level will make for the best entries ahead of the expected decline. Those traders looking for confirmed weakness before playing can use a drop under $35 as their entry signal. Note that GM is one of the minority of DOW stocks that is NOT on a PnF Buy signal, with its bearish price target of $18 still being in play. Rather than continue to update this play every day, we're changing it to a longer-term play and will only update it when necessary due to significant price action or news developments. We're just fractionally tightening our stop to $38 (which is still above the 200-dma), and we'll leave it there until the stock authoritatively loses the $35 level. Suggested Options: Short-term traders will want to focus on the May 35 Put, as it will provide the best return for a short-term move. But note that we've shifted our focus on GM to the longer term and are recommending using the September strikes to alleviate the concern of time decay. Those traders looking to gain greater leverage can utilize the SEP-32 Put, which although it is out of the money, should have enough life to get the job done. BUY PUT JUN-35 GM-RG OI=19538 at $1.45 SL=0.75 BUY PUT SEP-35 GM-UG OI= 1688 at $2.95 SL=1.50 BUY PUT SEP-32 GM-UZ OI= 5201 at $1.95 SL=1.00 Annotated Chart of GM: Picked on May 4th at $35.80 Change since picked: +0.17 Earnings Date 07/15/03 (confirmed) Average Daily Volume = 5.15 mln --- Goldman Sachs Grp. - GS - close: 75.00 change: +0.94 stop: 78.25 Company Description: The Goldman Sachs Group is a global investment banking and securities firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high net- worth individuals. The company provides investment banking, which includes financial advisory and underwriting, and trading and principal investments, which includes fixed income, currency and commodities, equities and principal investments. GS recently completed the acquisition of Spear, Leeds & Kellog, which is engaged in securities clearing, execution and market making, both floor-based and off-floor. Why we like it: While it would have been nice to see GS follow through to the downside on Friday, that would have been too much to hope for in light of the bullish action in the broad market. We can't say we're disappointed though, as the rebound was rather anemic and looks like it is setting us up for a better entry point into the play. Remember that broken ascending channel? Well Friday's bounce was pretty anemic and it could be the early part of a rebound that fails at the bottom of that broken channel. Currently, the bottom of that channel is about $76.40, so we'll be looking for a failed rally in the $76.00-76.50 area to signal an entry into the play. Of course traders that would prefer to see confirmed weakness before entering the play will want to keep their eye on the $74 level. GS found support just above that level on both Thursday and Friday and if it breaks, the trip down to fill the $70-71 early April gap could be swift. The one potential fly in the ointment is the action of the Brokerage sector (XBD.X), which reversed higher on Friday and appears intent on another test of the $460-463 area. Should that test fail, it will provide confirmation for those taking new entries on a failed rally in GS. Maintain stops at $78.25. Suggested Options: Short-term traders will want to focus on the June 75 Put, as it will provide the best return for a short-term play. Those looking for a larger move down towards the early April gap will want to utilize the June 70 Put or even the July 70 put, which provides greater insulation from the spectre of time decay. Note that we haven't listed any May strikes, with expiration next week. BUY PUT JUN-75 GS-RO OI=1563 at $2.75 SL=1.25 BUY PUT JUN-70 GS-RN OI=2713 at $1.15 SL=0.50 BUY PUT JUL-70 GS-SN OI=4563 at $1.90 SL=1.00 Annotated Chart of GS: Picked on May 8th at $74.06 Change since picked: +0.94 Earnings Date 06/19/03 (unconfirmed) Average Daily Volume = 4.28 mln --- Kohl's Corp. - KSS - close: 52.62 change: -0.63 stop: 55.25*new* Company Description: Kohl's Corporation operates family-oriented, specialty department stores, primarily in the Midwest. The company's stores sell moderately priced apparel, shoes, accessories and home products targeted to middle-income customers shopping for their families and homes. Kohl's stores have fewer departments than full-line department stores, but offer customers assortments of merchandise displayed in complete selections of styles, colors and sizes. Of the 420 stores the company operates, 116 are takeover locations, which have facilitated the entry into several new markets, including Chicago, Illinois; Detroit, Michigan; Ohio; Boston, Massachusetts; Philadelphia, Pennsylvania; St. Louis, Missouri, and the New York region. Why we like it: Sure enough, Thursday's breakdown under the $54 level did indeed prove to be the straw that broke the bulls' back. We've been saying that when KSS broke that level that it ought to be a quick trip down to fill in the $51-52 gap left behind on March 13th. Well we didn't have to wait long, as the stock plunged this morning, hitting its intraday low of $51.06 during the first hour of trading. That was the opportunity to harvest some quick gains in the play, as it then rebounded smartly, consolidated near $52 for most of the day and then moved higher into the close. There's no question that KSS has suffered some technical damage over the past couple days, not the least of which is the new PnF Sell signal and subsequent break of the bullish support line at $53. Despite the rebound from the lows, KSS still looks quite weak and we're sticking with it on the thought that our $50 target should be in the bag early next week, market permitting. You see, the Retail index (RLX.X) rebounded with the rest of the market, popping right back to the $307 resistance level for a 1% gain on the day. In light of that performance, KSS' relative weakness becomes more clear. As close as the current price is to our eventual target, there is no sense in new entries on further price weakness. No, the best strategy for new entries is to sell resistance, which should be firming up in the $54-55 area. A failed rally below $55 looks good to ride for the next wave down. Recall that KSS has been rather volatile, so we're trying to balance risk control with giving the stock enough room to wiggle before hitting our $50 target. Lower stops to $55.25 this weekend, as a close above that level should not occur until after the current bearish trend ends. Suggested Options: Short-term traders will want to focus on the June 50 Put, as it will provide the best return for a move towards our eventual target of $50. More conservative traders can use the June 55 put, which is currently $2 ITM. Note that May options expire next week. BUY PUT JUN-55 KSS-RK OI=2306 at $4.20 SL=2.50 BUY PUT JUN-50 KSS-RJ OI=4192 at $1.75 SL=0.75 Annotated Chart of KSS: Picked on April 27th at $55.02 Change since picked: -2.40 Earnings Date 05/15/03 (confirmed) Average Daily Volume = 3.90 mln ************************Advertisement************************* "If you haven't traded options online – you haven't really traded options," claims author Larry Spears in his new compact guide book: "7 Steps to Success – Trading Options Online". Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***** LEAPS ***** Edging Closer To The Precipice By Mark Phillips If there was ever in doubt in your mind as to my attitude about this market, that title should remove all doubt. It isn't so much a matter of timing, as it is about ultimate direction. For those who remember their Physics, it is a bit like the Heisenberg Uncertainty Principle. Roughly stated, the more accurately the position of a particle is known, the less accurately the momentum of that particle can be known. Related to the markets, I'll postulate that the more accurately the direction of the next market move is known, the less accurately the timing of that move can be determined. We're in a monster of a bear market at the time and nothing other than an improving profit picture in Corporate America can change that fact. We may have a series of mini bull and mini bear markets over the next several years, but I believe the dominant force for the next several years is that of the bear. I've gone into my rationale for this in the past and I won't bore you with a repeat of all the same old valuation and macroeconomic issues. I just want to remind you of what my view of the market is. All the major indices are going much lower before the BEAR MARKET BOTTOM is at hand. But between now and then, there will be strong rallies and equally precipitous declines. Anyone will be able to look back 10 years from now and see so clearly how they could have gotten wealthy during the intervening years. Sell the rally tops and buy the selloff bottoms. They'll say to themselves, "any fool could have seen what had to unfold as the bubble deflated". But as you and I know, the devil is in the details. We "know" the market is headed lower in a series of jagged steps up and down. But the more certain we are of what that next move is, the less likely we are apt to be able to forecast the time of the turn. I know some students of Elliott Wave analysis will disagree with me, but what's life without a few critics? I am convinced that the next major move in the markets will be down, and I feel that it will commence rather soon. But with options, "rather soon" doesn't provide nearly the exactitude necessary to profit. For that, we need some objective, quantifiable tools with which to measure sentiment, degree of overextension and likelihood for a major reversal. Hey, that sounds an awful lot like Technical Analysis, don't you think? Over the years, I've used a widely varied group of chart studies, technical indicators and trading systems. I've even tried forecasting using fundamental analysis. What I've arrived at is a very simple list of tools that I have found to work reliably time and again. That doesn't mean there aren't other terrific analysis tools out there that I don't use. Just that I've chosen a different set. Analyzing individual stocks is one endeavor, while analyzing the broad market is another kettle of fish altogether. In some respects, broad market analysis is easier because there are indicators we can utilize that tell us the health of the overall market -- things that we just can't find an analog of in the individual equity world. VIX/VXN, Bullish Percent, Volume Breadth, Advance/Decline line, Put/call ratio, and a host of other market-wide sentiment indicators are but a part of the universe of ways in which we can take the pulse of the broad market. As you know by my recent columns, when I'm searching for a significant reversal in the broad market, aside from price action, I only really watch 3 things. The first is the VIX, the second is Bullish Percent and the third is long-term oscillators. Very simple, very easy. Just the way I like it. As I've covered in my recent series on the MOPO trade setup, I'm looking for the VIX to fall into the 19-21 area, and I've actually been impressed how it has stubbornly held above the 23 level for the past few weeks. If you've missed that series and are interesting in reading the articles, they can be accessed at the following links. MOPO - Remember That Term? http://www.OptionInvestor.com/traderscorner/tc_042803_1.asp Setting Up For MOPO http://members.OptionInvestor.com/options101/opt_043003_1.asp Further Reflections on MOPO http://members.OptionInvestor.com/options101/opt_050703_1.asp Well guess what? As of Friday's close, the VIX dropped pretty sharply, coming to rest at 22.04, its lowest close since May 24th of last year. We're not into the "Total Complacency" zone just yet, but getting close. The VIX could drop to or even below 20 next week, or it could take another 3-4 weeks. Or it could reverse right here and head back up towards the end of its historically "normal" range. We don't really know. But what we do know is that when it reaches down into the 19-21 area (the lower the better), it has always been a good time for purchasing long-term puts on the broad market. Based on what appears to be a fairly widespread belief (at least in the financial media) that this time is different and we may be entering a more pronounced and extended bullish phase for the market, I think it is entirely possible we'll see the VIX below 20 before the day of reckoning is at hand. Next up are the bullish percents. As they approach overbought territory (70% or higher), the bulls assume greater and greater levels of risk. Well, let's take a look at the bullish percents of the major indices and see where we are. SPX - Currently 64% and butting up against the PnF bearish resistance line at 65%. The December high was 68% and the high last March was 77%. It is getting elevated here, but still has some room to run if the bulls continue to feel frisky. DOW - Pushing up to 66.67% on Friday, the DOW still has some upside room as measured by the Bullish Percent before reaching the levels of overbought seen last November (73%) or last March (76%). No hurry to get short here either. NDX - The Bullish Percent for the NASDAQ-100 tends to get the most extended, and regularly reaches into the low-80% range. Last December saw a reading of 82%, and April of 2001 saw a reading of 83%. Nevertheless, Friday's closing value of 78% should have bulls nervously looking over their shoulder. As you can see, these bullish percent readings are high enough that they should start getting our attention for the next high- odds longer-term put opportunity, but it isn't yet ripe for the plucking. As mentioned in the above-referenced MOPO articles, my preferred timing tool for picking the point of reversal is to wait for the crossover of the bullish percent lines over their 10-dmas on a standard line chart. I looked at each of these bullish percents in that format this weekend and none of them are even starting to show the first sign of weakness -- at least not yet. Next up are the oscillators, and my chosen tool in this arena is Stochastics on the weekly chart. I tend to place the most faith in the 10,5,3 setting, as it tends to eliminate much of the choppiness found with shorter settings, while still giving good, actionable signals. As of this writing, the weekly Stochastics for the DOW, SPX and OEX are all in overbought and just starting to show the first signs of flattening out. They aren't bearish yet, but could be in as little as 1-2 weeks. So as you can see by the title of this week's column and the foregoing discussion, my view is that the markets are edging closer to the point where they will tip over and we'll head back down, just as we have at the end of each bear-market rally for the past 3 years. More than anything, that should explain why the bulk of the listed Watch List plays are biased to the downside. But the devil is in the details, as they say. The delicate balance is in trying to pick the right targets and the right timing. As you can see by the price developments on some of our Watch List plays, I'm having a hard time picking those high-odds action points, but isn't that struggle what keeps us coming back for more each week? All right, I know it's really the money and you're ready to get to it, so let's go. Portfolio: EMC - Once EMC started breaking free of the resistance that had held the stock in check for the past year, our focus turned to the $10-11 area as a likely area to harvest some gains on the play. Ever so slightly, the stock peeked over the $10 level on Wednesday, but quickly got pushed back and the consolidation below that level continued right into the close on Friday. On the plus side, EMC has been very resistant to drop. On the negative side, I fear the stock is running out of steam with bearish Stochastics divergence showing on the daily chart and the weekly Stochastics topping out in overbought. While we've been getting ever more aggressive with our stop, it is now time to force EMC to either break out or stop us out of the play. To that end, I'm raising the stop this weekend to $9.00. I know that may seem really tight and it is. But I'm counting on the combined support of the ascending trendline ($9.15) and the 20-dma (currently $8.94, but rising about 9-cents per day which will put it over $9.00 on Monday) to provide for a rebound on any continuation of last week's pullback from the recent highs. AIG - Last week made for a rather exciting ride, with the early strength trying mightily to push AIG through the $58 resistance and 200-dma. In the end, it looks like the bulls lost that battle and the drop back under $56 on Thursday was critical because it represented a break below the 2-month ascending trendline. It's far too early to count the bulls out, but I would view successive near-term tests of the 200-dma as entry opportunities. Note that the broken trendline should also provide resistance. AIG must break and close below $54 to generate a fresh PnF Sell signal and get this party moving in the right direction. Until then, we're giving AGI plenty of room to gyrate around with our stop set at $61. Watch List: NEM - I don't think I need to tell you my level of frustration at having missed this upward move in NEM. If it was any other play, I'd probably just cut the play loose and go looking for a fresh candidate. But my fundamental reasons for the play are still very much intact and NEM continues to trade within the broad neutral triangle that has been forming for the past year. Daily and weekly Stochastics are topping out in overbought, and this certainly isn't the time to be considering new entries. But I'm going to leave it on the Watch List until such time as it either breaks out of the triangle pattern or gives us a technically sound entry. Given the stock's extended nature, I'm backing off and putting the play on HOLD so that we can wait and see what develops. Due to the fact that we've got some time to wait, this will be the last update on this particular Watch List play until the technical pattern becomes more appealing. GD - Over the past few weeks, GD seems to have stalled near the $61-62 level and really isn't going anywhere. The oscillators look extended here and a pullback seems imminent. The big question is how deep or shallow that pullback might be. I would prefer to watch this one from the sidelines, so I'm also going to place GD on HOLD this weekend. I want to see a pullback to at least fill the 4/21 gap and preferably test the 50-dma before considering new entries. But with the weekly Stochastics topping out in overbought, I think the responsible course of action is to wait for a more attractive technical setup. AMZN - Talk about your relentless rise! I originally thought we'd be doing well to get an entry at the top of the year-long ascending channel (currently $29.30). But the stock barely paused to catch its breath as it pushed up through that level and then the $30 resistance level following what were deemed to be good earnings last month. Let's just say I remain unconvinced. Skepticism aside though, there's no reason to place money on the line until we see something in the price action that confirms my bias. That means we continue to wait for price weakness, and preferably for the weekly Stochastics to at least start to roll over. I'm raising the entry target again this weekend, but remember we aren't selling into strength on this play -- we're waiting for price action to confirm my bias before playing. KO - As I said last week, patience is a key requirement in waiting for a solid entry setup in our KO play. Wow! Talk about dodging a bullet. Morgan Stanley upgraded the stock Wednesday morning and it shot higher right out of the gate, vaulting right through our targeted entry zone without so much as a pause. The buying spree continued on Friday, with KO stretching to slightly above the $44 level, amazingly generating its first PnF Buy signal since last March. So does that make this a busted play? Not by a long shot -- it just means we're going to have to exercise a bit more patience. PnF bearish resistance is at $46, major historical resistance is at $45-46 and the 200-dma is at $44.94. Taken altogether that would seem to make the $45 level a very nice entry point into the play, with risk easy to manage by placing a stop at $47. So that's the modified game plan. DJX - There's really nothing more to add to this play than what appeared in my commentary above. The DJX looks on track to fulfilling our entry criteria up in the $88-89 area and for now we wait for all the pieces to fall into place. More aggressive traders that are worried about missing the play could consider starting to average into their position starting near the intraday highs from last week, but that's not how I'm going to play it. We'll exercise patience and wait for the DJX to give us the trade setup we're looking for. GS - I really considered initiating an entry into the GS play on Wednesday on the stock's 2nd failure to touch the $78 level. In the end, I held off, as much due to problems I was having with posting to the Market Monitor, as to the fact that I really felt the entry was early. Too bad, because that would have turned out to be a very nice entry into the play just before Thursday's more than $3 melt down. That drop broke the stock's 2-month ascending channel, but dip-buyers were still active at the $74 level on Friday. That rebound should continue up to test the bottom of the broken channel and a rollover from that line (currently $76.50) looks like our high-odds entry for the trip back down the charts. Modify the entry target to $76.50-77.50. Closing Thoughts: I've had a couple of questions over the past weeks regarding my opinion that Technology stocks will perform better in 2003 than the rest of the market. Specifically, readers have wondered aloud if the reason these technology-related stocks deserve higher prices from now on or if this is just a technical bounce. One reader even asked the question of whether we're going to have Bubble II? In short, I would have to say "No, these valuations are not warranted". I think we're looking at a readjustment in the market right now and for the remainder of the year, as investors come to terms (most have refused to accept the possibility) that we have entered a "sustained period of sub-par growth". See Uncle Alan, I can sound important too. HUGE GRIN The only reason I feel the NASDAQ should perform better this year is that more air was let out of that balloon more quickly than the rest of the market. But are these stocks worth the kinds of valuations they are currently being assigned? Not by a long-shot, in my opinion. Many of these stocks are pushing into the triple-digit P/E ratio again and that screams lunacy, in my mind. My advice is to not think so much about the absolute valuations when trying to make a decision on a trade. Rather, I think the prudent approach is to trade the technically favorable setups, as that is a more certain and quantifiable endeavor. As I said at the beginning, we're getting close to what I think is the next direction change to the downside. I expect non- Technology stocks to feel the most pain on the next downward leg and that more than anything explains my penchant for bearish plays in that arena. The most important point I can make is that until the indicators that I detailed above start to give some overt bearish signs, we do not want to press the issue with lots of bearish entries. We've got our targets identified, and hopefully some reasonable action points. Now we watch to see if the market is feeling in an obliging mood. Have a great week! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: EMC 03/12/03 '04 $ 7 LUE-AU $ 1.40 $ 2.90 +107.1% $8.50 '05 $ 7 ZUE-AU $ 2.15 $ 3.60 +67.44% $8.50 Puts: AIG 04/24/03 '04 $ 55 LAJ-MK $ 5.60 $ 5.30 - 5.36% $61.00 '05 $ 55 ZAF-MK $ 8.50 $ 8.60 + 1.18% $61.00 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: NEM 03/09/03 HOLD JAN-2004 $ 25 LIE-AE CC JAN-2004 $ 20 LIE-AD JAN-2005 $ 25 ZIE-AE CC JAN-2005 $ 20 ZIE-AD GD 03/23/03 $56-57 JAN-2004 $ 60 KJD-AL CC JAN-2004 $ 50 KJD-AJ JAN-2005 $ 60 ZZJ-AL CC JAN-2005 $ 50 ZZJ-AJ PUTS: AMZN 04/13/03 $29-30 JAN-2004 $ 25 LOH-ME JAN-2005 $ 25 ZWE-ME KO 04/27/03 $45-46 JAN-2004 $ 40 LKO-MH JAN-2005 $ 40 ZKO-MH DJX 05/04/03 $88-89 DEC-2003 $ 84 DJX-XF DEC-2004 $ 84 YDJ-XF GS 05/04/03 $76.50-77.50 JAN-2004 $ 75 KGS-MO JAN-2005 $ 75 ZSD-MO GM 05/11/03 $37.00-37.50 JAN-2004 $ 35 LGM-MG JAN-2005 $ 30 ZGM-MF New Portfolio Plays None New Watchlist Plays GM - General Motors $35.97 **Put Play** Following more than 18 months of aggressive incentives to keep the consumer buying cars following 9/11 and the continuing economic weakness, automotive manufacturers are running out of tricks to keep the party going. Sure sales are still respectable, but only because the incentives are still in place. GM has acknowledged that they'd like to back off on the incentives, but each time they do, there is a resultant drop in sales -- so they keep them in place just to retain market share. Clearly, GM isn't making its money from selling cars at a huge discount. In reality, most of the company's profits are now coming from the consumer finance division, GMAC. And of course they can "pad" their quarterly results using the "assumed" returns from their pension plan. Working with an assumed rate of return of 9-10% is ridiculous on its face, especially when in recent years, many pension plans have been hit by losses of that magnitude. But at some point, reality is going to hit fantasy and GM will have to acknowledge the growing shortfall in its pension plan -- at that point the plan will have to be refunded from current income and that will show up as large charges against earnings. The stock has been showing the depth of the company's fundamental problems over the past couple months, as it is really unable to show much upside conviction, still laboring well under both its 200-dma ($37.84) and the descending trendline connecting the December and January highs. Add to that the solid historical resistance at $37.50, and GM looks like it will be hard pressed to sustain any upward action on its own merits. Turning to the PnF chart, the stock's weakness is confirmed, as we can see it is one of the 10 remaining DOW stocks that are NOT on a PnF Buy signal. It would require a trade at $42 to accomplish that feat. The current vertical count gives GM a bearish price target of only $18. I don't think we're going to see that level over the next year, but I wouldn't rule it out either. Realistically, I'm looking for a drop back to test the $30 level, which provided solid support a couple months ago. Once that level is achieved or breached, we can re-evaluate to see whether it looks to have more downside in store. Daily Stochastics have been looking weak for the past couple weeks and the weekly oscillator (10,5,3) is just starting to flatten out, without having entered overbought territory - a clear bearish sign. We're looking for a brief surge over the $37 level to give us a favorable entry into the play, as resistance should come into play turning back any attempted advance above that level. Accordingly, we're playing with a rather tight stop. While the $38 level should work, given the way we just barely got stopped out on GM last time we played it, I'm setting the stop at $39. BUY LEAP JAN-2004 $35 LGM-MG BUY LEAP JAN-2005 $30 ZGM-MF Drops None ************** TRADERS CORNER ************** Being Married Can Be Fun – If You're A Put By Mike Parnos, Investing With Attitude Don't promise to love, honor and obey unless you're marrying a short term put. No need for a large wedding. Don't invite your friends. It won't last. Besides, you'll be getting married over and over you can't afford the caterers. I'll be glad to be your best man – no charge. I'm dedicating this column to those remaining CPTI "unmarried" stockowners who spend their lives in the single bars – drowning their losses in 80-proof who-knows-what. They may get lucky with a one-night-stand. But, most of the time, they just get drunk. ______________________________________________________________ Did You Go Nowhere or Make Money? Take MSFT for example. If you bought 1,000 shares of a Microsoft a year ago, it was trading around $25 (split adjusted). Today, MSFT is still trading around $25. So, you're about even – after an entire year. It's like a tie game. It's said a tie is like kissing your sister. That may be an appealing thought, or a daily activity, in certain rural parts of the country. However, we're here to make perfectly formed dollars – the spendable kind. During the past year a lot has happened. MSFT hasn't traded at $25 for the entire year. It's moved up and down over and over. A buy and hold investor would have nothing to show for the entire year. A trader, with CPTI skills, could have pocketed many thousands of dollars on the journey. How? We're going to use married puts. It's not the "till-death-do-us- part" married. These marriages are for two or three months and are lot more likely to work than real-life marriages. Why? Short-term commitments, affordable, no mother-in-laws, no baby puts, and no property settlement when it's over. _____________________________________________________________ The Married Put (Chart Point A) -- A year ago we bought 1,000 shares of MSFT at $25. Our investment is $25,000 – and so is our exposure. A three-month at-the-money put cost approximately $2.25. So, the cost is about $.75 per month to protect our $25,000 investment. (Chart Point B) – MSFT has moved up to $28, but the move seems to have stalled out. We'll buy a three-month $30 put for $2.25 to lock in the $3 profit. We sell the $25 put for $1.00. Revised cost for $30 put is $1.25. (Chart Point C) – MSFT moved back down to $25. So now we sell the $30 put for $5.50. We have pocketed $4.25. We now buy the $25 put for $1.50. (Chart Point D) – MSFT makes another move up to $28, but again fails to move through resistance. Again we buy a $27.50 put for $1.50 to protect our gain. We sell the $25 put and salvage $.50. (Chart Point E) – MSFT tanks all the way down to $22. It blew right through the support at $25. When it bottoms, we sell the $27.50 put for $5.50 and we pocket the $4,500 of profit from this downward move. We buy a two-month $22.50 put for $1.50. (Chart Point F) – MSFT makes a quick move up to $28.50. As it begins to fall, we buy a protective $30 put for $2. We can sell the $22.50 put and salvage $.25. Net cost for $30 put is $1.75. (Chart Point G) – MSFT declines to $26. As the move ends, we sell the $30 put for $4.25 and put $2.50 more in our pocket. We now buy the $27.50 put for $1.50. (Chart Point H) – MSFT moves up to $28.25. We're still protected by our $27.50 put. We buy a $30 put for $2 and sell our $27.50 put for $1.00. Net cost for $30 put is $1. (Chart Point I) – MSFT falls to $22.50. As it begins to bounce, we sell the $30.00 put for $7.50 and put $6.50 in our pocket. Now we buy the $22.50 two-month put for $1.50 to protect our stock. (Chart Point J) – MSFT moves up to $26.50. We buy the $27.50 put for $1.50 and sell the $22.50 put for $.50. We've now protected the $4 gain from $22.50 to $26.50. (Chart Point K) – MSFT bounces back down to $24. We sell the $27.50 put for $3.50, pocketing the $2.50. Now we buy the two- month $25 put for $1.50. You get the picture? Let's add things up. Put Purchases: (A) $2.25 - $25.00 put (B) $1.25 - $30.00 put (C) $1.50 - $25.00 put (D) $1.00 - $27.50 put (E) $1.50 - $22.50 put (F) $1.75 - $30.00 put (G) $1.50 - $27.50 put (H) $1.00 - $30.00 put (I) $1.50 - $22.50 put (J) $1.00 - $27.50 put Total purchases to Chart Point K = $14,250 Put Sales Proceeds: (C) $4,250 on sale of $30.00 put (E) $4,500 on sale of $27.50 put (G) $2,500 on sale of $30.00 put (I) $6,500 on sale of $30.00 put (K) $2,500 on sale of $27.50 put Total proceeds to Chart Point K = $20,250 Our profit on MSFT – even though it ended up about where it started – was $6,000. That's about a 25% return on your $25,000 investment – an impressive return compared to the big ZERO for the buy-and-hold investor. AND your $25,000 investment was protected the ENTIRE TIME. MSFT was a good example because it has volatility. It also has strike prices at $2.50 increments that give us added flexibility of choice in puts to buy. Keep in mind that the above figures are approximate, but pretty close. Each purchase and/or sale may vary $.25 one-way or the other. Time value depends on current volatility and when, during the option cycle, the moves are made and transactions completed. I know this seems a little confusing. It was confusing for me to write it, but it's a reality. I can be, and is, done all the time – by wise investors. Warren Buffet, in addition to selling covered calls on his stocks, is reported to also use puts to protect stock positions and to generate additional capital. _____________________________________________________________ May CPTI Portfolio Positions Position #1 -- SMH Baby Condor. Friday's Close: $27.93 SMH is the Semiconductor Holder Trust. We feel that semiconductor stocks have moved up a little too far and too fast. We created a baby condor by selling the May SMH $25 puts and $27.50 calls. For protection, we bought the May $22.50 puts and $30 calls. The net credit is $1.05 Our maximum profit range is $25 to $27.50. We're only exposed for the 2 1/2 point difference between the strikes ($25/$22.50 or $27.50/$30) less what we've taken in ($1.05) = $1.45. Maximum potential profit is $1,050. SMH has been bouncing around within the range – but then, that's what it's supposed to do. Our safety range is $23.95 to $28.55. It's still within the range. ____________________________________________________________ Position #2 – SPX Iron Condor. Thursday's Close: 933.41 We believe the market may be a bit extended so we gave it a big sandbox to play in. We sold the SPX May 825 puts and the May 950 calls. Then we bought the SPX May 800 puts and May 975 calls for protection. The net credit was $2.95. Our exposure is a little more than usual – 25 points less the $2.95 we took in = $22.05. That's why we're only doing five contracts. Our maximum potential profit is $1,475. SPX traded up to 934+ earlier this week. In the last few days the market has come down, but Friday bounced up again. We have a 16.59-point cushion. Isn't this exciting? If you want, the spread can be closed now for about $2.35. That would be an acceptable dime loss. Only a week to go. Option trading is not for the meek. ______________________________________________________________ Position #3 – MSFT Ménage-A-Qua – Thursday's Close: $26.35 Microsoft just came out with respectable earnings and unenthusiastic guidance. We believe that MSFT will finish at or around $25. We sold the May MSFT $25 puts and calls for a credit of $1.80. We bought the $27.50 calls and $22.50 puts for protection at a cost of $.45 – yielding a net credit of $1.35. Our maximum profit occurs if MSFT closes right at $25. Our profit range is from $23.65 to $26.35. Our risk is only $1.15 with the potential to make $1.35. Maximum potential profit is $1,350. We're right at our break-even point. Timid souls can buy back the $25 call for $1.40 and take a very acceptable nickel loss. _____________________________________________________________ Position #4 – DJX Ménage-A-Qua – Thursday's Close: $86.05 The DJX tracks the DOW. It looks like the DOW is in a minor uptrend with resistance at $86 and support at $82. We sold 10 contracts of the May DJX $84 puts and bought the May DJX $80 puts. Then sold 10 contracts of the May DJX $84 calls and bought the May DJX $88 calls for a credit of $.80 for a total net credit of $2.25. We'll receive our maximum profit if the DOW closes right at 8400. However, we will be profitable if the DOW closes anywhere between 8175 to 8625. That's a 450-point range. The closer it finishes to 8400, the greater the profit. Maximum profit potential: $2,250. There are five trading days left. Remember, the DJX is a European style option that expires on Thursday's close. Unless you buy back the option(s), there will be a cash settlement in your account. There is no risk of assignment. We're within 20 points of breakeven. You can buy back the short call for $2.20 and still own the $88 call in case the market takes off. ______________________________________________________________ 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 Master Strategist and HCP ************** TRADERS CORNER ************** Six Simple Rules Back in my college days, a buddy of mine introduced me to the game of backgammon. He hooked me using the premise that there are just a few simple rules and I could learn the game in 5 minutes. It is true. Backgammon does indeed take 5 minutes to learn as the rules, per se, are simple. What my friend failed to inform me (before I became addicted to the game) was that the strategy takes a lifetime to master. I was recently reviewing the rules of Elliott Waves. I never stopped to count them before but there are only 6 rules. The rules themselves are simple. Let me list them here for you. 1. Motive waves subdivide into a 5 wave basic pattern and move 2. in the direction of the larger trend. 3. The 2 wave always retraces less than 100% of the 1 wave. 4. The 4 wave always retraces less than 100% of the 3 wave. 5. The 3 wave always extends past the end of the 1 wave. 6. Wave 4 never overlaps into the price territory of the 1 7. wave 8. The 3 wave is never the shortest of the motive (1, 3 or 5) 9. waves. Wave 3 is usually the longest. A rule is a rule because it always applies to the wave it is describing. Rules cannot be broken. If a wave pattern breaks a rule, then the numbering is incorrect and the pattern needs to be relabeled. Although there are only 6 rules which always apply, each wave pattern has numerous characteristics which may or may not be visible. The rule/characteristic relationship is akin to the teacher who says that the test has only 2 questions but each question has 25 parts. The wave characteristic discussion is for a different day. Let's examine each rule in a bit more detail. Chart: Basic 5 Wave Pattern This is a chart of the Dow from March 2002 until October 2002. This is my favorite 5 wave basic pattern because it so exemplifies a classic Elliott Wave pattern. Wave 1, 3 and 5 are the motive waves. Note how each of these waves moves in the direction of the larger trend in accordance with rule one. If we were looking at a bullish chart, the pattern would be inverted. If we were to take a closer look within each motive wave, we would be able to subdivide each 1, 3 and 5 wave into another 5 wave basic pattern. This rule applies recursively down to the smallest time frame. Rule 2 states that wave 2 will always retrace less than 100% of wave 1. In the above chart of the Dow, wave 2 retraced about 62% of wave one. Should wave 2 ever retrace more than 100% of wave 1, we would need to step back and re-evaluate the wave count. Take a look at this chart. Chart: Incorrect 2 Wave Although this may seem obvious, this chart is not labeled correctly because the 2 wave retraced more than 100% of wave 1 when it breached the 84.61 level. The best strategy at this point would be to look at the bigger picture of the chart to see where the stock is going. What is the larger trend? Could this wave pattern be more appropriately labeled an A-B-C correction and fit much better with the total picture of what the stock is doing? In the same way that the 2 wave must always retrace less than 100% of the 1 wave, wave 4 must always retrace less than 100% of wave 3. This rule is rarely broken because before wave 4 retraces 100% of wave 3, the wave pattern will violate rule 5 which states that wave 4 cannot overlap in the territory of wave 1. An example will show this much more clearly. Take a look at this chart. Chart: Pre-Overlap of Wave 1 Right now we still have a valid wave count. If wave 4 were to retrace 99.999999% of wave 3, it would have to go to 86.45. Before it could do that, it would have to cross the red line at 81.10 which marks the bottom of wave 1. Once the wave pierces the 81.10 level, wave 4 would have entered into the territory of wave 1 and would violate rule 5. At that point an alternate count would have to be found. Rule 4 states that in the progression of the 5 wave basic pattern, wave 3 must extend past the end of wave 1. If the wave pattern violates this rule, then the stock would never be able to progress in its movement, either up or down. Here is a chart with a rule 4 violation. Chart: Multiple Violations Wave 1 subdivides into a 5 wave basic pattern quite nicely to satisfy rule 1. Wave 2 retraces wave 1 less than 100% to satisfy rule 2. Look at wave 3. Wave 3 never extended past wave 1 and violates rule 4. Labeling wave 3 in this manner not only violates this rule but also rule 6. At this point we have to relabel the wave pattern and get a sad face on our graph from our teacher. Rule 6 is a rule that many people forget to follow or at the least are very lax about. Rule 6 states that the 3 wave must not be the shortest wave of the 5 wave pattern. Take a look at this chart. Chart: Wave 3 Too Short Although this motive wave does have a 5 wave basic pattern within it, this labeling is not correct. Look at how short (in price) the 3 wave is compared to either the 1 wave or the 5 wave. This labeling needs to be adjusted so that the 3 wave is longer. Here is a better labeling. Chart: Wave 3 Correct OK. Quiz time. Below is a wave that can be labeled into a 5 wave basic pattern. Take a moment to study it and apply all the rules to label it correctly. Chart: Quiz 1 Here is how the program labeled it. Chart: Quiz 1 Program Label If you examine this labeling, you will see two rule violations. Take a moment and see if you can discover them. Hint. They aren't on the labeling of the major waves (numbers in blue circles). Did you find them? Take a look at the 5 wave basic pattern within the blue circle wave 3. Note how the 4 wave overlaps into the territory of the 1 wave. This is a rule violation and an alternate count must be found. Also, the 3 wave appears to be the shortest wave. Wave 1 and 5 are longer. This is a good example of how it is not only necessary to follow the rules on the major waves, but the subdivided wave must follow the rules as well. Sometimes this is a big clue as to how to label the whole 5 wave pattern correctly. Take a look at this alternate count. Chart: Quiz 1 Alternate Answer This labeling does not violate any rules. The general labeling strategy is to start with as large a time frame as possible to grasp the overall trend. Once the overall trend is determined, the current daily/hourly charts should fall in line. Knowing what to expect in the larger trend helps to label the smaller time frames. The best way to get good at Elliott Wave labeling is to look at as many charts as possible. I find that labeling hourly graphs are a great way to practice. Start with the daily chart to grasp the larger trend and then look at the hourly charts to label as many subwave patterns as you can. ************** TRADERS CORNER ************** Where Is The Dow Going? Last week I presented the "big picture" of the Dow. If you did not get a chance to read it, I would suggest that you review it now because I am going to be building on that interpretation here. I remember many moons ago I was "in love" with this one young lady. She had an ardor for soap operas. She would come home during her lunch break to watch her favorite soap. (For some unknown reason, recording it on a VCR for later viewing was never an option.) For a while there, I met her at lunchtime and watched the soap with her. After a very short time, I noticed one thing. There was a lot of "activity" but nothing really happened. That is what this market is doing right now. We have been getting 100 point swings, but nothing appears to be happening. The Dow is just sitting there. It is as if someone is winding up a spring that is going to be unleash at any moment. Well? DO SOMETHING. Go up, go down, but do something. And as Arnold would say, "Do it now!" (Read in a German accent.) Chart: Dow Daily 5/9/2003 Here is a chart of the general trend of the Dow. If you compare this chart to last week's chart, you will not notice much of a difference. That is because, nothing is happening. But if we examine the Dow in a smaller time frame, we might be able to see a hint of direction. Chart: Dow Daily 5/9/2003 close up This is a chart of the last several months. Here we see that it looks like the c wave of the ii wave is topping, or nearly so. Let's review briefly. All motive waves, those in the direction of the general trend (1, 3, 5), subdivide into a 5 wave basic pattern. All corrective waves, those in a counter trend (2, 4), subdivide into an A-B-C pattern. A-B-C patterns are numerous, but the one this ii wave is tracing out looks to be a zigzag pattern. Zigzags subdivide as a 5 wave A, a 3 wave B and a 5 wave C. (All C waves subdivide into a 5 wave basic pattern.) What this chart is saying is that the A and B waves are in and we are waiting for the C wave to complete before the Dow starts the iii wave down. So how much longer will it be before the iii wave is complete? Let's take a look at an hourly chart to see if we can find some clues. Chart: Dow Hourly 5/9/2003 Here is an hourly graph that goes back to about mid March. The A- B-C wave here labeled in caps is the same A-B-C wave in the previous chart that was labeled in small letters. Remember, C waves always subdivide into a 5 wave basic pattern. According to this chart, the C wave has topped and the Dow has already started down, completing the i and ii waves of the 1 wave. Unless, of course, it isn't. Here is a slightly different interpretation. Chart: Dow Hourly 5/9/2003 alternate In this chart the C wave is not quite complete. But since this is an hourly chart, the C wave should complete within the next day, two at the latest, topping at around 8700. In either case, it appears as if the top is near and the Dow is going to head down. Unless, of course, it continues to go up. Could the Dow still go higher? Of course. One guru firmly believes that we will get a slight pull back and then the Dow is headed much, much higher. In fact, he believes a new bull market has started. Is he right? Time will tell. In fact, a break above the 9043 level would totally invalid the current count. In that case the Dow will indeed be headed to around 9500. I do not think this is likely, but I do have my stops in at that level just in case. So in my opinion, we have either already topped and have started heading down, or we will do so in a day or two after another 100 point move up. In either case, until proven otherwise, we are starting a major down trend. ************** FUTURES CORNER ************** Using Futures to determine Market Strength or Weakness by Alan Hewko Abbreviations used in this article: Ticker $ move per index pt ES = E-mini SP500 June futures ES03M $ 50 per ES pt YM = E-mini Dow $5 June futures YM03M $ 5 per YM pt NQ = E-mini NDX 100 June futures NQ03M $ 20 per NQ pt Using Futures to determine Market Strength or Weakness Index futures can be valuable tools for those traders who never even trade them for they often can provide an indicator for where the overall market (and perhaps the stocks they are trading) are going. Very often, “Big Money” sets their Buy and Sell Programs pegged to the Futures Markets; and this can be a great tool for Stock and Option traders of whether the market is Buying Support or Selling Resistance. A stock and option trader may ask themselves at times: Time to take profit on these Stock XYZ calls? Time to buy Puts on my favorite Nasdaq momentum stock if the general market is now going back down? Time to wait and just watch the Index Futures a bit first? Etc etc. There’s also a Trade Rule I call: “the Futures SHOULD BE but is NOT rule” (I think the Futures should be going UP based on what just happened, but gee, they are going DOWN very hard – what am I missing here?) – the SHOULD BE but ISN”T rule [grin] A good example of this rule occurred about three weeks ago, starting on the late afternoon of April 22 involving AMGN, EBAY, and NQ (NDX futures). NQ had a large psychological wall at the 1100 Level, with the next higher trade wall at 1110, and the middle pivot of 1105. AMGN and EBAY are both very large cap NDX stocks, with both of them in the Top 10 as far as NDX Weight is concerned. AMGN is also the largest stock in the BBH bio-tech index. Look at the below NQ chart which was made that day: IMPORTANT COMMENT: All the NQ charts include the overnight sessions, so the 02:00 on the chart is 2 AM and 15:00 is 3PM You can see how NQ closed at 4:15pm above the psych 1100 level, right at its 1105 pivot. AMGN and EBAY shortly after that time, at approx. 4:30pm, came out with their earnings and both of them crushed earnings to the upside and give positive guidance going forward. EBAY quickly moves from 88 to 92; and AMGN busts over its old 60 wall and is trading at 62. You the trader form some VERY bullish views for your other stocks, and are expecting a large market rally to form based on EBAY and AMGN. It’s now 4:40pm and NQ futures will re-open at 4:45pm and you make a guess as to where NQ will re-open at. They closed at 1105 and you are guessing they re-open at: 1110? 1115? 1118? By the way, I want you to notice and remember the NQ 1105 level above, for it is going to show up in several charts to follow. So, when NQ re-opens only a TINY bit higher at 1107 that should set off a small flag in your head, and hopefully rein in some of that large bullish market tone you had formed just 15 minutes earlier listening to the EBAY and AMGN conference calls. Never get “TOO BULLISH” and never get “TOO BEARISH” !!! Let the FUTURES tape provide the market tone for you. And right here that NQ futures tape was NOT sending off mega- bullish Nasdaq market tone, perhaps stoping you from backing the truck up tomorrow and buying Long Calls on all your favorite Nasdaq stocks. So, lets see what actually did happen over the next few days. Was this “don’t get too bullish” NQ futures indicator a good one when it did not bust hugely higher after EBAY and AMGN earnings? Below chart includes the overnights, and the 10:00 time is the Open area the following day, 4-23-03 Remember the NQ 1105 level ? That’s where NQ was both before and after EBAY/AMGN. Notice here how the next day sucked in some Market Longs right near the open? But also notice that after 90 minutes of Longs buying, that around 12Noon found Sellers. So if you were very nimble and quick, and bought Longs right at the open the following day, and were quick to take profits after just 1-2 hours, you did ok. Let’s see how it worked out if you bought Longs and just held them. NOTE: Iraq was over by now, the tape was moving completely free of any Iraq good news/bad news. Below we have the next day, April 24. Once again, notice the NQ 1105 level. Next Day, April 25. NQ 1105 is now a memory as the Market has done some hard selling. Below is the chart of NQ over the next several days. Once again, notice the NQ 1105 line. Hopefully, noticing that NQ did NOT rocket higher immediately after AMGN and EBAY reined in some of that mega-bullish tone you might have had after reading their earnings. The same would apply if it was MSFT and DELL both reporting great earnings the same evening and NQ didn’t move up very much (DELL always reports very late in the quarter so this isn’t likely in the real world, and was just an example). By the same token, I can recall times when at 4:30PM there was some very serious BAD NEWS on some key NDX/Nasdaq stocks, and NQ barely budged lower when it re-opened at 4:45pm nor thru the overnights. I can recall some nasty Chip Stocks warning at 4:30pm, and NQ only downticked a few points, perhaps telling you the stock/option trader it’s “buy the bad news” time or that “the bad news is priced in.” In a situation like this, that hopefully reins in your desire to trade very bearish. The point is, watching how Futures react after-hours to either very good or very bad news can often be an excellent barometer for the overall market and perhaps the stocks and options you might be trading. Naturally, if some bio-tech stock has news of its CEO and CFO being hauled off to jail for Fraud, and the FDA is pulling all of their patents; Nasdaq futures could be at +100 but that bio-tech stock is going to be going down very hard, so what the futures are doing is meaningless in a case like this. They say the market is a Market of 5000 Stocks, and not a Stock Market; but most of the time, stocks and their options do generally move in the direction of the Index trends. In a more recent example: See the below ES (SP500 Index Futures Emini) chart Notice the line at 935 ES. EVERY repeat EVERY Index trader in the world knew the importance of 935 which very recently hit. (935 was Jan 2003 High, and Year High). You will notice how each time the Broad Market, the S&P 500, rose above 935 it met with hard selling. This should be of help to those of you who do not even trade Futures, as knowing that piece of data, and knowing that very likely Funds will have SELL programs pegged to that level; may indicate it is a good time to take some Profits on some Long Calls / Long Stocks you may have been holding. Or a good time to enter some Long Puts (or Short Calls, Bearish Credit Call Spread, etc). Yes, each and every Stock out there has its own story, and can move completely independent of the overall market; however, watching Index Futures should always remain one of your Trading Tools. Good example this past week was DELL – it could have cared less about ES 935 for it traded in a very bullish fashion over $30 and into its earnings this coming week. Warmest, Alan Hewko PS: Happy Mothers Day to all those Great Women out there who very often have sacrificed so very much for their Children and Families. ************************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 05-11-2003 Sunday 5 of 5 In Section Five: Covered Calls: Another Strategy For Covered-Calls Naked Puts: Profiting From Changing Trends -- Part II Spreads/Straddles/Combos: Another Strong Finish For Stocks! Updated In The Site Tonight: Market Posture: Bulls Not Giving Up ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************* COVERED CALLS ************* Trading Basics: Another Strategy For Covered-Calls By Mark Wnetrzak One of the best hedging strategies for conservative investors is a bullish "collar" combination using stocks and options. With the current uncertain market outlook, investors are focusing on ways to limit potential losses in their portfolio holdings. If an investor buys a stock and purchases a put option on that issue, he has created a long position with unlimited upside potential and reduced downside risk until the option expires. This is a common approach to stock ownership for conservative investors because it includes put options as insurance against short-term declines in the market. The bullish collar is strategy which provides downside protection for stock ownership through the purchase of put options that are financed with the sale of call options. In short, an investor sacrifices upside potential for downside protection with fixed limits established for risk and reward. The name of the strategy stems from the "collared" profit-loss outlook, which is determined by the cost of the underlying and the respective strike prices of the long and short options, as well as the net debit (or credit) for the option portion of the position. By purchasing (cheap) put options and selling (inflated) call options, a collar often can be established for little or no "out-of-pocket" expense. Here is an example using recent (5/5/03) stock/options data: PACIFICARE HEALTH SYSTEMS (NASDAQ:PHSY) STOCK PRICE = 35.05 SELL NOV-40.00 CALL BID = 2.05 BUY NOV-30.00 PUT ASK = 2.10 COST BASIS (LESS COMM.) = 35.10 MAXIMUM UPSIDE PROFIT = 4.90 MAXIMUM DOWNSIDE LOSS = 5.10 An investor purchasing 100 shares in this position would have to pay $3,505 (or $1,752 if stock was bought on margin). The price of the option portion of the transaction would be $5.00, due to the small debit for the put option. Of course, commissions can have a significant affect on the profit or loss in a combination position, so the exact prices should always be calculated prior to initiating any trade. With regard to the possible outcomes, a number of things could happen to the stock between now and the November options expiration: 1) The stock could remain between $30 and $40, which means both the call and the put would expire worthless and you would own 100 shares of PHSY at the current value, with no impact on the position from the options. 2) The stock could fall below $30 prior to the expiration of the put option, and in that case, your maximum loss would be $500, regardless of how much the share value declines. This is the advantage of the "insurance" portion of the collar because in a "stock only" position, the losses would continue to increase as the price of the issue declined. 3) The stock could continue to rally in the coming months, moving to $40 and beyond. If this occurred, you could adjust the position upwards (buying-back the call and selling a higher strike option) or you could allow the shares to be assigned at $40, which would yield a gain of $490 on $3,510 invested over a period of 6 months (28% annualized profit). As you can see, the advantage of a collar when compared to simply purchasing a protective put is its lower cost. Recall that the premium received from the sale of the "covered" call is used to pay for the put. The shortcoming of a collar is the upside limit it places on the stock's profit potential. The sold (short) call establishes a maximum amount of profit that can be earned from an increase in the stock's price. For conservative investors, the put options act as a safety net in the portfolio, protecting its value against catastrophic declines in individual stocks. The sale of call options generates income to offset the cost of the protective puts, while at the same time, sacrificing a portion of potential gains. This strategy is best used when call premiums are higher than the equivalent put premiums. This type of premium disparity is often referred to as a volatility option skew and it tends to occur in active stocks with upcoming events or announcements that have the potential to significantly affect share value. Earnings reports, FDA reviews and merger/acquisition-related activities are among the most common reasons for inflated options premiums and traders can exploit these opportunities by purchasing low volatility and selling high volatility. Depending on the stock, the collar can be a very attractive technique for conservative investors who want a good risk to reward ratio in all but the worst market conditions. 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 AMR 5.47 6.60 MAY 5.00 0.70 0.23* 10.5% TER 12.75 13.06 MAY 12.50 0.75 0.50* 9.1% XICO 5.09 6.13 MAY 5.00 0.45 0.36* 8.4% OSTE 8.39 10.68 MAY 7.50 1.30 0.41* 8.4% GRP 12.52 12.99 MAY 12.50 0.45 0.43* 7.7% IMMU 2.95 4.91 MAY 2.50 0.65 0.20* 7.6% ASML 7.59 9.25 MAY 7.50 0.55 0.46* 7.1% CYBX 23.87 23.13 MAY 22.50 2.05 0.68* 6.8% ABGX 10.77 10.36 MAY 10.00 1.05 0.28* 6.3% CAL 5.68 11.29 MAY 5.00 1.00 0.32* 5.9% SEAC 7.80 8.26 MAY 7.50 0.75 0.45* 5.5% OSIP 21.19 20.24 MAY 17.50 4.10 0.41* 5.2% CCRD 11.05 13.04 MAY 10.00 1.50 0.45* 5.1% IGEN 38.90 37.58 MAY 35.00 4.70 0.80* 5.1% ALTR 15.78 17.14 MAY 15.00 1.45 0.67* 5.1% IFX 8.17 7.77 MAY 7.50 1.00 0.33* 5.0% CTLM 5.18 8.67 MAY 5.00 0.45 0.27* 5.0% NEOL 13.50 15.50 MAY 12.50 1.80 0.80* 5.0% UNTD 19.23 20.40 MAY 17.50 2.80 1.07* 4.7% RINO 13.29 14.73 MAY 12.50 1.40 0.61* 4.5% BMRN 12.06 11.20 MAY 10.00 2.35 0.29* 4.3% COMS 5.17 5.31 MAY 5.00 0.45 0.28* 4.3% PDE 15.17 17.35 MAY 15.00 0.60 0.43* 4.3% MVSN 15.97 18.98 MAY 15.00 1.40 0.43* 4.3% AAII 11.43 12.20 MAY 10.00 1.80 0.37* 4.2% PLCE 13.34 14.96 MAY 12.50 1.40 0.56* 4.1% UNTD 19.67 20.40 MAY 17.50 2.95 0.78* 4.1% NEOL 13.60 15.50 MAY 12.50 1.65 0.55* 4.0% TOM 8.01 7.58 MAY 7.50 0.70 0.19* 3.8% MSCC 11.77 12.18 MAY 10.00 2.25 0.48* 3.7% OVRL 18.02 17.53 MAY 17.50 0.95 0.43* 3.6% * Stock price is above the sold striking price. Comments: The bullish euphoria continued for another week with the major averages moving higher, despite emerging concerns about their "overbought" status. Tommy Hilfiger (NYSE:TOM) is the lone exception in the covered-call portfolio -- the stock dropped after a warning about the current quarter and year. Depending on your outlook, exiting the position or rolling-forward and/or down may be wise. We will show the position closed in the name of prudent money management. Next week, the May option series expires. Positions Previously Closed: None NEW CANDIDATES ********* Sequenced by Target Yield (monthly basis) ***** Stock Last Option Option Last Open Cost Days Target Symbol Price Series Symbol Bid Int. Basis Exp. Yield MOSY 7.50 JUN 7.50 QST FU 0.60 8 6.90 42 6.3% TER 13.06 JUN 12.50 TZY FV 1.40 4191 11.66 42 5.2% MDR 5.08 JUN 5.00 MDR FA 0.40 75 4.68 42 5.0% FFIV 15.45 JUN 15.00 FLK FC 1.30 437 14.15 42 4.4% GNTA 8.78 JUN 7.50 GJU FU 1.70 1197 7.08 42 4.3% MRVL 26.72 JUN 25.00 UVM FE 3.10 6471 23.62 42 4.2% GP 17.99 JUN 17.50 GP FW 1.40 2514 16.59 42 4.0% 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). ***** MOSY - Monolithic $7.50 *** What's Up? *** Monolithic System Technology (NASDAQ:MOSY) designs, develops, licenses and markets memory technologies used by the semiconductor industry and electronic product manufacturers. The company has developed a patented semiconductor memory technology, called 1T- SRAM (static random access memory), which offers a combination of high-density, low-power consumption with high speed. The company licenses its 1T-SRAM technology on a non-exclusive and worldwide basis to companies that incorporate or embed memory on complex integrated circuits. MOSY licenses its 1T-SRAM technology in the form of customized memory designs and memory compilers. They also sell memory chips based on their 1T-SRAM technology, constituting substantially all of their memory chip sales. No recent news to explain the strong rebound, on heavy volume, off support near $6. This position offers investors who believe the semiconductor industry is indeed recovering excellent reward potential at the risk of owning this issue at a reasonable cost basis. JUN-7.50 QST FU LB=0.60 OI=8 CB=6.90 DE=42 TY=6.3% ***** TER - Teradyne $13.06 *** The Trend Continues... *** Teradyne (NYSE:TER) is a supplier of automatic test equipment, high- performance interconnection systems and electronic manufacturing services. The company's automatic test equipment products include Semiconductor Test Systems, Circuit Board Test and Inspection Systems and Broadband Test Systems. Teradyne's interconnection systems products and services (Connection Systems) include high- bandwidth backplane assemblies and associated connectors used in electronic systems, and electronic manufacturing services of assemblies that include Teradyne backplanes and connectors. TER has been forming a Stage I base for almost a year and the stock appears poised to move higher in the coming sessions. Traders can profit from the current lateral trend with this position at the risk of owning Teradyne at a cost basis near $11.70. JUN-12.50 TZY FV LB=1.40 OI=4191 CB=11.66 DE=42 TY=5.2% ***** MDR - McDermott $5.08 *** Earnings Rally *** McDermott International (NYSE:MDR) is the parent company of the McDermott group of companies, which includes J. Ray McDermott, and its consolidated subsidiaries; McDermott Incorporated and its consolidated subsidiaries; Babcock & Wilcox Investment Company and its consolidated subsidiaries; BWX Technologies, Inc. and its consolidated subsidiaries; and The Babcock & Wilcox Company. The company operates in 4 business segments: namely Marine Construction Services, Government Operations, Industrial Operations and Power Generation Systems. McDermott surprised investors on Tuesday by posting a 1st-quarter profit as it reduced the estimated cost of a bankruptcy settlement and increased sales, on stronger marine construction businesses. The company said revenues rose to $523.5 million from $399.2 million last year and also raised its 2003 earnings estimate. The news was obviously well received and the issue has vaulted higher on heavy volume. Traders who believe the rally will endure can profit from that outcome with this position. JUN-5.00 MDR FA LB=0.40 OI=75 CB=4.68 DE=42 TY=5.0% ***** FFIV - F5 Networks $15.45 *** Trading Range *** F5 Networks Inc. (NASDAQ:FFIV) provides integrated products and services to manage, control and optimize Internet traffic. FFIV's core products, the BIG-IP Controller, the 3-DNS Controller and the BIG-IP Link Controller, help manage traffic to servers and network devices in a way that maximizes availability and throughput. The company's iControl Architecture integrates its products and also allows its customers to integrate them with other third-party products. FFIV's solutions address many elements required for successful Internet and Intranet business applications, including high availability, high performance, intelligent load balancing, fault tolerance, security and streamlined manageability. FFIV has been stuck in a trading range for almost two years and the trend appears likely to continue though the technicals suggest an upside bias. This position allows investors who retain a long-term bullish outlook on F5 Networks a method to participate in the future movement of the issue with relatively low risk. JUN-15.00 FLK FC LB=1.30 OI=437 CB=14.15 DE=42 TY=4.4% ***** GNTA - Genta $8.78 *** Earnings Rally: Part II *** Genta Incorporated (NASDAQ:GNTA) is a biopharmaceutical company that is dedicated to developing drugs to treat cancer. In the past, the company's research efforts have focused primarily on the development of "anti-sense" drugs, which are designed to selectively prevent the production of specific proteins that contribute to the cause or progression of disease. Genta has broadened its research portfolio into other "DNA medicines," which, in addition to anti-sense drugs, consist of decoy aptamers and small molecules, including the its gallium products and androgenics compounds. Apparently investors were pleased with Genta's earnings report at the beginning of the month. We simply favor the bullish move above the March and April highs on heavy volume which suggests further upside potential. Investors who agree with the bullish outlook can establish a reasonable cost basis in the issue with this position. JUN-7.50 GJU FU LB=1.70 OI=1197 CB=7.08 DE=42 TY=4.3% ***** MRVL - Marvell $26.72 *** Breaking-Out *** Marvell (NASDAQ:MRVL) designs, develops and markets integrated circuits utilizing proprietary communications mixed-signal and digital signal processing technology for communications-related markets. Marvell offers its customers a wide range of integrated circuit solutions using proprietary communications mixed-signal processing and digital signal processing technologies. Marvell's product groups include: storage products, consisting of a variety of read channel, system-on-chip and preamplifier products; and broadband communications products, consisting of a variety of transceiver products, switching products, internetworking products and wireless LAN products. Marvell appears to have broken out of its recent trading range and above resistance near $24. Investors must be looking forward to "good" news when Marvell reports earnings on May 22. The stock appears poised to move higher in the coming sessions and traders who believe the issue is destined for a future rally can profit from future upside movement with this position. JUN-25.00 UVM FE LB=3.10 OI=6471 CB=23.62 DE=42 TY=4.2% ***** GP - Georgia-Pacific $17.99 *** Bottom Fishing *** Georgia-Pacific (NYSE:GP) is engaged in four principal business operations: the manufacture of tissue products (including bath tissue, paper towels and napkins) and disposable tabletop products (including disposable cups, plates and cutlery); the manufacture of containerboard and packaging (including linerboard, medium and corrugated packaging); the manufacture of bleached pulp and paper (including paper, market and fluff pulp, craft and bleached board), and the manufacture and distribution of building products (including plywood, oriented strand board, various industrial wood products and softwood and hardwood lumber, as well as certain non-wood products, including gypsum board, chemicals and other products). GP's four principal businesses are broken down into six operating segments: North America consumer products, international consumer products, packaging, bleached pulp and paper, building products manufacturing and building products distribution. Regardless of the recent slump in share value, Georgia-Pacific is one of the top companies in the Lumber-wood Production Group and among many institutional investors, it is also one of the core holdings. 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. JUN-17.50 GP FW LB=1.40 OI=2514 CB=16.59 DE=42 TY=4.0% ***** ***************** 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 Option Option Last Open Cost Days Target Symbol Price Series Symbol Bid Int. Basis Exp. Yield AMR 6.60 JUN 5.00 AMR FA 1.95 5736 4.65 42 5.5% SFNT 25.77 JUN 25.00 UUI FE 2.50 77 23.27 42 5.4% CY 10.18 JUN 10.00 CY FB 0.85 1917 9.33 42 5.2% DRIV 16.95 JUN 15.00 DQI FC 2.90 285 14.05 42 4.9% USG 8.90 JUN 7.50 USG FU 1.85 311 7.05 42 4.6% MKSI 15.92 JUN 15.00 QQB FC 1.80 48 14.12 42 4.5% ZGEN 10.80 JUN 10.00 GZU FB 1.35 200 9.45 42 4.2% ITMN 23.89 JUN 22.50 IQY FX 2.60 114 21.29 42 4.1% FEIC 18.17 JUN 17.50 FQE FW 1.60 103 16.57 42 4.1% MUSE 7.85 JUN 7.50 QUM FU 0.75 3470 7.10 42 4.1% NTAP 15.71 JUN 15.00 NUL FC 1.45 8301 14.26 42 3.8% ***************** NAKED PUT SECTION ***************** Options 101: Profiting From Changing Trends -- Part II By Ray Cummins This week's strategy discussion concerns techniques that will benefit from a long-term recovery in the stock market. Despite the recent sharp rally in share values, we all know how difficult it has been to forecast market direction over the past few months and consistently picking winners during the volatile activity has been almost impossible. Considering the current uncertain outlook, what is the correct course of action for a conscientious, well-disciplined investor? Two weeks ago, we discussed a few alternatives: attempt to trade the market's short-term gyrations for limited profits, adopt a bullish, long-term outlook and use conservative strategies that will benefit from a recovery in stocks, or remain on the sidelines until the primary directional trend (even if it is a lateral one) is better defined. This week, we will begin to discuss the second choice: adopt a bullish, long-term outlook and use conservative strategies that will benefit from a recovery in stocks. As with any approach to the financial markets, the first step in this process is to examine the various strategies used to profit from a rebound in share values. Obviously, the most popular technique that will profit from an extended economic recovery (and a resultant rise in equity prices) is stock ownership. If buying shares of your favorite (public) corporation is the strategy of choice, there are a few guiding principles you should be aware of: 1) Do your homework. Study the company and its major products. Review the most current financial statements with a focus on items such as earnings growth, cash flow and the balance sheet. Favorable companies will have stable or increasing margins as well as positive cash flow. Their balance sheet should reflect a low debt to equity ratio, positive return on equity (this is a measure of net income relative to stockholder's equity), and a high current ratio, which is the ratio of current assets to short-term liabilities. It's also important to know the number of common shares outstanding and whether or not dividends are issued by the company on a regular basis. 2) Learn the basics of technical analysis; a method of research using historic prices, charts, and computer software to forecast the future trends of stocks. Traders who use technical analysis understand the fundamental values of securities but concentrate on the past behavior of the market, industry groups or sectors, and individual stocks. The goal is to use their price movements, trends and chart patterns to predict future direction and changes in character. Most of this analysis is based on the fact that the values of stocks reflect what people "think" they are worth, not what they are really worth on a fundamental basis. Technical indicators are also helpful in generating buy or sell signals when specific parameters are met and the use of stage analysis can be helpful in initiating new positions. 3) Become familiar with the common methods used to determine the overall movement of the stock market and apply this knowledge as a practical element of a proven investing strategy. After you are comfortable with the popular indicators, combine them with proven timing strategies and practice using the various systems until your "paper" portfolio is profitable on a regular basis. After you begin investing "real" money, use proven position management techniques to maximize gains and limit potential losses. Most experts recommend the use of stop-loss orders as they are an efficient method to follow the movement in a stock while insuring some profit (or limited loss) if the primary trend changes. In addition, trading stops are an excellent way to manage a position without the emotional or reactive decision-making that often occurs in the stock market. Investors who follow these guidelines in a diverse, well balanced portfolio will increase their probability of profit with stock ownership and that's an essential step to long-term success in the financial markets. Good Luck! SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Stock Price Last Option Price Gain Simple Max Symbol Picked Price Series Sold /Loss Yield Yield IMCLE 21.00 19.63 MAY 17.50 0.35 0.35* 4.4% 14.5% WYNN 17.02 16.90 MAY 15.00 0.50 0.50* 5.0% 13.7% KOSP 21.97 23.16 MAY 20.00 0.45 0.45* 5.0% 13.5% APPX 24.30 23.40 MAY 20.00 0.35 0.35* 3.9% 13.2% RMBS 15.75 15.37 MAY 12.50 0.55 0.55* 3.3% 10.8% LSCC 8.54 8.80 MAY 7.50 0.25 0.25* 3.7% 10.3% PHSY 30.20 34.42 MAY 27.50 0.70 0.70* 3.8% 10.1% MSTR 30.35 27.28 MAY 25.00 0.50 0.50* 3.0% 9.9% NFLX 19.55 22.62 MAY 15.00 0.60 0.60* 3.0% 9.6% WYNN 16.22 16.90 MAY 12.50 0.40 0.40* 2.9% 9.5% CYBX 23.87 23.13 MAY 20.00 0.25 0.25* 2.8% 9.2% AVID 25.54 27.86 MAY 22.50 0.80 0.80* 3.2% 8.7% GTRC 23.25 23.22 MAY 22.50 0.50 0.50* 3.3% 8.0% EYE 11.96 16.33 MAY 10.00 0.35 0.35* 2.6% 8.0% BOBJ 20.75 22.51 MAY 17.50 0.40 0.40* 2.5% 8.0% OVTI 25.29 28.64 MAY 20.00 0.40 0.40* 2.2% 8.0% SEPR 19.00 19.33 MAY 17.50 0.35 0.35* 3.0% 7.9% JCOM 32.12 28.98 MAY 25.00 0.75 0.75* 2.2% 7.6% SEPR 15.77 19.33 MAY 12.50 0.30 0.30* 2.1% 7.5% VRTS 21.20 24.59 MAY 20.00 0.40 0.40* 3.0% 7.5% XLNX 27.30 28.81 MAY 25.00 0.30 0.30* 2.6% 7.3% GTRC 21.10 23.22 MAY 20.00 0.65 0.65* 2.9% 7.1% SEPR 16.35 19.33 MAY 12.50 0.35 0.35* 2.1% 7.0% BCGI 18.90 17.01 MAY 15.00 0.25 0.25* 1.8% 6.7% RIMM 14.88 17.22 MAY 12.50 0.35 0.35* 2.1% 6.5% JCOM 31.96 28.98 MAY 22.50 0.50 0.50* 2.0% 6.3% ADTN 43.65 45.05 MAY 40.00 0.40 0.40* 2.2% 6.1% MRVL 23.15 26.72 MAY 20.00 0.35 0.35* 1.9% 5.9% NFLX 20.77 22.62 MAY 15.00 0.30 0.30* 1.8% 5.9% BOBJ 18.31 22.51 MAY 15.00 0.35 0.35* 1.7% 5.8% INTC 18.66 19.58 MAY 17.50 0.35 0.35* 2.2% 5.7% ADRX 14.71 15.95 MAY 12.50 0.25 0.25* 1.8% 5.5% CMCSA 31.73 31.11 MAY 30.00 0.40 0.40* 2.0% 5.1% CMCSK 28.44 29.47 MAY 25.00 0.60 0.60* 1.8% 5.1% * Stock price is above the sold striking price. Comments: Another week of volatility ended with a positive bias as stocks closed Friday's session in "rally mode." At the same time, key technical resistance levels have yet to be surpassed, thus it is important for traders to remain cautious in their play selection and diligent in their position management. Issues on the "watch" list include j2 Global (NASDAQ:JCOM), ImClone (NASDAQ:IMCLE), Boston Communications Group (NASDAQ:BCGI), and Microstrategy (NASDAQ:MSTR). Previously Closed Positions: Footstar (NYSE:FTS) 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 Simple Max Symbol Price Series Symbol Bid Int. Basis Exp. Yield Yield ANPI 25.20 JUN 17.50 AUJ RW 0.75 706 16.75 42 3.2% 9.4% OVTI 28.64 JUN 22.50 UCM RX 0.80 578 21.70 42 2.7% 8.9% NVDA 21.37 JUN 17.50 UVA RW 0.55 789 16.95 42 2.3% 7.6% CELG 27.42 JUN 22.50 LQH RX 0.70 632 21.80 42 2.3% 7.5% ITMN 23.89 JUN 20.00 IQY RD 0.60 34 19.40 42 2.2% 6.9% ARTI 22.75 JUN 20.00 UAR RD 0.50 51 19.50 42 1.9% 5.3% APPX 23.40 JUN 15.00 AQO RC 0.35 10045 14.65 42 1.7% 5.0% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, SY-Simple Yield (monthly basis - without margin), MY-Maximum Yield (monthly basis - using margin). ***** ANPI - Angiotech $25.20 *** Stent-Coating Maker *** Angiotech Pharmaceuticals (NASDAQ:ANPI) is engaged in the fusion of medical device technologies and pharmaceutical therapies. The company's first product was a drug-coated stent. Angiotech's goal is to develop other products to enhance the performance of medical devices and biomaterials through the use of pharmatherapeutics. In September 2002, the company and Cohesion Technologies, Inc. agreed to a merger in which Cohesion will merge with a wholly owned subsidiary of Angiotech, with Cohesion continuing as a wholly owned subsidiary of the company. Angiotech shares rallied at the end of February after announcing a strategic alliance with Baxter and a submission by its partner Boston Scientific, of the first module of Boston's PMA application for its TAXUS paclitaxel-eluting coronary stent system. A 12-month study on a Boston Scientific drug-coated coronary stent, Taxus II, is expected to bolster already strong sales of the newly introduced device in Europe. Friday's rally to a 52-week high suggests further upside potential and traders can profit from that outcome with this play. Earnings are due on 5/13. JUN-17.50 AUJ RW LB=0.75 OI=706 CB=16.75 DE=42 TY=3.2% MY=9.4% ***** OVTI - OmniVision $28.64 *** Next Leg Up? *** OmniVision Technologies (NASDAQ:OVTI) designs, develops and sells high performance, high quality and cost efficient semiconductor imaging devices for computing, telecommunications, industrial, automotive and consumer electronics applications. The company's main product, an image sensing device called a CameraChip, is used to capture an image in cameras and camera-related products in a range of imaging applications such as personal computer cameras, digital still cameras, security and surveillance cameras, personal digital assistant cameras, mobile phone cameras, and cameras for automobiles and toys that incorporate both still picture and live video applications. OmniVision has been a solid performer in recent months and on Friday, the issue closed at a new "all-time" high. Investors can use this position to speculate on the firm's near-term share value with the risk of owning the stock at a cost basis below $22. JUN-22.50 UCM RX LB=0.80 OI=578 CB=21.70 DE=42 TY=2.7% MY=8.9% ***** NVDA - Nvidia $21.37 *** Headline Stock! *** Nvidia (NASDAQ:NVDA) designs, develops and markets graphics and media communication processors and related software for personal computers (PCs), workstations and digital entertainment platforms. The company provides an architecturally compatible top-to-bottom family of unique, performance 3-D graphics processors and graphics processing units that set the standard for performance, quality and features for a broad range of desktop PCs. Nvidia's graphics processors are used for a wide variety of applications, including games, digital image editing, business productivity, the Internet and industrial design. Its graphics processors are designed to be architecturally compatible backward and forward between computer generations, giving its original equipment manufacturers (OEMs), customers and end users a low cost of ownership. Shares of NVDA soared Friday amid news that the company expects revenue for its fiscal second quarter to grow 12% to 18% from the first quarter on increased Xbox sales. In addition, Nvidia plans to launch a new high-end graphic chip for computers (NV35) and investors are bullish on the company's outlook. This position offers a low risk method to profit from the current upside activity in the issue. JUN-17.50 UVA RW LB=0.55 OI=789 CB=16.95 DE=42 TY=2.3% MY=7.6% ***** CELG - Celgene $27.42 *** Bullish Biotech! *** Celgene (NASDAQ:CELG) is a commercial-stage biopharmaceutical company. The company is primarily engaged in the discovery, development and commercialization of small molecule drugs that are designed to treat cancer and immunological diseases through gene and protein regulation. Small molecule drugs are man-made, chemically synthesized drugs that, because of their relatively small size, can typically be administered orally. The firm's drugs are designed to modulate multiple disease-related genes, including cytokines (which are proteins) such as Tumor Necrosis Factor alpha, or TNF(alpha), growth factor genes such as those that control angiogenesis, blood vessel formation and apoptosis genes. Because the company's drugs can be administered orally, they have the potential to advance the standard of care beyond current injectible protein drugs that inhibit TNF (alpha) and other disease-causing cytokines. Celgene expects to meet or exceed 2003 financial targets, as its new cancer drug Thalomid propels the company to profitability. Celgene also recently said it has discovered a new class of anti-cancer compounds and is in the early stages of developing them in the lab. Investors who wouldn't mind owning the stock near a basis of $22 should consider this position. JUN-22.50 LQH RX LB=0.70 OI=632 CB=21.80 DE=42 TY=2.3% MY=7.5% ***** ITMN - Intermune $23.89 *** Recovery Underway! *** InterMune (NASDAQ:ITMN) develops and commercializes products for the treatment of serious pulmonary and infectious diseases and cancer. The company has the exclusive license rights in the U.S. to Actimmune injection for a wide range of indications, including chronic granulomatous disease, osteopetrosis, idiopathic pulmonary fibrosis, cancer, mycobacterial and systemic fungal infections, and cystic fibrosis. The company has active development programs underway for these indications, several of which are in mid- or advanced-stage human testing, known as clinical trials. InterMune announced Friday that data from a Phase II trial of pirfenidone suggests it may be more effective than prednisone, an popular anti-inflammatory glucocorticoid drug, in patients with idiopathic pulmonary fibrosis. Intermune has worldwide rights, excluding parts of Asia, to develop and commercialize pirfenidone for all fibrotic diseases and the company plans to discuss the data with the FDA before formulating a plan for a larger-scale clinical development program. Investors who want to participate in the future performance of ITMN shares should consider this position. JUN-20.00 IQY RD LB=0.60 OI=34 CB=19.40 DE=42 TY=2.2% MY=6.9% ***** ARTI - Artisan Components $22.75 *** Short-Squeeze! *** Artisan Components (NASDAQ:ARTI) is a developer of high-performance, high-density and low-power embedded memory, standard cell and input/output intellectual property components for the design and manufacture of complex integrated circuits or semiconductors. The firm's products are used for the design of integrated circuits used in complex, high-volume applications, such as portable computing devices, cellular phones, consumer multimedia products, automotive electronics, personal computers, workstations and servers. Artisan focuses on licensing its products and providing related services to semiconductor manufacturers and integrated circuit design companies. Shares of ARTI moved to a 52-week high Friday in conjunction with the rally in chip stocks, but also due to "short" covering as the short-interest in the stock represents 18% of the float. Traders who favor speculative positions in bullish issues should consider this position. JUN-20.00 UAR RD LB=0.50 OI=51 CB=19.50 DE=42 TY=1.9% MY=5.3% ***** APPX - American Pharmaceutical $23.40 *** Premium Selling! *** American Pharmaceutical Partners (NASDAQ:APPX) is a specialty pharmaceutical company that develops, manufactures and markets injectable pharmaceutical products. The firm produces over 100 generic injectable pharmaceutical products in more than 300 dosages and formulations. Its primary focus is in the oncology, anti-infective and critical care markets. The company makes products in all of the three basic forms in which injectable drugs are sold: liquid, powder and lyophilized (freeze-dried). American Pharmaceutical Partners continues to be a popular stock among speculative traders and the inflated option premiums offer a good opportunity for investors who wouldn't mind owning the issue at a substantially reduced cost basis. Due diligence is a "must" with this issue. JUN-15.00 AQO RC LB=0.35 OI=10045 CB=14.65 DE=42 TY=1.7% MY=5.0% ***** ***************** 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 Simple Max Symbol Price Series Symbol Bid Int. Basis Exp. Yield Yield IDCC 23.92 JUN 20.00 DAQ RD 0.80 1257 19.20 42 3.0% 9.0% BRCM 18.85 JUN 17.50 RCQ RW 0.85 2848 16.65 42 3.7% 8.7% SRNA 18.27 JUN 17.50 NHU RW 0.85 63 16.65 42 3.7% 8.3% CHKP 18.05 JUN 17.50 KEQ RW 0.85 833 16.65 42 3.7% 8.2% LSS 23.05 JUN 22.50 LSS RX 1.10 20 21.40 42 3.7% 8.2% DCTM 18.96 JUN 17.50 QDC RW 0.75 18 16.75 42 3.2% 7.9% MVL 18.75 JUN 17.50 MVL RW 0.75 277 16.75 42 3.2% 7.8% MINI 17.74 JUN 17.50 UAC RW 0.80 0 16.70 42 3.5% 7.6% MRVL 26.72 JUN 22.50 UVM RX 0.75 965 21.75 42 2.5% 7.5% NFLX 22.62 JUN 17.50 QNQ RW 0.45 260 17.05 42 1.9% 6.6% NSM 21.80 JUN 20.00 NSM RD 0.65 97 19.35 42 2.4% 6.2% IGEN 37.58 JUN 25.00 GQ RE 0.60 2926 24.40 42 1.8% 5.4% AMLN 18.51 JUN 15.00 AQM RC 0.30 13 14.70 42 1.5% 5.2% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Another Strong Finish For Stocks! By Ray Cummins The major equity averages closed with a bullish bias Friday as investor optimism over a recovery in the U.S. economy boosted share values. The Dow Jones industrial average ended up 113 points at 8,604, its highest finish since mid-January. Eastman Kodak (NYSE:EK), Citigroup (NYSE:C), and Johnson & Johnson (NYSE:JNJ) were the only losing components. The technology-laden NASDAQ Composite soared 30 points higher to 1,520, capping a fourth consecutive week of gains as computer hardware, telecom, computer storage, and electronic manufacturing shares moved higher. The broader Standard & Poor's 500 Index climbed 13 points to finish at 933 with selling pressure seen only in gold stocks and department store shares. Advances pounded declines 3 to 1 on the New York Stock Exchange and 2 to 1 on the NASDAQ. Trading was moderate with 1.3 billion shares changing hands on the Big Board, and over 1.5 billion shares traded on the technology exchange. The bond market saw higher prices on hopes that interest rates will remain low in the coming months. The 10-year note was up 1/32, taking yields to 3.69%, well below last Friday's close at 3.93%. ***************** 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 or 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 AZO 76.38 86.85 MAY 65 70 0.55 69.45 $0.55 Open BSTE 42.33 49.80 MAY 30 35 0.50 34.50 $0.50 Open GILD 44.15 46.69 MAY 37 40 0.30 39.70 $0.30 Open OIH 54.58 59.58 MAY 45 50 0.55 49.45 $0.55 Open MDT 46.90 46.49 MAY 42 45 0.35 44.65 $0.35 Open NBR 41.11 41.38 MAY 35 37 0.30 37.20 $0.30 Open BBBY 39.52 40.15 MAY 35 37 0.30 37.20 $0.30 Open PFCB 42.47 42.56 MAY 35 40 0.55 39.45 $0.55 Open GENZ 39.82 41.15 MAY 35 37 0.30 37.20 $0.30 Open IVGN 31.45 33.97 MAY 27 30 0.30 29.70 $0.30 Open SEE 41.62 42.65 MAY 35 40 0.50 39.50 $0.50 Open BZH 71.80 74.58 JUN 60 65 0.55 64.45 $0.55 Open CECO 60.52 60.79 JUN 50 55 0.50 54.50 $0.50 Open FDC 40.22 41.14 JUN 35 37 0.30 37.20 $0.30 Open RCII 65.35 64.83 JUN 55 60 0.50 59.50 $0.50 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status CAM 49.39 51.20 MAY 60 55 0.45 55.45 $0.45 Open DRYR 67.40 67.00 MAY 75 70 1.10 71.10 $1.10 Open? HCA 37.70 31.90 MAY 45 42 0.25 42.75 $0.25 Open VAR 49.04 52.67 MAY 60 55 0.60 55.60 $0.60 Open OIH 54.58 59.58 MAY 65 60 0.50 60.50 $0.50 Open BAC 71.34 74.00 MAY 80 75 0.60 75.60 $0.60 Open? OEX 440.97 472.25 MAY 480 475 0.55 475.55 $0.55 Open WLP 76.80 77.50 MAY 90 85 0.50 85.50 $0.50 Open SYK 66.35 64.10 MAY 75 70 0.65 70.65 $0.65 Open INTU 37.24 39.93 MAY 45 40 0.40 40.40 $0.40 Open? NVLS 27.21 28.69 MAY 32 30 0.25 30.25 $0.25 Open PG 90.15 89.50 JUN 100 95 0.40 95.40 $0.40 Open NBR 39.21 41.38 JUN 45 42 0.30 42.80 $0.30 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss With the recent rally in oil service shares, our new position in Nabors Industries (NYSE:NBR) joins Bank of America (NYSE:BAC), Dreyer's (NASDAQ:DRYR), and Intuit (NASDAQ:INTU) on the portfolio "watch" list. McKesson (NYSE:MCK), GlaxoSmithKline (NYSE:GSK), International Game Technology (NYSE:IGT), and L-3 Communications (NYSE:LLL) have previously been closed to limit potential losses. CALL DEBIT SPREADS ****************** Symbol Pick Last Month LC SC Debit B/E G/L Status BGEN 35.67 37.81 MAY 30 32 2.20 32.20 0.30 Open GILD 44.04 46.69 MAY 37 40 2.25 39.75 0.25 Open SLM 115.05 109.35 MAY 105 110 4.50 109.50 (0.15) Open? AXP 38.46 39.80 JUN 32 35 2.20 34.70 0.30 Open GENZ 41.47 41.15 JUN 35 37 2.20 37.20 0.30 Open LC = Long Call SC = Short Call B/E = Break-Even G/L = Gain/Loss On Friday, SLM Corporation (NYSE:SLM) fell below a recent support area near $111-$112, thus conservative traders should consider closing the position to limit potential losses. PUT DEBIT SPREADS ***************** Symbol Pick Last Month LP SP Debit B/E G/L Status WMT 52.98 55.80 MAY 60 55 4.30 55.70 (0.10) Open? CCMP 42.68 45.11 MAY 50 45 4.30 45.70 0.59 Open? LP = Long Put SP = Short Put B/E = Break-Even G/L = Gain/Loss Wal-Mart (NYSE:WMT) rallied again this week, however the technical resistance area near $56-$57 is limiting its upside activity. We will continue to monitor the issue closely in the coming sessions. The position in Boston Scientific (NYSE:BSX) has previously been closed to limit potential losses. Cabot Micro (NASDAQ:CCMP) has substantial upside potential and conservative traders might find it prudent to close the position on any further bullish activity. SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status OVRL 15.99 17.53 MAY 17 15 0.10 1.00 Open? DCTM 16.09 18.96 MAY 17 15 (0.30) 2.25 No Play SMH 26.43 27.93 AUG 30 22 0.10 0.90 Open SLAB 30.17 28.92 JUL 30 22 0.10 0.00 Open The new position in Silicon Laboratories (NASDAQ:SLAB) has been very volatile and traders should expect the activity to continue in the coming sessions. Documentum (NASDAQ:DCTM) did not offer the target entry price, but the position was very profitable for traders who paid a small debit to initiate the play. The target entry price was available in the Semiconductor Holdrs (AMEX:SMH) and the position has already achieved a favorable profit. SYNTHETIC (BEARISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Put Call Credit Value Status QQQ 25.51 28.41 MAY 24 27 0.10 0.00 Closed As previously noted, conservative traders should have exited this position when the issue closed above recent resistance near $27. CALENDAR & DIAGONAL SPREADS *************************** Stock Pick Last Long Short Current Max Play Symbol Price Price Option Option Debit Value Status BMET 28.52 29.45 JUL-30C MAY-30C (0.20) 1.00 Open ESI 29.11 28.87 OCT-30C MAY-30C 2.00 2.40 Open OCR 27.07 27.27 JUN-27C MAY-27C 0.60 0.60 Open MO 32.13 31.70 JUN-27P MAY-27P 0.95 0.45 Open FILE 13.75 15.25 JUL-15C MAY-15C 0.60 0.65 Open IBM 87.57 87.55 JUL-90C MAY-90C 2.15 2.00 Open Biomet (NASDAQ:BMET) and ITT Educational Services (NYSE:ESI) are trading near maximum profit. Positions in Altria Group (NYSE:MO), which has already offered a small profit, and Omnicare (NYSE:OCR) were not available at the suggested entry prices, however we are tracking the plays at the higher initial debits. The "Reader's Request" calendar spread in Action Performance (NYSE:ATN) was not available due to a sharp decline in the stock price prior to the opening bell on 4/28/03. DEBIT STRADDLES *************** Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status LNC 29.88 32.21 MAY 30 30 3.00 3.70 Open? CREDIT STRANGLES **************** No Open Positions 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. ***** ADTN - Adtran $45.05 *** New Multi-Year High! *** Adtran (NASDAQ:ADTN) 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. ADTN - Adtran $45.05 PLAY (conservative - bullish/credit spread): BUY PUT JUN-35.00 RQA-RG OI=20 ASK=$0.25 SELL PUT JUN-40.00 RQA-RH OI=825 BID=$0.65 INITIAL NET-CREDIT TARGET=$0.45-$0.55 POTENTIAL PROFIT(max)=9% B/E=$39.55 ***** KLAC - KLA Tencor $42.49 *** Semiconductor-Equipment Leader! *** KLA-Tencor (NASDAQ:KLAC) is a supplier of process control and yield management solutions for the semiconductor and related microelectronics industries. The company's large portfolio of products, software, analysis, services and expertise is designed to help integrated circuit manufacturers manage yield throughout the entire wafer fabrication process, from research and development to final mass production yield analysis. The company offers a broad spectrum of products and services that are used by every major semiconductor manufacturer in the world. These customers turn to the company for in-line wafer defect monitoring; reticle and photomask defect inspection; CD SEM metrology; wafer overlay; film and surface measurement; and overall yield and fab-wide data analysis. KLAC - KLA Tencor $42.49 PLAY (conservative - bullish/credit spread): BUY PUT JUN-35.00 KCQ-RG OI=5861 ASK=$0.45 SELL PUT JUN-37.50 KCQ-RU OI=1581 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$37.20 ***** LLTC - Linear Technology $36.34 *** Bullish Chip Maker! *** Linear Technology (NASDAQ:LLTC) designs, manufactures and sells a broad line of standard high-performance linear integrated circuits (ICs). Applications for the company's products include telecommunications, cellular telephones, networking products, optical switches, notebook and desktop computers, computer peripherals, video/multimedia, industrial instrumentation, security monitoring devices, high-end consumer products, digital cameras and MP3 players, complex medical devices, automotive electronics, factory automation, process control and military and space systems. LLTC - Linear Technology $36.34 PLAY (conservative - bullish/credit spread): BUY PUT JUN-30.00 LLQ-RF OI=1390 ASK=$0.50 SELL PUT JUN-32.50 LLQ-RZ OI=257 BID=$0.80 INITIAL NET-CREDIT TARGET=$0.30-$0.35 POTENTIAL PROFIT(max)=14% B/E=$32.20 ***** ROST - Ross Stores $40.09 *** Bottom-Fishing In Retail! *** Ross Stores (NASDAQ:ROST) operates a chain of off-price retail apparel and home accessories stores that target value-conscious men and women between the ages of 25 and 54, primarily in middle income households. The company offers brand name and designer merchandise at low everyday prices, generally 20% to 60% below regular prices of most department and specialty stores. Ross operates over 450 stores with a large selection of brand names within each classification with a wide assortment of vendors, prices, colors, styles and fabrics within each size or item. The company's quarterly earnings report is due on 5/19/03. ROST - Ross Stores $40.09 PLAY (less conservative - bullish/credit spread): BUY PUT JUN-35.00 REQ-RG OI=20 ASK=$0.45 SELL PUT JUN-37.50 REQ-RU OI=2 BID=$0.85 INITIAL NET-CREDIT TARGET=$0.40-$0.45 POTENTIAL PROFIT(max)=17% B/E=$37.10 ***** GS - Goldman Sachs $75.00 *** Trading Range? *** The Goldman Sachs Group (NYSE:GS) is a global investment banking and securities firm that provides a range of services worldwide to a substantial and diversified client base. The firm operates offices in over 20 countries with activities are divided into two primary segments: Global Capital Markets, and Asset Management and Securities Services. The Global Capital Markets segment, which represented 64% of the firm's 2001 net revenues, consists of Investment Banking, and Trading and Principal Investments. Goldman's Asset Management segment offers investment strategies and advice across all major asset classes: global equity; fixed income, including money market instruments; currency, as well as alternative investment products. The firm's Securities Services activities include brokerage, financing services and securities lending. GS - Goldman Sachs $75.00 PLAY (conservative - bearish/credit spread): BUY CALL JUN-85.00 GS-FQ OI=1309 ASK=$0.15 SELL CALL JUN-80.00 GS-FP OI=2633 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$80.60 ***** MMM - 3M Corporation $122.81 *** Trading-Range Top At $130 *** 3M Company (NYSE:MMM), formerly known as Minnesota Mining and Manufacturing Company, is an integrated enterprise characterized by intercompany cooperation in research, manufacturing and sale of products. 3M's business has developed from its research and technology in coating and bonding for coated abrasives, the company's original product. Coating and bonding is the process of applying one material to another, such as abrasive granules to paper or cloth (coated abrasives), adhesives to a backing (pressure-sensitive tapes), ceramic coating to granular mineral (roofing granules), glass beads to plastic backing (reflective sheeting) and low-tack adhesives to paper (repositionable notes). The company conducts business through six operating segments: Industrial Markets; Transportation, Graphics and Safety Markets; Health Care Markets; Consumer and Office Markets; Electro and Communications Markets, and Specialty Material Markets. MMM - 3M Corporation $122.81 PLAY (conservative - bearish/credit spread): BUY CALL JUN-135.00 MMM-FG OI=1995 ASK=$0.35 SELL CALL JUN-130.50 MMM-FF OI=2190 BID=$0.80 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$130.50 ************* 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. ***** BSX - Boston Scientific $46.91 *** Revenge Play! *** Boston Scientific (NYSE:BSX) is a global developer, manufacturer and marketer of less-invasive medical devices. The firm's unique products are offered by two major business groups, Cardiovascular and Endosurgery. The Cardiovascular segment focuses on products and technologies for use in the firm's interventional cardiology, interventional radiology, peripheral vascular and neurovascular procedures. The Endosurgery organization focuses on products and technologies for use in oncology, vascular surgery, endoscopy, urology and gynecology procedures. BSX - Boston Scientific $46.91 PLAY (conservative - bullish/debit spread): BUY CALL JUN-37.50 BSX-FU OI=266 ASK=$10.50 SELL CALL JUN-40.00 BSX-FH OI=925 BID=$8.30 INITIAL NET-DEBIT TARGET=$2.20-$2.25 POTENTIAL PROFIT(max)=11% B/E=$39.75 ***** MERQ - Mercury Interactive $35.75 *** Next Leg Up? *** Mercury Interactive (NASDAQ:MERQ) offers a variety of solutions for testing, deployment assurance and application performance management (APM). Business technology optimization (BTO) is an emerging business strategy that enables companies to optimize and align business and technology performance to meet key business objectives. Mercury Interactive is a provider of BTO products and services, rendering a unique integrated approach to testing, deployment assurance and APM solutions that enables customers to optimize the quality of their information technology-delivered services, align IT execution with business goals and reduce spending throughout their IT infrastructure. MERQ - Mercury Interactive $35.75 PLAY (conservative - bullish/debit spread): BUY CALL JUN-30.00 RQB-FF OI=10 ASK=$6.30 SELL CALL JUN-32.50 RQB-FZ OI=61 BID=$4.10 INITIAL NET-DEBIT TARGET=$2.20-$2.25 POTENTIAL PROFIT(max)=11% B/E=$32.25 **************** 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 cost and large potential profit. ***** CHKP - Check Point Software $18.05 *** Cheap Speculation! *** Check Point Software Technologies (NASDAQ:CHKP) develops, markets and supports Internet security solutions for enterprise networks and service providers, such as Telcos, Internet service providers, application service providers as well as managed service providers including virtual private networks (VPNs), firewalls, intranet and extranet security. Check Point has solutions that enable secure, reliable and manageable business-to-business communications over Internet protocol networks, including the Internet, intranets and extranets. Check Point product offerings also include traffic control and quality of service and IP address management. The company's products are fully integrated as a part of its secure virtual network architecture, and provide centralized management, distributed deployment and comprehensive policy administration. CHKP - Check Point Software $18.05 PLAY (speculative - bullish/calendar spread): BUY CALL OCT-20.00 KEQ-JD OI=1472 ASK=$1.55 SELL CALL JUN-20.00 KEQ-FD OI=1702 BID=$0.45 INITIAL NET DEBIT TARGET=$1.00-$1.05 INITIAL TARGET PROFIT=$0.50-$0.70 ***** GDT - Guidant $39.98 *** Reader's Request! *** Guidant Corporation (NYSE:GDT) pioneers lifesaving technology, giving an opportunity for a better life today to millions of cardiac and vascular patients worldwide. The company, driven by a strong entrepreneurial culture of 11,000 employees, develops, manufactures and markets a broad array of products and services, enabling less invasive care for some of life's most threatening medical conditions. GDT - Guidant $39.98 PLAY (very speculative - bullish/calendar spread): BUY CALL OCT-45.00 GDT-JI OI=1858 ASK=$1.65 SELL CALL JUN-45.00 GDT-FI OI=223 BID=$0.30 INITIAL NET DEBIT TARGET=$1.25-$1.30 INITIAL TARGET PROFIT=$0.65-$0.90 ***** NSM - National Semiconductor $21.80 *** Favorable Outlook! *** National Semiconductor (NYSE:NSM) designs, develops, manufactures and markets a wide array of semiconductor products, including a broad line of analog, mixed-signal and other integrated circuits. The company's analog and mixed-signal devices include amplifiers and regulators, image sensors, power monitors and line drivers, radio frequency, audio amplifiers, display drivers and signal processors. NSM also makes other products with digital-to-analog or analog-to-digital capability include products for local area and wireless networking and wireless communications, as well as products for personal systems and personal communications. NSM uses the brand name Super I/O to describe its ICs that handle system peripheral and input/output functions on the personal computer motherboard. NSM - National Semiconductor $21.80 PLAY (conservative - bullish/calendar spread): BUY CALL JAN04-25.00 LBV-AE OI=770 ASK=$2.45 SELL CALL JUN03-25.00 NSM-FE OI=24 BID=$0.35 INITIAL NET DEBIT TARGET=$2.00-$2.05 INITIAL TARGET PROFIT=$1.10-$1.75 ******************* 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. ***** MRVL - Marvell $26.72 *** Chip Sector Rally! *** Marvell (NASDAQ:MRVL) designs, develops and markets integrated circuits utilizing proprietary communications mixed-signal and digital signal processing technology for communications-related markets. Marvell offers its customers a wide range of integrated circuit solutions using proprietary communications mixed-signal processing and digital signal processing technologies. Marvell's product groups include: storage products, consisting of a variety of read channel, system-on-chip and preamplifier products; and broadband communications products, consisting of a variety of transceiver products, switching products, internetworking products and wireless LAN products. MRVL - Marvell $26.72 PLAY (speculative - bullish/synthetic position): BUY CALL JUN-30.00 UVM-FF OI=714 ASK=$1.00 SELL PUT JUN-22.50 UVM-RX OI=965 BID=$0.70 INITIAL NET DEBIT TARGET=$0.00-$0.10 INITIAL TARGET PROFIT=$0.40-$0.70 Note: Using options, the position is similar to being long the stock. The minimum initial margin/collateral requirement for the sold option is approximately $725 per contract. However, do not open this position if you can not afford to purchase the stock at the sold put strike price ($22.50). ***** ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. 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