The Option Investor Newsletter Sunday 05-25-2003 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: Picnics and Taxes Futures Market: Holding up Index Trader Wrap: Correction time Editor's Plays: I Give Up Market Sentiment: A Losing Week Ask the Analyst: Measuring new high and new low breadth 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 5-23 WE 5-16 WE 5-09 WE 5-02 DOW 8601.38 - 77.59 8678.97 + 74.37 8604.60 + 18.92 +276.33 Nasdaq 1510.09 - 28.44 1538.53 + 18.38 1520.15 + 17.27 + 68.34 S&P-100 469.75 - 5.97 475.72 + 3.47 472.25 + .38 + 15.77 S&P-500 933.22 - 11.08 944.30 + 10.89 933.41 + 3.33 + 31.27 W5000 8916.23 - 73.62 8989.85 +106.51 8883.34 + 49.28 +308.17 RUT 418.40 + 3.73 414.67 + 1.14 413.53 + 5.86 + 19.17 TRAN 2383.36 - 35.95 2419.31 - 42.87 2462.18 + 1.38 +108.19 VIX 21.38 + 0.37 21.01 - 1.03 22.04 - 1.57 - 0.29 VXN 29.73 - 1.29 31.02 - 1.07 32.09 - 0.27 - 1.34 TRIN 1.09 0.93 0.83 0.66 Put/Call 0.74 0.52 0.82 0.71 ****************************************************************** Picnics and Taxes by Jim Brown Friday was another humdrum day with the averages ending only fractions from old support levels. Thoughts were on picnics, taxes, racing, golf or just three days away from the market. After the market closed I discovered that the day was not as boring as I thought, which leads me to believe that next week could be exciting. Dow Chart - Daily Nasdaq Chart - Daily There were no material economic reports on Friday with the Weekly Leading Index ticking only slightly lower due to lower bond yields and a drop in mortgage applications. The six-month projected growth rate did rise to +3.2%. This matches several high profile estimates this week for growth in the second half of 3% to 4%. Another obscure economic report showed the Internet E-commerce sector continued to expand rapidly in the 1Q with $11.9 billion in sales. This represented 1.54% of all retail sales and showed an almost imperceptible dip from the 1.59% 4Q rate. This was the second highest quarter ever and not normally a strong quarter. The growth rate slowed but the sector is continuing to expand. The news powered YHOO and NTES to new highs for the year but did not help EBAY, AMZN or BGP, which you would have thought would have benefited from the news. The big news for the day was the final vote on the tax cut bill by the Senate. We got a final burst of buying on news and dividend stocks added another round of gains. Utility stocks like FPL gained +2.59 on the news. A $50 stock paying a $2.30 annual 4.6% dividend yielded +2.6% after taxes under the old plan. Under the new plan that after tax yield jumped to +3.9%. Even Altria gained another +1.26 to $42.30. Microsoft CEO Steve Ballmer announced he was selling some of his 471 million shares. He did not say how many but most commentators believe he had to go public because of a 70 million share block that has been shopped all week. Rumor had it that one of the eight largest shareholders was making the sale. Odds are now good that it is Ballmer. He said this was part of his diversification program. Another Microsoft billionaire, Paul Allen, announced he was cutting 20% of the staff at Vulcan Ventures due to the slow economy. Puts a crimp in the net worth when your majority of your stock holdings were in a $60 stock (presplit $120) that is now selling for $24. If Steve and Paul need help adjusting to a lower lifestyle I am sure Ted Turner is available for a price to consult. His $100 stock is now trading for $14 without a split. That is a painful $8 billion loss. Brings new meaning the term grumpy old man. Speaking of fortunes lost, Union Finance and Investment filed suit in Los Angeles against Michael Jackson claiming he is near bankruptcy. The 44-year old singer has reportedly blown through a $500 million fortune and has been living on a line of credit for months. Jackson is said to be sitting on nearly $500 million in song rights including 200 titles from the Beatles, Elvis and other top stars. However, he reportedly has no income after the sales of his recent albums fell flat. Michael Jackson broke? Toto, we really are in never-never land. The big three automakers came under pressure after Goldman Sachs said the companies will post disappointing results for May and cut production by 10% in the 3Q. They said negative headlines about sales and production cuts and high inventory are likely to weigh on those stocks. Incentives are having to be increased and sales are slowing while inventories are expected to be as much as +35% above normal levels. Another vehicle maker landed a huge $16 billion deal to lease tankers to the Air Force. Boeing will lease 100 modified 767 jets to the Air Force as aerial gas stations beginning in 2006 and adding 20 planes a year for five years. The lease has a $4 billion purchase option at the end of the lease for a total of $20 billion. The planes could have been purchased outright for $8 billion. Needless to say there has been quite a controversy over the big difference in price. Personally I think there has to be something not visible on the surface to justify the difference in the price. Do the leases included any maintenance, insurance, upgrades, etc. Enquiring minds want to know why BA got such a sweetheart deal. If you looked at the close on Friday with the Dow +7, Nasdaq +2 and the S&P +1 you would have a very wrong impression of the day. With the markets finishing basically flat you may be surprised to learn the advances beat decliners severely 4489 to 2731 across all markets. Even more remarkable was the new 52-week highs which came in at 660 compared to only 47 new lows. This was in a week where the major averages lost ground instead of gained it. The 660 new highs was the largest reading of the year. You could easily form two entirely different opinions about next weeks market direction, maybe three. If you just looked at the rounding top rebound on the Dow from the last two days and seeing the flat close on Friday you would think we were about to start the next leg down. If you looked at the internals I mentioned above you should be pounding the table making the case for the bulls. If you are a technician the VXN close at an all time low of 29.73 on Friday with the VIX at the second lowest close for the year you would be backing up the truck to load up on puts. I kept seeing the potential for Mark's MOPO event behind every tree. The economy is not well but everyone says it is getting better. You can believe the economic reports or the spin doctors or ignore them both and just go with the market. The Feds would have you believe the economy is poised to explode in the 2H but that would need a jump in consumer spending. With unemployment rising and benefits expiring there are about to be 2.5 million workers with no jobs and no income. Jonathan sent me this chart today. Note that since 2001 the unemployment rate has risen +50% from 4% to 6% and in the same period consumer debt has increased over 10% in percent of the GDP. With employment still dropping there are two choices. We will either have another huge spike in debt as the unemployed live off their credit cards prior to bankruptcy or the rate of consumer spending will slow substantially. Neither is market friendly. Unemployment/Debt Chart I mention this because it runs completely contrary to the current market trend. The markets are moving up like the recovery is guaranteed. Friday was a slow news day and the research urge hit me once again when I saw the bullish internals. I have shown these charts before but since this is the critical date I feel the need to show them again. The top chart is the S&P for May of 2002 compared to the bottom chart which is May-2003. The comparisons are simply amazing. Very seldom does history repeat itself so closely. Same dips, same peaks, same trend, same VIX. S&P Charts - May 2002/2003 The $64 question is what will happen next. In 2003 the pre Memorial day dip bounce was the first in a series of painful dip/bounce patterns as we drifted into summer. The charts below illustrate that pattern. S&P Charts - June 2002/2003 There are many differences in the underlying markets. The May-2002 new 52-week high/lows were split 50/50 at about 200 each, not 660/47! The Q1 GDP was only 1.3% when reported in May-2002. Oops, Q1 is only expected to be 1.6% next week! Ah but, Q1-2002 GDP was 5.0% so the drop from 5.0% to 1.3% was a real shock. Going from Q1-1.6% to Q2-1.6% in 2003 should not be such a shock to the system. The unemployment in 2003 has seen three months of losses for more than 500K jobs. Sounds pretty grim for the 2003 outlook. In May 2002 there was an explosion of new jobs, +41,000. That may not sound like much but after eight straight months of job losses ending in March-2002 totaling -1,260,000 jobs that +41K number was a breath of fresh air. The ISM in April-2002 was 53.9 after climbing out of a hole in Oct-2001 under 40. In 2003 the ISM for April was 45.4 after falling from a high of 55.2 in December. The Dow was 10350 the week before the holiday in 2002 and only 8743 in 2003. Interest rates had already been cut to 1.75% in 2002. Oil in Q2-2002 was $28, today $28. Confused yet? The differences between May-2002 and May-2003 are vast in some numbers but not really that different. The GDP is about the same at +1.3%-1.5%. The unemployment is coming out of a 3-month hole in 2003 and an 8-month hole in 2002. The ISM was rising in 2002 and falling in 2003. The markets were 20% higher. Earnings were falling in 2002 and despite massive cuts in estimates for Q1-2003 a full 55% of the S&P have already warned for Q2. Interest rates are only 50 basis points lower now than then. The tax cut passed this week was the third tax cut for this administration in three years so that factor is also mitigated. If anything 2002 was in better shape than 2003. What is it that is different? I listen to talking heads all day long that say the market is going up for this or that reason. I personally see several that I believe are powering this rally. First I do not see a recovery yet. It may be coming but the signs are so faint that it would take a stethoscope to hear them. Two of the major factors which are powering this market are bonds and sentiment. The yield on the 30-year was 5.75% in May-2002. The 30-year closed at a new 45-year low on Friday at 4.25%. Even more amazing is the 10-year at 5.25% in 2002 and 3.33% today. The after tax yield is even lower. Greenspan was quizzed severely this week about the impact of another rate cut on the money market industry. At what rate do they begin losing money and how long before the industry implodes. He said the Fed had spent considerable time and research in trying to determine that impact but gave no answer. With financial rates so low there is simply no incentive for retail investors to park money in stagnant accounts. That brings us to the second reason, sentiment. The market was supposed to go up. That is what investors were conditioned to think. We won a war and the threat to peace has vanished. They can look back to 1991 for a quick history lesson and pattern for the market. The economy was coming out of a soft patch then and again now. Technology triumphed over evil and the retail investor voted with their dollars. Did it make economic sense? No, it was sentiment, plain and simple. The economic cloud was lifted. Is this a justification for continued investment? No, but then retail investors do not need justification. They normally vote with their emotions. Traders tell me the market can't go higher because the economy is in the tank and dropping. Others tell me that the second half recovery is going to power the techs to huge earnings gains. I agree, just like the second half recovery of 2001 and 2002. If it come it will power them to huge earnings because of significant cost cuts just to stay alive over the last two years. Is it coming? Intel, Cisco and Microsoft all said "no recovery in sight" in so many words. If companies were taking bids for infrastructure components for the second half, which is only 25 trading days away if you are counting, then these big tech companies would be seeing those bids. If you are GE you don't just call HPQ and say I need 150,000 PCs and here is how I want each of them configured and where I want each one shipped. Can I get a price tomorrow for shipment on June 15th? The procurement process for any orders of scale takes months of details, bids, adjustments, rebids, etc. Let's be generous and just say the odds are slim for any major change in the 3Q. Not impossible, just slim. That puts us back to what now and why. Can May/June 2003 end up like May/June of 2002? Maybe. The only two major components that are really different are bonds and sentiment. Investors are thinking "what is my risk?" Leaving the cash in a money market is about as profitable as a mattress. The markets have rebounded +20% but so what. Stocks are rising from the dead. Lucent hit $2.50 after trading at 55 cents. BRCM is $22 after trading under $10. JNPR is $13 after trading at $4. EBAY $100 and YHOO $28.50 are setting new 52-week highs. YHOO was $9. Retail traders see this and instead of thinking "I will wait for the summer pull back to buy some" are instead thinking "I have to get YHOO before it breaks $30." Fund managers are buying in self-defense. If XYZ fund performs better than me I could lose my bonus and/or my job. Yes, the market should trade lower during the summer but what if I wait and it doesn't? I could be fired. They cannot afford to wait in cash or bonds with the markets continuing to move up. I am not saying they wont be the first to sell if it begins to roll over but right now they have to buy in self-defense. Even the conservative funds are being forced to buy. Have you seen the dividend stocks this week? You cannot tell me a million retail investors suddenly got the urge to buy Florida Power and Light (FPL) today. Funds bought it because it pays a big dividend and it is stable. With the ten-year treasury yielding 3.33% they are not going to win many customers with their end of quarter statements. With only 25 trading days left in the quarter they are in a pinch. There is an estimated $5.5 trillion in cash and money markets that is waiting for a sign. Next week begins the road signs for May. The economic calendar was nearly void this week but the wait is over. The battle cry of "it takes May data to play" is about over. That May data begins on Tuesday with Consumer Confidence and Home Sales. Wednesday has Durable Goods and Thursday GDP, Jobless Claims and the Help Wanted Index. Friday closes with Personal Income/Spending, Michigan Sentiment and PMI. This week is just a warm up for the first week of June and ISM, Productivity, Construction Spending, Factory Orders, Nonfarm Payrolls and Consumer Credit. The May data mystery will be solved over the next nine trading days and we will finally know if the war cloud has lifted. Institutional investors and mutual funds are hoping for the best as the bullish scenario is spun over and over on stock TV. If you are hoping for the best then you don't wait until after the data to buy. You buy before the data and then be prepared to bail if it is wrong. If you are right then you could be up +10% over those funds that waited. If you are wrong you may not have lost anything if the market continues to rise into the reports. It is the perfect greater fool theory. John Doe fund manager is buying to beat Bill Smith fund manager to the punch. Bill Smith is buying to beat Bob Brown who is trying to beat John Doe. If the data is bad they all dump simultaneously and we get a crash. Everyone is hoping the very high 55% prewarning rate was excess caution and we will start getting more positive confessions than negative when the warning season for July starts soon. As informed traders we are faced with trading our bias or trading the market. My bias has been biting me lately so I am going with the market. With the new highs running 14:1 over new lows the market is trying to tell us something. With the advances beating declines 2:1 on the NYSE on Friday despite only a seven point Dow gain there is a message. With the Russell-2000 posting its first six week gain in three years everyone should take note. The major indexes closed the week with a loss, a minor loss. Considering the drop last Monday this was still bullish. Whether this was another consolidation week or the first week in a repeat of 2002 we will not know until next Sunday. Remember that asset allocation shift I mentioned last week? It has not happened yet. Bonds are still soaring to new highs on the hopes for another Fed rate cut to combat the "D" word. Every piece of bad data and every mention of deflation spurs another round of bond buying. If we get a couple of positive reports next week and those bonds begin to fall the last ten paragraphs are immaterial. Once the trend breaks the rush could be strong. I know I alienated many people today. There is a large contingent of traders constantly pointing out every potential chart pattern that could be even remotely suggesting a crash next week. I have to admit there are some good ones. I also have to admit we could easily test the bottom of that 8200-9000 trading range I suggested. We came close to 8400 this week but closed exactly in the middle at 8600 on Friday. There is no crystal ball and anything is possible. I look at those comparison charts for May/June and my gut reaction is look out below. On Friday the internals were telling us something else. Bear markets are built on the slippery slope of hope and bull markets climb over the wall of worry built by disbelieving bears. Just don't fight the trend. Follow the internals not the points. Just to prove I have not lost my mind I will leave the bulls with the following NYSI chart updated from last week. NYSE Summation Index Chart The NYSI has stalled at the 1215 high from last Sunday, which is the highest (most overbought) since Feb-1999. The MACD has broken beneath the zero line and based on this chart alone I would be very bearish. However, remember the -200 point drop on Monday? It did not even cause a blip on the chart. Bullishness remained very high. NYSE New Highs/Lows Another reading of overbought conditions is the NYSE new high/low chart at +355. This level has only been reached three times in the last four years. VERY overbought. My parting thought is that these extreme indicators are one more reason why the market should and may go down next week. They are also very strong reasons why the bears will be shorting every top and then buying back those shorts in disbelief if the markets continue up. Over the last five years we have seen some serious market extremes. Who is to say these overbought conditions cannot become even more extremely overbought? At 21.38 the VIX is in the danger zone but still well above its historical YEARLY low of 19 for each of the last three years. In 1998 it dropped into the 16s three times. Never say the market can't go any higher. It may not but then again we could be surprised. I looked at a lot of Dow stocks Friday night and there were very few I would buy. Just look at charts of IBM, MMM, WMT, GM, JNJ, CAT, GE, MRK, INTC, MSFT, DD and AA and you will see why the Dow closed flat on Friday. You will also see the reason why the bulls could have trouble next week. Big caps are under pressure while small caps were still moving up. There are mixed messages under every chart and behind ever indicator. Next week should definitely be interesting. Enter Very Passively, Exit Very Aggressively! Jim Brown ************** FUTURES MARKET ************** Holding up Jonathan Levinson Daily Pivots (generated with a pivot algorithm and unverified): Figures rounded to the nearest point: R2 R1 Pivot S1 S2 DJIA 8639 8620 8607 8588 8575 COMPX 1518 1514 1510 1506 1503 ES03M 940 936 931 928 923 YM03M 8666 8631 8582 8547 8498 NQ03M 1143 1137 1131 1125 1119 Today was another inside day, but it's easy to miss the sheer teethgrinding narrowness of the session, with the Dow traveling less than 80 points and the COMPX less than 9 points. As expected ahead of this holiday weekend, volume was lighter, with 1.49B NYSE shares and 1.43B COMPX shares changing hands. The sheer boredom and lack of pullback dealt another blow to the volaitility indices, with the VIX dropping .24 to 21.38, the VXN -.38 to an alltime closing low of 29.73, and the QQV -.89, with this latter index spiking down intraday to within a fraction of its alltime low. Daily QQQ chart Today's daily print was a doji star, with QQQ closing unchanged and trading between its 5 and 13 day simple moving averages. Weekly QQQ chart The weekly candle was a weak hangman doji. More significantly, this week printed a lower low and lower high, which points to a possible change in trend. Nevertheless, the QQQ 28 and 27.89 levels will have to be taken out first before testing the 13 week moving average at 26.73. QQQ:QQV chart Today's QQV wipeout drilled the QQQ:QQV ratio to a new daily high for this move, and to within a hair of its alltime high printed in March 2002. I believe that, unless QQQ is in a new bull market(which I don't), this ratio is signaling a very significant top that is or possibly already has printed. Weekly QQQ:QQV ratio The US Dollar Index got smoked last night and was then drilled this afternoon to a new closing low for this bear market below 93.00. 10 minute chart of the US Dollar Index This violent selloff did surprisingly little for gold or the CRB, with the latter closing up a mere .14, below the pivotal 240 level, while June gold closed at 369.10. Natural gas, crude oil, sugar and cocoa led the CRB. Daily chart of June gold Zooming out on gold, we see the stochastics trending, buried in overbought territory, while the MacD continues higher. The formation looks to me to be a bullish cup and handle, and projects higher on a resolution of the bull flag which is in its very early stages. If I'm correct, I expect a light pullback before the price moves higher. I have highlighted horizontal downside support. The equity futures were about as exciting as the cash markets today, and that's saying very little. The daily and weekly QQQ charts above provide the context for the 30 minute candle charts below. I've added a year-to-date daily candle view of ES3M as well: 30 minute 20 day chart of the NQ3M The 30 minute NQ changed little today, other than extending yesterday's move. I speculated in last night's wrap that we could be witnessing the formation of the right shoulder of a head and shoulders formation, and nothing I saw today caused me to change my mind. The 1136-1140 resistance zone was never seriously challenged, and that level remains the key level to watch on Tuesday. The downsloping neckline moved a little lower to the 1100 area given today's sideways action. Daily candles ES3M Today's daily ES candle did nothing to change the outlook on ES either. The longer cycle stochastic remains in its downphase, with yesterday's and today's prints causing it no more than pause. An up day on Tuesday could change all that. 20 day 30 minute chart of the ES3M Meanwhile, the 30 minute ES candles brought to 300 minute stochastic back into a down phase, and with the longer cycle and shorter cycle both in gear to the downside, I expect to see lower prices on Tuesday. Given that today was an inside day, I expect the move to pack a punch, but the market has had a habit of disappointing bears expecting explosive downside. 935 resistance remains key, and the neckline has crept down to the 911 level. 20 day 30 minute chart of the YM The YM paints the same picture on the 20 day 30 minute chart as we see on the ES and NQ contracts. For Tuesday, the outlook remains difficult, principally because I hesitate to sound like a broken clock. Other than the QQQ:QQV ratio chart which gave us "buy signals" for the QQQ today, we have a consensus of stochastic and Macd sell signals on the daily and 30 minute timeframes for QQQ and the equity futures, and the weekly QQQ, while not giving us confirmatory bearish crosses, remains toppy. Today and this week saw significant sums of money added by way of repo agreements by the fed, with today's 5B weekend repo on top of yesterday's 7.75B 7-day repo adding plenty of liquidity to assist the different markets. It's difficult to speculate as to the impact of such interventions on the markets, and the projected impact of their being returned to the fed when they mature next week. However, the bearish chart patterns and oscillator setups are clear- until the upper resistance lines discussed above are taken out, it looks like down from here. This is how my account is positioned. ******************** INDEX TRADER SUMMARY ******************** Correction time By Leigh Stevens lstevens@OptionInvestor.com THE BOTTOM LINE – Not Miller Time! This past week's correction to the several week rise in the indices looks set to continue with another downswing ahead. The typical pattern is for a sharp 1-2 day drop, then a rebound that might retrace 50-60% of the fall, followed by another decline that will typically take out the prior correction low. This view fits with the current fundamentals. The rebound off the Fall lows was in response to a possible better economy after the Iraqi conflict. And, earnings were not too bad, based on continued tight control of costs. Now, the market is waiting for a further improvement and a trend of better numbers. With the next round of earnings reports still some way off and with the move into summer, we're into the doldrums for a while. Absent new bullish news, the market is prone to fall some more. FRIDAY'S TRADING ACTIVITY – Except for a strong utility sector that pays the biggest stock dividends, stocks ended mostly unchanged - the boost in the utilities was of course due to the passage of the new tax bill, with its centerpiece tax break for stock dividends. The benchmark S&P 500 and the Dow Industrials broke a 3-week winning streak. Some blame was laid to nervousness on Monday and Tuesday over a string of terrorist attacks in Morocco, Saudi Arabia and Israel. Lets not forget our Moo faced friends in Canada who went a bit mad. Yes, Mad Cow disease, really no laughing matter, was afoot in Canada. For the week the Dow fell about a percent - for the day on Friday, ahead of the 3-day Memorial Day holiday, the Industrials were up some 7 points and climbed back above 8600 - just barely at 8601. The Nasdaq composite also rebounded slightly, gaining 2 and 1/2 points to 1510, just above near support in the 1500 area. COMPX was down a bit less than 2% on the week. The $350 billion tax-cut package that was passed by the House and the Senate reduces the top rate on dividends and capital gains to 15% and was the prime driver for utilities. American Electric Power (AEP) was up over 4%, Southern Co. tacked on 5% and Public Service Enterprise was also up close to 5%. Individual investors tend to buy these stocks for their safety and predictable dividends and the companies are of greatest interest when their costs fall, the biggest part of which is energy costs which are falling of late. Also, other interest rates have been declining in a significant way. Yields of 5%, with only a 15% top tax rate are looking pretty attractive versus the 10-year government Note priced to yield 3.3% at Friday's bond market close. The other big news was the continued fall of the dollar - I commented last week on the bullish gold charts and bullion rallied even more sharply this week in reaction to the dollar's fall. With gold still mostly priced in global markets in dollars, its price will rise if its going to maintain its value in dollar terms. The Euro ran up for week to a 4-year high, closing at 1.1837. I can't believe this bit of minor good fortune as I keep getting distracted from converting (to dollars) a yearly rent that I get paid in Euros - my resolution at the moment is to, without fail, get that done in the coming week. Hey, I was happy with $1.10! Recent comments were made by some key United States officials that they wouldn't try to prop up the dollar, which led to accelerated selling of the greenback. Moving to a still further price extreme is not atypical in the currency markets. The dollar was quite overpriced last year and these markets like others - think stocks - tend to move from one extreme to the other over time. Fundamentally, much of the pressure has stemmed from all the recent concern of a possible U.S. deflation trend and the possibility of a double dip recession because of it. After this correction runs its course, I think we will work higher in stocks - multinational earnings looks like they'll rise partly due in fact to a weaker dollar and the Federal Reserve's increase in the money supply due to falling interest rates. Fed funds, now at 1.25%, could fall by late-June to .75% - this is the current expectation, for the Fed to push its benchmark rate down by a 1/2 percent. OTHER MARKETS - Hey, if you're a gold bug, it's a great looking chart! The reaction low held right where I would have looked for support - at a level line from the apex of the triangle. Better to have owned calls on gold itself, as the XAU or Philly Gold Index has not done as well as the metal itself. MY INDEX OUTLOOKS – S&P 500 Index (SPX) – Weekly, Daily & Hourly charts: Don't say I didn't warn you - about technical resistance in the 950 to 960 area that is. It became a showstopper in the S&P 500 (SPX) by the Monday opening last week. What now? You got another chance to buy puts from my reading of the charts. 935- 940 looks like the area - perhaps the hourly chart "gap" will get entirely filled in by a move up to about 945. Anything over 940 is a "gift" in my book and a good entry for put purchases. What would suggest that SPX was back on a bullish track? - simply to clear a well-defined "line" of resistance by closing over 948- 950. On the downside, as discussed above, I think we'll see a dip to below this past week's (down) swing low around 915. Perhaps SPX will not re-test 900, but it could get close, say to 905, at least once between now the June expiration. While I am not a strident bear and am mildly bullish for the longer term, I still point out that the end of the current bear market isn't really "confirmed" until we see SPX close above 960 on the week and then maintain that level, as support, on subsequent pullbacks. While institutions will bury significant money in key COMPX biggies, the S&P 500 is the biggest draw for money managers to put the most money to work and they're not convinced yet. S&P 100 Index (OEX) – Daily & Hourly charts: Repeating the daily chart twice here, in order to show the OEX envelopes I use and the overall bullish upside momentum by the fact of the upside crossover of the 50 day above the 200-day moving average in the S&P 100 (OEX). There is a tendency for a move back below the 21-day average however, once there is dip below it - that's the center line on the lower chart. Upper left shows two interesting technical patterns. One is the fact that OEX cleared its prior 475 peak for the week - the fact that this was followed by a sharp drop was largely unpredictable expect for my (largely) unfailing indicator of "sentiment": the line that plots daily equities total call option volume relative to total equities put volume on the CBOE. I got bearish prior to last week based on the chart patterns I highlighted, the overbought indicators and by a bearish price/RSI divergence. I have to keep up my favorite "sentiment" indicator - my Call to Put ratio - by manual entry. While I thought it was up to date last week, something went awry and the chart didn't show the jump in the "needle" to a bearish extreme of 2.5, as is circled below. Friday the 16th saw CBOE equities call volume surge to 851 thousand contracts, versus put volume of 340 thousand. I'm glad to know that this indicator continues so reliably to predict downside reversals within 1-5 days of such extremes. Fortunately, many OIN subscribers have picked up the habit of checking this ratio and pointed out the extreme that can now be seen under the lower left OEX chart. Another thing that I would point out about when you have overlooked some single factor is what I call the "Tree of Indicators & Patterns" concept. If you follow enough of the right things, you will rarely fail to see a correction coming even though a particular single indicator or pattern does not develop as expected or you just overlook seeing it. Enough hindsight and on to foresight - I think OEX is due or nearly due for its next fall and would get ready to be in puts to capture this. 472-475 is my most favored price zone to enter into some (put) buying. If 475 is pierced, 480 looks to be the next key resistance. My outlook is for new lows below 460, perhaps to around 445-450 again, support implied by the 200-day moving average. The lower envelope "band" relative to the 21-day average in the lower daily chart, intersects in the 440 area currently - however, I rate the chance of seeing OEX down this far as being slim. Note the prior recent trend of a decline RSI trend while prices were going sideways, as forewarning of the price break of early last week. After the current correction runs its course, OEX could reach 500, but that would probably could not happen before the next earnings announcement window in July - and, of course, earnings would have to be good. Nasdaq Composite Index (COMPX) – Daily & Hourly: I highlighted in the daily Nasdaq Composite chart - left, below - my expectation for a common or "typical" corrective pattern that would see another downswing ahead, suggesting a possible move back down to the 1450 area. 1550 is resistance in the COMPX. 1480 is near support. The Composite has retraced now about 50% of its decline from recent high to recent low. I don't envision the current rebound carrying much higher than 1525 at the most optimistic - the pattern says more correction or downside ahead in my estimation. What would begin to convince me otherwise is a close back above 1530. Resistance and selling interest can be anticipated in the 1530-1540 price zone. Both the daily and longer hourly oscillator indicators are suggesting either continued downside momentum (daily chart RSI) or another overbought extreme in the case of the hourly stochastic. Similar to my suggestion last week, I again suggest bearish trading strategies by buying NDX or QQQ puts on further rallies in the Composite. On to the Q's! Wish I were sailing on the new QE2, but will have to settle for QQQ. QQQ charts - Daily & Hourly: QQQ could be re-shorted in the 28.5-28.75 resistance zone, anticipating a move back to below recent lows around 27.5, perhaps to the 26-26.50 area where the longer term up trendline intersects on the daily chart currently. The daily chart has a bearish rising wedge pattern to some degree. A few such technical considerations are pointing to another downswing ahead that is tradable. After further corrective action however, I could see QQQ reaching 30 again, at the top of its current hourly uptrend channel. The very next move looks to be down however. My expected maximum price range over the next 2-4 weeks is 26 or perhaps a bit lower on the downside, to 30 on the upside. Knowing that any imagined outlook can be wrong, a move to 29 or above, especially on a closing basis in the upcoming 4-trading day week, seems the least likely next move in the Q's. But a rally to this extent would suggest an upside "breakout" and renewed upside price momentum. The downside seems the path of least resistance just ahead as the stock has had a decent advance off its lows - some pause and a further pullback would be normal at this juncture. Good Trading Success! ***************************Advertisement*************************** Thinking of retiring to Hawaii? Or a second home in Paradise? Here's a rare Real Estate offering, not yet listed. Ideal for the successful trader who would like to live, work and play on Maui - America's Magic Isle. Maui's Most Private Property - A 4br country home surrounded by 50,000 acres of pristine open space. Spectacular views of pastures, cane fields, ocean and three islands. Described as the "Crown Jewel of Privacy" you can be here for months and never see a soul! The land adjoins a 600-acre pasture where Jimmy Hendrix held his last concert. Look out the windows in the early morning and you'll see a herd of cows, wild boar, axis deer, circling owls and hundreds of pheasant - but no people. Four phone lines, DISH, Sky Fiber broadband and Roadrunner available. For more on Maui's ultimate retreat see http://www.mauimansions.com/OIN ********************************************************************* ************** Editor's Plays ************** I Give Up On Friday night I looked at several hundred stocks for this section and I simply could not find one I would put my money on. Sometimes FLAT is a position. I looked for put plays, call plays, strangles and straddles and I could not find anything I would feel comfortable recommending. There were plenty of plays in both directions but I could find no compelling reason to play them. I looked at WMT as a put play. The turkey is dropping like a rock and I can find no good reason. I looked at AMZN, which has a shareholder meeting this week and a triple top at $33. The meeting could be contentious but it could also be another spin event for Bezos. No clue as to direction. I looked at EBAY with a strong double top at $100 as a likely put candidate but the potential for a stock split or a rally off some AMZN meeting news kept me from going in that direction. The options are also very expensive. I looked at TSCO, PII, TTC for put plays on the HDI news from Friday. PPI had already died along with TTC and TSCO has got a strange chart. It looks like there is strong pressure and $43 will break soon but there is no clue to direction. Options are expensive as well. I spend an hour looking for stocks suffering from the new asbestos like plague, silicosis. Linda and I were talking about the thousands of cases gearing up for class action status but all the companies I could find were already approaching penny stock status. I was dying to short/put the BBH but I can't recommend a put play on an index that finished at the high of the day and the year on Friday. I looked at index plays, ladder plays, strangles and straddles on the DJX/DIA/QQQ but none were attractive. I looked for naked puts, covered calls, naked calls, combination plays and kept drawing a blank. In all I looked at several hundred charts, read dozens and dozens of news articles and came up empty. My official recommendation is FLAT. However I know almost everyone would take offense at that position. So, in the interest of keeping the peace I give you these two possibles. Not recommendations just suggestions. Despite my market wrap today my gut still tells me we are going down. I look at those extreme overbought readings and cringe. That leads me back to the DJX and the $84 put. My suggested short term trading range between 8200-9000 gives us plenty of room for a drop. The DJX June $84 put was $1.05 on Friday night. It should be less on Tuesday due to decay if there is not a gap down open. Try to buy for $1.00 and sell for $1.50. The second candidate is MRVL. The stock reported good earnings and raised guidance on Thursday. It spiked +4.50 on Friday on short covering. I would be surprised if there was any follow through and despite the spike the options were reasonable. The June $32.50 put is only $1.85 or the $30 put is only 85 cents. Both have about equal risk/reward ratios for a drop back to $30. Take your pick. MRVL 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. QCOM - Put $30.89 5/18/03 ($31.10 when recommended) It was an exciting week for QCOM. They gapped open on Monday after affirming their guidance for the quarter in the face of the new competition. They introduced several new products during the week and found some bargain hunters coming to their aid. On Friday SG Cowen downgraded them on excess inventory, stronger competition and weak sales of their higher priced components. That put them right back where they closed the prior Friday after giving us a great entry point on Monday. Both puts profiled opened -25 cents lower than the price when recommended. IVX - Calls - $17.28 4/27/03 ($15.28 when recommended) Bummer! We got stopped out on the dip below 16.75 on Tuesday and the stock is looking strong again. The KIV-AC calls were trading at $3.20 when stopped compared to $2.10 when recommended. http://members.OptionInvestor.com/editorplays/edply_042703_1.asp CY - Cypress Semi Call - $9.60 ($9.95 week high) 3/2/03 ($6.41 when recommended) CY is not looking healthy. We have seen a sharp drop in the stock from its $11.15 high two weeks ago. Granted it is not much but the Jan-$7.50 calls profiled at $1.45 have dropped from their high of $4.00 to only $3.20. Still a double but slipping. I am going to take profits here and close this trade today. http://members.OptionInvestor.com/editorplays/edply_030203_1.asp EMC Call from Feb-2nd $9.58 ($9.85 week high) ($7.70 when recommended) EMC is also well off its highs but I want to give it one more week. If it drops below $9.00 I am going to close it. I have faith in the network storage sector but I do not want this once profitable play to turn into a loss. http://members.OptionInvestor.com/editorplays/edply_020203_1.asp Powerball No material change in this lottery play. RFMD, TLAB and FLEX remain the biggest drag but still eight months to go. It would have taken $1,255 to buy one contract of each on January-2nd. Any bets on what this will be worth on 12/31/03 ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** A Losing Week - James Brown The markets may have snapped their recent winning streak with a down week but the bears certainly can't claim any big victories. Other than the big, triple-digit down day on Monday, most of the market either traded sideways or hit new relative highs. All of this on top of a string of suicide bombings last weekend, a mad cow disease scare in Canada and more concerns over the d-word (deflation). It's been said before...this market wants to go higher. The passing of the tax-cut bill has at least two sectors trading higher - the utilities and the housing sector. The dividend tax cut is already showing its impact on share prices. Add all-time lows for home mortgage rates and home sales continue to run strong despite the soft labor market. Next week we'll see the latest new and existing home sales numbers. You can bet with homebuilding stocks as high as they are there will be a lot people watching those reports for any weakness. I noticed a ton of stocks that had pulled back to minor support levels as if waiting for their next cue. Do we rebound higher again? Or do we break support and begin a significant consolidation? There have been many comments about the breadth of this market's rally. In truth, the broadness of the rally is truly encouraging. However, without their "generals" the "troops" tend to move with less efficiency and can meander off course. Those generals I'm talking about are the mega-caps like GE, MSFT, MMM and WMT, just to name a few. Looking at the charts of these three giants you won't see strength but weakness. In GE it's been a slow bleed lower. In MSFT and WMT the pull has been much sharper. What could be bad news for the retail sector is the close under the 200-dma for WMT. MMM has been unable to bounce back above its own 200-dma and its point-and-figure chart looks poised for a big drop downward. As the highest dollar stock in the Industrials it has a unique position to put the great weight (up or down) on that index. I continue to suggest caution in both your play selection and your stop loss management. It is a market maxim that stock's move in cycles and that means that any one trend will eventually reverse. I think the OptionInvestor.com play list offers both bullish and bearish opportunities but you can tell from the number of put plays on the list we're betting with our bearish bias that this short-term up trend could be close to over. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10348 52-week Low : 7197 Current : 8601 Moving Averages: (Simple) 10-dma: 8614 50-dma: 8385 200-dma: 8331 S&P 500 ($SPX) 52-week High: 1107 52-week Low : 768 Current : 933 Moving Averages: (Simple) 10-dma: 935 50-dma: 899 200-dma: 884 Nasdaq-100 ($NDX) 52-week High: 1313 52-week Low : 795 Current : 1130 Moving Averages: (Simple) 10-dma: 1138 50-dma: 1089 200-dma: 1010 ----------------------------------------------------------------- Yet another new all-time low for the VXN. The VIX lost another 1%. These continue to flash major warning signs to any who would read them. CBOE Market Volatility Index (VIX) = 21.38 -0.24 Nasdaq-100 Volatility Index (VXN) = 29.73 -0.38 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.74 430,326 319,365 Equity Only 0.59 330,919 196,412 OEX 1.67 6,383 10,651 QQQ 7.83 4,749 37,185 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 60.9 + 1 Bull Confirmed NASDAQ-100 78.0 + 0 Bull Confirmed Dow Indust. 70.0 - 3 Bull Confirmed S&P 500 68.2 + 0 Bull Confirmed S&P 100 66.0 - 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 1.45 10-Day Arms Index 1.12 21-Day Arms Index 1.13 55-Day Arms Index 1.23 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 1882 1784 Decliners 969 1261 New Highs 331 177 New Lows 22 10 Up Volume 906M 905M Down Vol. 517M 472M Total Vol. 1467M 1412M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 05/20/03 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're still not seeing anyone place any big bets one way or the other in the full S&P 500 futures contracts. Number of contracts increased but no significant changes in sentiment here. Commercials Long Short Net % Of OI 04/29/03 432,710 419,245 13,465 1.6% 05/06/03 429,519 419,545 9,974 1.2% 05/16/03 429,028 419,553 9,475 1.1% 05/20/03 438,238 426,569 11,669 1.3% 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 04/29/03 149,616 154,782 5,166 1.7% 05/06/03 150,345 148,681 1,664 0.6% 05/16/03 151,883 148,479 3,404 1.1% 05/20/03 157,034 154,980 2,054 0.7% 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 In the E-minis we see a strong jump in number of contracts. Plus, we notice that the commercials made a much bigger percentage increase in their long positions while the small traders make a bigger percentage increase in their short positions. This is what we would expect. One moving counter to the other. Not in a contract for contract basis but in a bullish or bearish sentiment basis. Commercials Long Short Net % Of OI 04/29/03 134,751 472,247 (337,496) (55.6%) 05/06/03 169,388 447,330 (277,942) (45.1%) 05/16/03 178,679 452,727 (274,048) (43.4%) 05/20/03 232,184 468,006 (235,822) (33.7%) 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 04/29/03 459,687 50,030 409,657 80.4% 05/06/03 423,918 55,932 367,986 76.7% 05/16/03 421,540 57,483 364,057 75.9% 05/20/03 422,555 62,580 359,975 74.2% Most bearish reading of the year: 283,831 - 04/08/03 Most bullish reading of the year: 409,657 - 04/29/03 NASDAQ-100 We have a dead heat in the commercials with a nearly even number of long and short positions. This doesn't do us any help unless you surmise that the "smart" money is just as confused about the direction of the Nasdaq as everyone else is. Commercials Long Short Net % of OI 04/29/03 45,497 37,557 7,940 9.6% 05/06/03 46,327 38,216 8,111 9.6% 05/16/03 43,539 39,046 4,493 5.4% 05/20/03 42,864 42,040 824 1.0% 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 04/29/03 11,219 19,760 ( 8,551) (27.6%) 05/06/03 13,482 21,010 ( 7,528) (21.8%) 05/16/03 11,706 16,104 ( 4,398) (33.0%) 05/20/03 11,024 9,965 ( 1,059) ( 5.0%) 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 We have almost no change in the commercials' positions while we see a small increase in bullishness for the small trader but not enough to bring them to a net positive for longs. Commercials Long Short Net % of OI 04/29/03 17,927 14,083 3,844 12.0% 05/06/03 16,772 13,568 3,204 10.6% 05/16/03 18,265 14,396 3,869 11.8% 05/20/03 18,028 14,108 3,920 12.2% 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 04/29/03 7,081 8,604 (1,523) ( 9.7%) 05/06/03 7,829 8,642 ( 813) ( 4.9%) 05/16/03 7,873 9,058 (1,185) ( 6.9%) 05/20/03 8,378 9,922 (1,544) ( 8.4%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ***************************Advertisement*************************** Thinking of retiring to Hawaii? Or a second home in Paradise? Here's a rare Real Estate offering, not yet listed. Ideal for the successful trader who would like to live, work and play on Maui - America's Magic Isle. Maui's Most Private Property - A 4br country home surrounded by 50,000 acres of pristine open space. Spectacular views of pastures, cane fields, ocean and three islands. Described as the "Crown Jewel of Privacy" you can be here for months and never see a soul! The land adjoins a 600-acre pasture where Jimmy Hendrix held his last concert. Look out the windows in the early morning and you'll see a herd of cows, wild boar, axis deer, circling owls and hundreds of pheasant - but no people. Four phone lines, DISH, Sky Fiber broadband and Roadrunner available. For more on Maui's ultimate retreat see http://www.mauimansions.com/OIN ********************************************************************* *************** ASK THE ANALYST *************** Measuring new high and new low breadth Jeff: I've really enjoyed and my account has benefited from the bullish percent charts and point and figure charting in general. I've got a question regarding the 52-week high/low indicator and how it is supposed to help alert me to a change in the market's direction quicker than the bullish percent? I edited out some of this trader/investor's question, as it was lengthy, but the general question is how a trader/investor would utilize the number of stocks trading new 52-week highs versus the number of stocks trading new lows, put the data into a form that the human mind can better understand, and then interpret. The number of new highs versus new lows is thought to be an indicator of leadership for the markets. When I use the word "leadership," don't necessarily thing "up," but also think "down," as it relates to where the leadership is coming from. For instance... it could be that a market environment that has been trending lower over the course of a year (52-weeks) we would expect a growing number of 52-week lows. If the number of 52- week lows grows each day, or over the course of several days, then we could say, "leadership is coming from the downside." Conversely, "leadership" can come from the upside, with a greater number of stocks hitting new 52-week highs, than stocks hitting new 52-week lows. Once again, we see two indicators, that definitely play into the measurement of supply and demand, where the point and figure charting methodology can serve yet another purpose. The thought is, if the number of 52-week highs begin outpacing the number of new 52-week lows, then "upside" leadership, where buying (demand) from buying has more stocks pushing higher, than selling (supply) has stocks falling lower. Now, there are times when both new highs and new lows will show a growing number. When we see a growing number of stocks hitting both 52-week highs and lows, think of this as a rubber band being stretched at both ends. Similar to a rubber band that continues to stretch, at some point, we'd look for something to either "snap!" The "snap" can come from an "inflection" point and can take place at a market low, or a market top. I'll show how the point and figure chartist will look to measure the 52-week highs and lows and then look to interpret this type of data. It's rather simple, and by building a ratio and tracking that ratio on a 10-day average, we can build a supply/demand chart to measure "leadership" in a market. The number of 52-week highs compared to the number of 52-week lows being traded in a particular day is very difficult in itself to make any type of meaningful interpretation. Calculating a ratio and establishing a trend along with MOMENTUM To better understand why trader/investors will follow the number of new highs and new lows in a market, it also important to understand that the number of new highs and new lows by themselves can be misunderstood as it relates to price level for a market. For instance, on December 2, 2002 the NASDAQ Composite (COMPX) traded a high of 1,521.44 and the number of stocks that traded new 52-week highs totaled 114, while the number of stocks that traded new 52-week lows totaled 26. On Friday, May 23, 2003 the NASDAQ Composite (COMPX) traded a high of 1,514.49 and the number of stocks that traded a new 52-week high totaled 154, while the number of stocks that traded new 52-week lows totaled 14. We can see from the above that the "value" of the NASDAQ Composite was similar, but the number of new 52-week highs and new 52-week lows are markedly different. It would be an error to simply assume that just because there's a greater number of new highs compared to new lows on any given day or date in time, would be indicative of a market's value. To really be able to interpret two separate numbers (highs and lows), its helpful to establish a ratio. If I read yesterday's Wall Street Journal and saw that 50 stocks traded new 52-week highs and 100 stocks that traded new 52-week lows, that by itself is of little use. My mind can process the information and see that there was "leadership" from the downside by a 2 to 1 margin, but that's it. The next day, I might see that 60 stocks traded new 52-week highs, compared to 100 stocks trading new 52-week lows. Suddenly, I see the RATIO change where "leadership" is still from the downside by a 5 to 3 margin, but I perhaps sense a "shift" taking place. What becomes difficult to track day after day is how each days number of new highs and new lows begins to "stack up" and eventually build some type of trend, or where a "change in "leadership" might be taking place. By establishing a RATIO, we're able to understand a "range" of 0 to 100, and then place our data point (the ratio) on a chart and better understand and interpret that data point and series of data points as time passes. Day to day changes in the number of stocks trading new 52-week highs and new 52-week lows can vary and so can the "ratio." To try and interpret this type of breadth on a day-to-day basis is practically impossible. Therefore, it's helpful to AVERAGE the ratio and then chart the AVERAGE. A bar chartist will measure the MOMENTUM of an index or stock's price movement with a 5, 10, 21, 50 or 200-day moving average. The RATIO of new highs against new lows can also be interpreted using the AVERAGE of several observations. Before we begin creating moving averages, lets quickly review how the RATIO is calculated. It's a simple mathematical equation whereby we divide the number of 52-week highs, by the number of new highs plus the number of new lows, and then multiply that number by 100, to get a percentage or RATIO. RATIO = (52-week highs / (52-week highs + 52-week lows)) x 100 Let's take a look at a data set. The following table is a tabulation of current market data to May 23, 2003 where each day, I gather the number of stocks trading new 52-week highs and new 52-week lows on both the NYSE and NASDAQ. Then, using the RATIO formula above, calculate ratios for both exchanges. I also take the average of the last 10-days, to create a 10-day average, that I will then plot on a point and figure chart, using the conventional 3-box reversal technique of charting RATIO change. NYSE and NASDAQ high/low data I've highlighted in "dashed pink" some data from April 1 - 8 that I wanted to draw attention to. I don't know about you, but if I only looked at the new highs (NH) and new lows (NL) each day, I'd have a difficult time trying to interpret "what end" leadership was coming from. It's "shocking" to compare Aril 7 and April 8 new highs and new lows. Obviously something drastic happened that day as new highs fell substantially from the day before in both the NYSE and NASDQ, while new lows also grew from the day before. This is a day-to-day observation, and something that can be difficult to interpret, and may be initially thought of as "noise." As we moved to the right of the data set, this is where we begin our calculation of RATIO between the new highs and new lows. Hopefully we can see that by putting two separate numbers (new highs and new lows) into "one number" and creating a ratio, it becomes a little easier to understand breadth. For instance, lets look at the NYSE new high/new low (NYSE NH Ratio) for April 1. Of the 98 stocks (70+28) that either traded a new 52-week high or 52-week low, 71.4% of the total were stocks trading new 52-week highs. That's pretty STRONG isn't it? And showing some BULLISH leadership? Yes! for that DAY. But as your eyes move down the NYSE NH/NL Ratio column or the NSDQ NH/NL Ratio column you'll see some rather sharp fluctuations in the day-to-day ratios won't you? As we AVERAGE these observations with a 10-day AVERAGE, the day-to-day volatility, or noise of the RATIO begins to be smoothed out (10-day average). Why do I use a 10-day average you might ask. I'm using a 10-day average, so that I'm charting the same value as Dorsey/Wright and Associates. Several OI and PI subscribers are using Dorsey's point and figure charting system and this keeps us on the same page. I've sent a question to www.stockcharts.com in regards to their NYSE and NASDAQ highs-lows charts, to try and figure out what type of value they are calculating and charting. For now, let's look at a point and figure type chart, where I'm going to plot the 10-day average for the NYSE NH/NL ratio. For those traders/investors that use the bullish % charts for the major market indexes, you should immediately recognize what this chart tends to reflect. I'm also going to annotate the chart as to how this chart is interpreted. NYSE NH/NL Ratio - 2% box scale Woooeee! By charting the 10-day average of the NYSE new high/new low ratio, we can build a chart somewhat similar to a bullish % chart. In a minute, we're going to see of a 52-week High/Low chart is a "faster moving" indicator to alert us to a shift in leadership. I've use some of the market condition slogans like "bull alert," "bull confirmed," "bear alert" and "bear confirmed" like we will use in the bullish % charts, that would have this indicator of leadership perhaps saying some of the same things a bullish % chart would "say." Again, time reference is Jan.-Sept. (1-9) with Oct.-Dec. (A-C) so take note when we use the High/Low Ratio with a bullish % chart. Is this indicator bullish right now? You better believe it is! Is risk for bulls high right now? You better believe it is! Is there some bullish leadership being found in the NYSE right now? You better believe there is! Let's try and compare the above NYSE NH/NL chart with that of the S&P 500 Bullish % ($BPSPX) from www.stockcharts.com. And see if the NYSE NH/NL chart is "faster moving" and perhaps gives an "early" alert to changes in bullish or bearish leadership and how BOTH the NYSE NH/NL and S&P 500 Bullish % ($BPSPX) chart should be used together! I will say this right now. The BULLISH % CHART should be the PRIMARY indicator used in assessing market RISK and internal strength, with the high/low indicator being used to assess change in leadership and breadth at "both ends" of a market, which can eventually lead to market direction! S&P 500 Bullish % (BPSPX) - 2% box scale I tried to build a chart where we could look at both charts side- by-side, but width limitations had that type of comparison unreadable. The "faster moving" observation is made by noting that in the directly above S&P 500 Bullish % ($BPSPX) we see 11 columns of alternating X's and O's since 2002, whereas in the NYSE High/Low chart, we count 17 columns of alternating X's and O's. What a trader/investor looks to do is compare each chart against the other and look for SIMILARITY, but attempts to use the "faster changing" or more volatile high/low indicator to alert the trader to a shift in "leadership" that might then be reflected in the BROADER and slower moving bullish %. A most recent example would have been in March (red 3 on a PnF chart) the High/Low indicator had already reversed up into a "bull alert" type of reading on its chart. Yet the Bullish % Chart was still falling at 32% as the broader market internals were still weakening as more and more stocks continued to give point and figure sell signals. But what did we "know" about RISK from both indicators? When both indicators were reaching the more "oversold" level of 30%, we "knew" that RISK for BEARS was HIGH. Still.... the High/Low chart was alerting us to a shift in leadership based on the plotting of the 10-day average. Then, the High/Low indicator did reverse back into a column of "O" briefly (40-32) as the broader and more IMPORTANT bullish % still told us the market internals were weak. But then... suddenly... the High/Low reversed back up again and at a 44 reading, turned that indicator "bull confirmed." Suddenly, a greater RATIO or percentage of stocks began setting new highs compared to new lows as if a more MEANINGFUL shift in BULLISH leadership was being found! Then... suddenly... the broader market internals as depicted by the bullish % ($BPSPX) reversed up. Here too, more and more stocks began generating point and figure buy signals and bullishness appeared to be spreading, not just from the ratio of new highs/new lows, but to the broader market as depicted by the S&P 500. Just as we can tie in "bullish ties" between the high/low indicator and the bullish %, we can make "bearish ties" between these to indicators. June of 2002 is perhaps the perfect example of this. From January to April (red 1 to red 4) both the High/Low and Bullish % had reached more "overbought" levels at or above 70%. The faster moving and more volatile high/low indicator was setting a pattern of higher highs and higher lows during that time. A BULLISH trader "knew" internals were still strong, but RISK for BULLISH trades was HIGH. By May (red 5) the high/low indicator showed a lower high on its chart at an OVERBOUGHT level. A comparison with the S&P 500 Bullish % chart (red 5) showed a "bear alert" status already having been issued. It was in June (red 6) that the High/Low indicator would have issued a "bear confirmed" type reading as suddenly, a shift toward BEARISH leadership had the number of new LOWS skewing the ratio to a level of BEARISH leadership. Soon after early June, the Bullish % Chart ($BPSPX) also gave the "bear confirmed" reading! Do you sense that when you get two somewhat "different" indicators that do monitor the market internals, but to different degrees start "saying" the same thing, that larger moves tend to take place? Print both of these charts out in the not too distant future and lay them side by side. Then, go to www.stockcharts.com and print out a FREE point and figure chart of the S&P 500 Index (SPX.X) on its conventional 5-point box. Lay all three charts out side-by-side and begin circling areas where you find CONFIRMING signs of strength and weakness. Market internals are important to understand, and give the trader/investor observations of the "guts" or internals of the market. This can differ from what the externals are showing. The internals give the trader/investor a look at the strength/weakness of the market. Those subscribers that have seen me mention how the market tends to move like a "snake" or an "inchworm" will associate the High/Low indicator as being the "head" and "tail" of a market. The new highs are the strength of the head compared to the new lows being the strength of the tail. Now, here's my NASDAQ High/Low chart. Print this one out too. If you're a NASDAQ-100 Index (NDX.X) trader, then you may want to also print out a FREE NASDAQ-100 Bullish % ($BPNDX) chart from www.stockcharts.com. Make sure your box size is set at 2, not the default of 1. NASDAQ NH/NL Ratio - 2% box scale Starting in October of 2001 (Red A lower left corner) I started highlighting every different stage for the six degrees of risk or "market cycles" as it would relate to the NASDAQ High/Low ratio. I did not do this for the NYSE High/Low ratio. Try saying them out loud as you follow the chart from left to right. It can help you "feel" they cycles, like you're on a roller coaster. When you're doing this, think RISK as being higher or lower for BULLS as you move back and forth from 70% to 30%. I read it like this. Bull alert, bull confirmed, bull correction, bear alert, bull confirmed, bull correction, bull confirmed, bull correction, bear confirmed (feel the shift?), bull alert, bear confirmed, bull alert, bear confirmed, bull alert, bull confirmed (feel the shift?), bull correction, bear alert, bull confirmed, bull correction, bear alert, bear confirmed (feel the shift?) bull alert, bull confirmed (feel the shift?). There are "Six Degrees of Risk" or "cycles" in a market, as depicted by the bullish %. I've tried to associate some of these "cycles" in the above charts. For a more thorough explanation of how to identify these "cycles", please go to the "Bailey's Basics" section of the site, and look for the November 8, 2001 article titled "Understanding Risk is key." Jeff Bailey ************* COMING EVENTS ************* ========================================== Market Watch for the week of May 26th ========================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- None ------------------------- TUESDAY ------------------------------ AZO AutoZone Inc. Tue, May 27 After the Bell 1.27 BMO Bank Of Montreal Tue, May 27 -----N/A----- N/A BNS Bank of Nova Scotia Tue, May 27 -----N/A----- N/A DCI Donaldson Tue, May 27 After the Bell 0.53 SMTC Semtech Tue, May 27 After the Bell 0.11 TKA Telekom Austria AG Tue, May 27 Before the Bell N/A VOD Vodafone Group Public Tue, May 27 -----N/A----- N/A ----------------------- WEDNESDAY ----------------------------- COST Costco Wholesale Corp Wed, May 28 Before the Bell 0.31 RDY Dr. Reddy's Labs Wed, May 28 -----N/A----- N/A HOV Hovnanian Enterprises Wed, May 28 After the Bell 1.21 KKD Krispy Kreme Doughnut Wed, May 28 Before the Bell 0.20 LZB La-Z-Boy Inc. Wed, May 28 After the Bell 0.39 PFP Premier Farnell Plc Wed, May 28 Before the Bell N/A ROP Roper Industries Wed, May 28 After the Bell 0.45 TECD Tech Data Corporation Wed, May 28 -----N/A----- 0.40 TOL Toll Brothers Wed, May 28 Before the Bell 0.68 ------------------------- THURSDAY ----------------------------- CHS Chico's FAS Thu, May 29 Before the Bell 0.28 DG Dollar General Corp. Thu, May 29 Before the Bell 0.16 DLTR Dollar Tree Stores Thu, May 29 -----N/A----- 0.27 OTE Hellenic Telecomm Thu, May 29 Before the Bell N/A JDEC J D EDWARDS & CO Thu, May 29 After the Bell 0.01 MBG Mandalay Resort Grp Thu, May 29 After the Bell 0.78 MCDTA McDATA Corporation Thu, May 29 After the Bell 0.05 MIK Michaels Stores Thu, May 29 -----N/A----- 0.29 PETM PetsMart Thu, May 29 Before the Bell 0.16 Q Qwest Communications Thu, May 29 Before the Bell -0.09 TTWO Take-2 Interact Sftwr Thu, May 29 Before the Bell 0.35 VIP Vimpel Communications Thu, May 29 -----N/A----- N/A ------------------------- FRIDAY ------------------------------- BFb Brown-Forman Corp Fri, May 30 Before the Bell 0.91 PNY Piedmont Natural Gas Fri, May 30 -----N/A----- 1.28 RY ROYAL BK CDA MON QUE Fri, May 30 -----N/A----- N/A ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable FNF Fidelity National 5:4 May 23rd May 27th AMN Ameron Intl 2:1 May 27th Apr 28th AMFC AMB Financial 5:4 May 29th Apr 30th FLIR FLIR Systems 2:1 May 29th May 30th ERES eResearchTech 2:1 May 29th May 30th CNBC Center Bancorp 2:1 Jun 2nd Jun 3rd POG Patina Oil Gas 5:4 Jun 4th Jun 5th FCN FTI Consulting 3:2 Jun 4th Jun 5th ECL Ecolab 2:1 Jun 6th Jun 9th ATVI Activision Inc 3:2 Jun 6th Jun 9th -------------------------- Economic Reports This Week -------------------------- Investors can enjoy the long weekend because when they get back there is a host of economic reports that could move the markets. Just to name a few, we've got Consumer Confidence, Home Sales, GDP, Help Waned, Personal Income and Spending and more! ============================================================== -For- Monday, 05/26/02 ---------------- None Tuesday, 05/27/02 ----------------- Consumer Confidence(DM) May Forecast: 83.0 Previous: 81.0 Existing Home Sales(DM) Apr Forecast: 5.70M Previous: 5.53M New Home Sales (DM) Apr Forecast: 980K Previous: 1012K Wednesday, 05/28/02 ------------------- Durable Orders (BB) Apr Forecast: -1.0% Previous: -2.0% Thursday, 05/29/02 ------------------ Initial Claims (BB) 05/24 Forecast: N/A Previous: 428K GDP-Prel. (BB) Q1 Forecast: 1.8% Previous: 1.6% Chain Deflator-Prel.(BB) Q1 Forecast: 2.5% Previous: 2.5% Help Wanted Index (DM) Apr Forecast: 37 Previous: 38 Friday, 05/30/02 ---------------- Personal Income (BB) Apr Forecast: 0.0% Previous: 0.4% Personal Spending (BB) Apr Forecast: 0.1% Previous: 0.4% Mich Sentiment-Rev.(DM) May Forecast: 92.7 Previous: 93.2 Chicago PMI (DM) May Forecast: 49.0 Previous: 47.6 Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ***************************Advertisement*************************** Thinking of retiring to Hawaii? Or a second home in Paradise? Here's a rare Real Estate offering, not yet listed. Ideal for the successful trader who would like to live, work and play on Maui - America's Magic Isle. Maui's Most Private Property - A 4br country home surrounded by 50,000 acres of pristine open space. Spectacular views of pastures, cane fields, ocean and three islands. Described as the "Crown Jewel of Privacy" you can be here for months and never see a soul! The land adjoins a 600-acre pasture where Jimmy Hendrix held his last concert. Look out the windows in the early morning and you'll see a herd of cows, wild boar, axis deer, circling owls and hundreds of pheasant - but no people. Four phone lines, DISH, Sky Fiber broadband and Roadrunner available. For more on Maui's ultimate retreat see http://www.mauimansions.com/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 05-25-2003 Sunday 2 of 5 In Section Two: Watch List: Little Bit of Sweet & Sour Daily Results Put Play of the Day: FRE Dropped Calls: None Dropped Puts: None ***************************Advertisement*************************** Thinking of retiring to Hawaii? Or a second home in Paradise? Here's a rare Real Estate offering, not yet listed. Ideal for the successful trader who would like to live, work and play on Maui - America's Magic Isle. Maui's Most Private Property - A 4br country home surrounded by 50,000 acres of pristine open space. Spectacular views of pastures, cane fields, ocean and three islands. Described as the "Crown Jewel of Privacy" you can be here for months and never see a soul! The land adjoins a 600-acre pasture where Jimmy Hendrix held his last concert. Look out the windows in the early morning and you'll see a herd of cows, wild boar, axis deer, circling owls and hundreds of pheasant - but no people. Four phone lines, DISH, Sky Fiber broadband and Roadrunner available. For more on Maui's ultimate retreat see http://www.mauimansions.com/OIN ********************************************************************* ********** Watch List ********** Little Bit of Sweet & Sour Hershey Foods - HSY - close: 68.65 change: +0.30 WHAT TO WATCH: Shares of the famous chocolate maker are about to move into the gap from last September. Once above the $69.00 mark it could try and fill that gap. Traders looking to jump the gun can target dips to $68.00 with tight stops. Chart= --- Vodafone - VOD - close: 20.94 change: +0.56 WHAT TO WATCH: A previous high-flying telecom from the bubble- years, this British mobile-service giant just broke out to the upside from a multi-month consolidation. It's point-and-figure (PnF) chart also looks bullish. Check out the weekly chart. Tally ho! Chart= --- Lexmark - LXK - close: 69.37 change: -0.58 WHAT TO WATCH: LXK is trying very hard to hold on to that $70.00 mark and its 50-dma but bulls should be concerned. Friday's close put it below both. There have been some negative comments out on the stock recently and the latest price target is $55. Bears could target a move to the $60.00 level, where LXK has natural support and its 200-dma. Chart= --- Apollo Group - APOL - close: 52.40 change: -0.89 WHAT TO WATCH: The profit taking for one of the strongest sectors the last couple of years, schools, may have begun. APOL's short- term channel was broken a few sessions ago and the selling pressure has been too much for it. We suspect it will target a move to the $46.00 area, while pausing to consolidate some near $50.00. Check out the weekly chart and the point-and-figure chart in addition to the daily and you'll see why. Chart= --- Citrix Systems - CTXS - close: 20.59 change: +0.19 WHAT TO WATCH: The incredibly strong CTXS just continues to build on its recent trend of higher lows. A move over today's high could launch it into its next leg higher. Granted this would be for aggressive traders only as the stock looks terribly overbought from its mid-April breakout. Chart= ==================================== RADAR SCREEN - more stocks to watch ==================================== NXTL $14.88 - We continue to watch NXTL. The breakout back over $14.50 looks attractive but shares could easily pull back. Maybe a bounce at $14.00 for aggressive bulls. CYMI $27.09 - Check out this chip stock. It's been ignoring any strength in tech the last week and closed under its 200-dma. Could a retest of April lows be far behind? JPM $30.90 - Thus far the financials have managed to hang in there. Notice how JPM has been bouncing along the $30.00 level? Look for a break one way or the other. SMG $50.30 - Keep an eye on Scotts. The stock has been holding at support near $50 and its 200-dma for the last four days. Will it hold or will it break? *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS LAST Mon Tue Wed Thu Week AMGN 61.88 -2.04 0.76 0.53 1.17 -1.00 Trend intact DISH 31.49 -0.65 -0.03 0.51 1.14 0.55 Look for a dip? MEDI 33.84 -0.48 0.42 -0.93 1.45 -0.75 Do or die. OHP 36.92 -0.66 1.32 0.15 0.15 -0.66 Drift higher QLGC 45.76 -1.52 -0.30 0.41 0.26 -0.10 Looks strong. PUTS AIG 54.99 -2.09 -0.44 0.43 0.37 -2.31 Could be soon FRE 57.90 -0.47 -0.09 -0.45 -0.70 -3.43 NEW, marketshare HDI 40.81 -0.55 0.00 0.10 0.57 -2.19 NEW, broken GM 33.26 -0.80 -0.28 0.20 0.07 -1.15 No update GS 76.15 -2.35 0.10 0.70 0.93 -0.55 Needs to fail JCI 80.70 -0.96 -0.13 -0.37 0.80 -0.80 No bounce LLL 42.43 -0.69 -1.29 0.05 0.66 -1.49 No bounce MTG 45.05 -1.01 -0.12 0.41 -0.01 -0.65 Treading water ***************************Advertisement*************************** Thinking of retiring to Hawaii? Or a second home in Paradise? Here's a rare Real Estate offering, not yet listed. Ideal for the successful trader who would like to live, work and play on Maui - America's Magic Isle. Maui's Most Private Property - A 4br country home surrounded by 50,000 acres of pristine open space. Spectacular views of pastures, cane fields, ocean and three islands. Described as the "Crown Jewel of Privacy" you can be here for months and never see a soul! The land adjoins a 600-acre pasture where Jimmy Hendrix held his last concert. Look out the windows in the early morning and you'll see a herd of cows, wild boar, axis deer, circling owls and hundreds of pheasant - but no people. Four phone lines, DISH, Sky Fiber broadband and Roadrunner available. For more on Maui's ultimate retreat see http://www.mauimansions.com/OIN ********************************************************************* *************** PLAY OF THE DAY *************** Put Play of the Day: ******************** Freddie Mac - FRE - close: 57.90 change: -1.45 stop: 60.00 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*************************** Thinking of retiring to Hawaii? Or a second home in Paradise? Here's a rare Real Estate offering, not yet listed. Ideal for the successful trader who would like to live, work and play on Maui - America's Magic Isle. Maui's Most Private Property - A 4br country home surrounded by 50,000 acres of pristine open space. Spectacular views of pastures, cane fields, ocean and three islands. Described as the "Crown Jewel of Privacy" you can be here for months and never see a soul! The land adjoins a 600-acre pasture where Jimmy Hendrix held his last concert. Look out the windows in the early morning and you'll see a herd of cows, wild boar, axis deer, circling owls and hundreds of pheasant - but no people. Four phone lines, DISH, Sky Fiber broadband and Roadrunner available. For more on Maui's ultimate retreat see http://www.mauimansions.com/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 05-25-2003 Sunday 3 of 5 In Section Three: Current Calls: AMGN, DISH, MEDI, OHP, QLGC New Calls: None Current Put Plays: AIF, GM, Gs, JCI, LLL, MTG New Puts: FRE, HDI ***************************Advertisement*************************** Thinking of retiring to Hawaii? Or a second home in Paradise? Here's a rare Real Estate offering, not yet listed. Ideal for the successful trader who would like to live, work and play on Maui - America's Magic Isle. Maui's Most Private Property - A 4br country home surrounded by 50,000 acres of pristine open space. Spectacular views of pastures, cane fields, ocean and three islands. Described as the "Crown Jewel of Privacy" you can be here for months and never see a soul! The land adjoins a 600-acre pasture where Jimmy Hendrix held his last concert. Look out the windows in the early morning and you'll see a herd of cows, wild boar, axis deer, circling owls and hundreds of pheasant - but no people. Four phone lines, DISH, Sky Fiber broadband and Roadrunner available. For more on Maui's ultimate retreat see http://www.mauimansions.com/OIN ********************************************************************* ****************** CURRENT CALL PLAYS ****************** Amgen, Inc. - AMGN - close: 61.79 change: -0.08 stop: 59.75 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: With the spotlight still on shares of DNA on Friday, the Biotechnology index (BTK.X) surged to $433, it's best close in over a year. But our AMGN play really didn't make much headway, remaining pinned just below the $62 level. Looking at the chart below, you can see that the stock is sandwiched between strong support provided by the 50-dma ($60.19) as well as the ascending trendline at $59.85, and the short-term descending trendline at $63. we're still looking for AMGN to continue its longer-term upward trend, but heading into the long weekend, the bulls just didn't have the conviction to get the job done. Dips back near the $60 level still look good for traders seeking a new entry point, with stops set just below the ascending trendline. We still need to see AMGN move and hold above the $63 level for confirmation that the bulls are willing to drive the stock to new highs for the year. The real key will be for a return of volume when traders get back to business as usual following the long weekend. 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= 6692 at $2.95 SL=1.50 BUY CALL JUN-65 YAA-FM OI=18363 at $0.55 SL=0.25 BUY CALL JUL-60 YAA-GL OI=41856 at $3.90 SL=2.50 BUY CALL JUL-65 YAA-GM OI=28418 at $1.30 SL=0.75 Annotated Chart of AMGN: Picked on May 11th at $61.24 Change since picked: +0.55 Earnings Date 07/22/03 (unconfirmed) Average Daily Volume = 10.7 mln Chart link: --- EchoStar Communications - DISH - cls: 31.49 chg: -0.75 stop: 29.99 Company Description: EchoStar Communications Corporation, through its DISH Network(TM), is a leading U.S. provider of satellite television entertainment services with 8.53 million customers. DISH Network provides advanced digital satellite television services to the home, including hundreds of video, audio and data channels, personal video recording, HDTV, sports and international programming, professional installation and 24-hour customer service. (source: company press release) Why We Like It: The relative strength shown in shares of DISH are pretty impressive. In six months time, the stock has appreciated by more than 50% and the trend doesn't show any signs of abating just yet. The stock broke out above the $30 level in early May just prior to its Q1 earnings report. The report was positive and a huge improvement over a year ago period. The stock spiked up again but then spent the next couple of weeks digesting gains. Considering that the broader markets were also consolidating some of their own gains, the weakness in DISH was rather muted. The stock eventually dipped to the $30 level again, but this time the level acted as support. Plus, bulls had the benefit of DISH's rising channel and its rising simple 50-dma. The stock bounced as expected. The dip on Friday looks like an entry point for new bullish positions. Yet if we're looking to buy the dip, considering looking for another pull back to the $30.00-31.00 area. This would significantly reduce any exposure with a stop at $29.99. Bulls also had reason to buy the stock yesterday after the company came to an agreement with 13 states over customer processing and advertising practices. Sure, EchoStar paid $5 million to make this decision but it probably saved them from a long and costly court battle. Suggested Options: We're going to list June, July and September call options but our favorites would probably be the July's as DISH's rising trend can be slow at times. Unfortunately, open interest appears to be rather small on July's right now. BUY CALL JUN 30.00 UAB-FF OI=5506 at $2.30 SL=1.15 BUY CALL JUN 32.50 UAB-FZ OI=2671 at $0.90 SL=0.45 BUY CALL JUL 30.00 UAB-GF OI= 661 at $2.95 SL=1.50 BUY CALL JUL 35.00 UAB-GG OI= 579 at $0065 SL=0.00 BUY CALL SEP 35.00 UAB-IG OI=1351 at $1.50 SL=0.75 Annotated Chart for DISH: Picked on May 21st at $31.10 Change since picked: +0.39 Earnings Date 05/06/03 (confirmed) Average Daily Volume = 3.3 million Chart link: --- MedImmune - MEDI - close: 33.84 change: -0.39 stop: 32.50*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: Initially, back in early April, we started MEDI as a "long-term" call play based on its steadily rising channel and the expectation that when the FDA approved its FluMist product the stock would appreciate even more. So far we're still waiting on that FDA approval, which is expected by the end of June. Unfortunately, the stock is starting to falter. It remains inside its rising channel but Wednesday's low was a bounce off the bottom and within 65 cents of our stop. Most of the technical indicators are negative and we don't like how it has fallen back under the $35 level. We are raising out stop to $32.50 and we're not suggesting any new plays unless shares close back above $35.00. Suggested Options: We're not suggesting any new plays at this time. Annotated Chart of MEDI: Picked on April 3rd at $34.31 Change since picked: -0.47 Earnings Date 04/23/03 (confirmed) Average Daily Volume = 3.9 million Chart link: --- Oxford Health - OHP - cls: 36.92 chg: +0.22 stop: 34.50*new* Company Description: Founded in 1984, Oxford Health Plans provides health plans to employers in New York, New Jersey and Connecticut, through its direct sales force and through independent insurance agents and brokers. Oxford's services include traditional health maintenance organizations, point- of-service plans, third-party administration of employer-funded benefit plans and Medicare+Choice plans. (source: company press release) Why We Like It: The path of least resistance appears to be "up" for OHP. The stock is sort of drifting higher as volume steadily declined ahead of the long holiday weekend. We're still positive on the stock but patient traders may want to wait for another dip before evaluating new long positions. We introduced the play last Tuesday evening after the entire group began showing incredible strength in the face of the broader market's weakness last Monday. OHP continues to show strength and it has the fundamentals to back it up. The latest earnings report gave management a chance to raise their full year guidance from $4.00-4.10 to $4.17-4.27. OHP claims recent trends have been positive with higher premiums and lower than expected medical costs. Our short-term target remains overhead resistance on the point- and-figure chart near $40.00 but we're raising our stop loss to $34.50. The $35.00 level was resistance the first half of May and shares bounced there once after breaking above its simple 200-dma. Another dip between $35.00 and $36.00 might be an effective entry point. Suggested Options: We're going to suggest June and August options. July options exist but the open interest has improved from almost zero to just a few dozen. This is one time we are going to list the 37.50 strikes instead of passing over them for round-number alternatives. BUY CALL JUN 35.00 OHP-FG OI=2340 at $2.65 SL=1.30 BUY CALL JUN 37.50 OHP-FU OI= 499 at $1.15 SL=0.50 BUY CALL AUG 35.00 OHP-HG OI=3219 at $3.60 SL=1.80 BUY CALL AUG 37.50 OHP-HU OI= 757 at $2.20 SL=1.10 Annotated Chart of OHP: Picked on May 20th at $36.51 Change since picked: +0.41 Earnings Date 05/05/03 (confirmed) Average Daily Volume = 857 thousand Chart link: --- QLogic Corp. - QLGC - close: 45.76 change: +0.63 stop: 43.00 Company Description: Somebody has to make the equipment that lets your computer talk to all its peripheral equipment, and QLGC does it well. A leading designer and supplier of semiconductor and board-level input/output (I/O) management products, QLGC has been providing SCSI-based connectivity solutions to this market sector for over 12 years. QLGC's I/O products provide a high performance interface between computer systems and their attached data storage peripherals, such as hard disk and tape drives, removable disk drives and RAID (redundant array of independent disks) subsystems. The company is also the market share leader in Fibre Channel host bus adapters, a market segment that is receiving tremendous attention from investors. Why we like it: Sometimes, timing is everything. After initiating coverage of QLGC on Thursday due to the bullish manner in which the stock has been trading, Morgan Keegan lent some support to the buyers this morning. The firm said its channel checks indicate a strong up- tick in Fibre Channel HBAs in the distribution channel. The firm stated that all the distributors with which it talked, said tht they have seen a willingness by customers to close large sized deals during the second quarter. Wow, maybe demand IS on the rise. That seems to have been the thought with investors on Friday, as the pushed the stock fractionally higher, even though the NASDAQ really made no discernable progress. Looking at the channel drawn on the chart below, it does seem that there are willing buyers, as they stepped up at the $44 level last week and kept the stock in its persistently rising channel. Subsequent pullbacks near the $45 level (also the site of the 20-dma) should provide solid entries into the play ahead of a continued rise towards our initial $48 target. Until QLGC can close back over the 10-dma ($45.83) and into the upper half of its channel, we're maintaining stops at $43. Suggested Options: Shorter Term: The June 45 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. Longer Term: Traders looking to capitalize on a rally back to the May highs and above will want to look to the July 47 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-42 QLC-FV OI=1146 at $4.20 SL=2.50 BUY CALL JUN-45 QLC-FI OI=6694 at $2.40 SL=1.25 BUY CALL JUL-45 QLC-GI OI=3876 at $3.60 SL=1.75 BUY CALL JUL-47 QLC-GW OI=2925 at $2.40 SL=1.25 Annotated Chart of QLGC: Picked on May 22nd at $45.13 Change since picked: +0.63 Earnings Date 07/29/03 (unconfirmed) Average Daily Volume = 6.82 mln Chart link: ************** NEW CALL PLAYS ************** None ***************************Advertisement*************************** Thinking of retiring to Hawaii? Or a second home in Paradise? Here's a rare Real Estate offering, not yet listed. Ideal for the successful trader who would like to live, work and play on Maui - America's Magic Isle. Maui's Most Private Property - A 4br country home surrounded by 50,000 acres of pristine open space. Spectacular views of pastures, cane fields, ocean and three islands. Described as the "Crown Jewel of Privacy" you can be here for months and never see a soul! The land adjoins a 600-acre pasture where Jimmy Hendrix held his last concert. Look out the windows in the early morning and you'll see a herd of cows, wild boar, axis deer, circling owls and hundreds of pheasant - but no people. Four phone lines, DISH, Sky Fiber broadband and Roadrunner available. For more on Maui's ultimate retreat see http://www.mauimansions.com/OIN ********************************************************************* ***************** CURRENT PUT PLAYS ***************** American Intl Group - AIG - cls: 54.99 chg: -0.81 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: Hmmm... we could be getting close. Bears probably smell a drop just around the corner. Shares of AIG have been stuck in a tight range, running along support for the last four sessions. Another move under $54.50 and we may have a winner. Of course there is the 50-dma to deal with, which is rising fast to meet AIG near $54.25. Yet if the stock can weaken enough to trade $54.00 then the crack in its armor may widen even more as a new PnF chart sell signal would emerge. Both AIG and the IUX insurance index have been trading sideways the last few weeks. This is a noticeable contrast to the bullish trends in the rest of the market. Multiple times now AIG has failed at its 200-dma but the $55 level has been support and limited losses. Sellers are working hard at that support and it could give way soon enough. We would not suggest any new plays unless you preferred a break down under the 50-dma or yet another failed rally near $58.00. Suggested Options: AIG has been rather hesitant to give up and break support but it is weakening. We're going to list the June's and an August as the July options still have low open interest. BUY PUT JUN 55 AIG-RK OI=7985 at $1.75 SL=0.85 BUY PUT JUN 50 AIG-RJ OI=7300 at $0.40 SL=0.00 BUY PUT AUG 50 AIG-TJ OI=8089 at $1.55 SL=0.75 Annotated Chart of AIG: Picked on May 20th at $54.94 Change since picked: -0.05 Earnings Date 04/24/03 (confirmed) Average Daily Volume = 7.2 Million Chart link: --- Goldman Sachs - GS - close: 76.15 change: +0.12 stop: 77.00 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: Stalled at resistance again, it is make or break time for our GS play. Last week's break below the $74 level looked like the technical sign of weakness we'd been waiting for, but the eager dip buyers thwarted any early bears. Over the past few days, the stock has been creeping back up to descending trendline resistance just below $77, and with the lack of volume in Friday's session, we're left with a rather muted picture to contemplate over the weekend. If GS rolls over here, it would be the 3rd consecutive lower high in as many weeks, confirming the premise of the play. The action in the Broker/Dealer index (XBD.X) seems to confirm a weakening picture, as this latest rebound seems to be stalling below that pivotal $465 level. Aggressive traders can consider new entries on another rollover below resistance, but must be cognizant of the proximity of our $77 stop. Note the location of the 50-dma on the chart below, which seems to indicate that was what provided support for the latest bounce. That means that traders looking to enter on a breakdown will want to see a violation of both $74 and the 50-dma before taking the plunge. Suggested Options: Short-term traders will want to focus on the June 80 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 75 Put or even the July 75 put, which provides greater insulation from the spectre of time decay. BUY PUT JUN-80 GS-RP OI= 802 at $4.60 SL=2.75 BUY PUT JUN-75 GS-RO OI=6070 at $1.70 SL=0.75 BUY PUT JUL-75 GS-SO OI=8626 at $2.80 SL=1.40 Annotated Chart of GS: Picked on May 8th at $74.06 Change since picked: +2.09 Earnings Date 06/19/03 (unconfirmed) Average Daily Volume = 4.38 mln Chart link: --- Johnson Controls - JCI - close: 80.70 change: -0.43 stop: 83.00 Company Description: Johnson Controls, Inc. is engaged in automotive systems and facility management and control. In the automotive market, the company is a major supplier of seating and interior systems and batteries. For non-residential facilities, JCI provides building control systems and services, energy management and integrated facility management. Why we like it: After the big selloff early last week on the downgrade of the auto supplier stocks, it seemed JCI would see its price fall into the $70s before the week was out. But the dip-buyers are still out in force, and they staked their claim in the stock at the 200-dma near $80, providing a mild bounce. Over the past few days, the stock has been chopping along between $80-82. that range was even tighter on Friday, as volume came in at an anemic 30% of the ADV. The tight price action produced an inside day, and the direction that price breaks from that pattern next week should be instructive. A failure to move through the $82 level can be used for aggressive entries, while those looking for confirmation before playing will want to see a breakdown under $79.80 (under both last week's intraday low and the 200-dma). Until price action unfolds next week, we're maintaining our stop at $83. Suggested Options: Short-term traders will want to focus on the June 85 Put, as it will provide the best return for a short-term play. Those looking for a larger move down towards the $78 level will want to utilize the July 80 Put, which provides greater insulation from the spectre of time decay. BUY PUT JUN-85 JCI-RQ OI= 30 at $5.00 SL=3.00 BUY PUT JUN-80 JCI-RP OI=1660 at $1.90 SL=1.00 BUY PUT JUL-80 JCI-SP OI= 160 at $2.80 SL=1.40 Annotated Chart of JCI: Picked on May 18th at $81.61 Change since picked: -0.91 Earnings Date 07/15/03 (unconfirmed) Average Daily Volume = 636 K Chart link: --- L-3 Communications -LLL - close: 42.43 change: -0.12 stop: 45.00 Company Description: As a leading supplier of sophisticated secure communication systems and specialized communication products, LLL provides critical elements of virtually all major communication, command and control, intelligence gathering and space systems. The company's high data rate communication, avionics, telemetry and instrumentation systems and components are used to connect a variety of airborne, space, ground-based and sea-based communication systems. Why we like it: As the week went out with a whimper, our LLL play spent the day drifting in a minuscule 55-cent range on anemic volume. It's hard to draw any conclusions from that sort of price action, and hopefully the return of volume next week will provide the necessary clarity. LLL still looks weak, as it never really staged a meaningful rebound from the breakdown under the $43.50 support level. Despite that lack of strength, the 50-dma ($41.64) did provide support over the past few days and we'll need to see a breakdown under that average to confirm a continuation of the fledgling downward move. Our entry strategy remains unchanged, as we want to take advantage of a failed rebound below $43.50 to initiate new positions. Alternatively, a breakdown under $41.60 can be used for momentum entries, with an initial target of $40. Until LLL breaks from its current consolidation, we're maintaining a liberal stop at $45, just over the 200-dma. Suggested Options: Short-term traders will want to focus on the June 45 Put, as it will provide the best return for a short-term play. Those looking for a larger move down towards the $40 level (or below) will want to utilize the July 40 Put, which provides greater insulation from the spectre of time decay. BUY PUT JUN-45 LLL-RI OI=482 at $3.20 SL=1.50 BUY PUT JUN-40 LLL-RH OI=951 at $0.70 SL=0.35 BUY PUT JUL-40 LLL-SH OI=639 at $1.20 SL=0.60 Annotated Chart of LLL: Picked on May 20th at $41.94 Change since picked: +0.49 Earnings Date 07/22/03 (unconfirmed) Average Daily Volume = 1.41 mln Chart link: --- MGIC Invest. Corp. - MTG - close: 45.05 change: +0.00 stop: 47.00 Company Description: MGIC Investment Corporation is a holding company that, through its wholly owned subsidiary, Mortgage Guaranty Insurance Corporation (MGIC), is a provider of private mortgage insurance coverage in the United States to the home mortgage lending industry. Private mortgage insurance covers residential first mortgage loans and expands home ownership opportunities by enabling people to purchase homes with less than 20% down payments. Private mortgage insurance also facilitates the sale of low down payment mortgage loans in the secondary mortgage market, principally to the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Why we like it: In what is becoming a rather annoying habit, MTG continues to vacillate about its 200-dma (currently $44.68) on light volume. this incessant choppy trade will eventually come to an end, and based on the stock breaking and staying below its ascending trendline last week, we continue to think down is where it is headed. That said, the stock is going to need to break below the $44 level to provide confirmation of its bearish intentions. Traders still looking for an entry into the play will want to look for a failed rebound below the broken trendline (now at $45.65) and just below the site of the declining 10-dma ($45.77). MTG is at a crossroads and now we wait for price action to either prove our view correct or incorrect. Patience with entries is warranted. Stops are still set rather wide at $47. Suggested Options: Short-term traders will want to focus on the June 45 Put, as it will provide the best return for a short-term play. Those looking for a larger move down towards the $40 target will want to utilize the September 45 Put, which provides greater insulation from the spectre of time decay. Note that the open interest is largest on the June 45 strike, so that one will likely provide the best liquidity. BUY PUT JUN-50 MTG-RJ OI= 5 at $5.40 SL=3.50 BUY PUT JUN-45 MTG-RI OI=611 at $2.00 SL=1.00 BUY PUT SEP-45 MTG-UI OI= 82 at $4.00 SL=2.50 Annotated Chart of MTG: Picked on May 15th at $45.21 Change since picked: -0.16 Earnings Date 07/15/03 (unconfirmed) Average Daily Volume = 1.08 mln Chart link: ************* NEW PUT PLAYS ************* Freddie Mac - FRE - close: 57.90 change: -1.45 stop: 60.00 Company Description: Freddie Mac is a stockholder-owned corporation chartered by Congress in 1970 to create a continuous flow of funds to mortgage lenders. By supplying lenders with the money to make mortgages and packaging the mortgages into marketable securities, Freddie Mac sustains a stable mortgage credit system and reduces the mortgage rates paid by homebuyers. Over the years, Freddie Mac has opened the doors for one in six homebuyers in America and two million renters. (source: company press release) Why We Like It: Normally, one would think that a mortgage lender like FRE would be benefiting from the low mortgage rates, high number of applications and refinancings. Actually, those refi's are hurting FRE's business. Freddie Mac's main rival is another government-sponsored lender, Fannie Mae (FNM). FRE has been losing market share to FNM. One analyst speculated that FNM took in 74% of the new business in April. Plus, FRE's MBS (mortgage- backed securities) are facing a higher rate of early payments. Without going into too much detail, when FRE's home loans get paid back early due to refinancing their MBS become less attractive to the bond investors who buy them because these investors lose out on the expected interest income. FRE's two biggest lenders have been aggressively encouraging their customers to refinance. Fannie Mae works with a larger number of lenders so the refi-boom doesn't hurt it quite as badly. Wall Street has been well aware of the difference between FRE and FNM lately and shares of FRE show it. Freddie Mac actually tried to soothe investor's fears with a three-part strategy to address the market share issue. It seemed almost humorous to see FRE try and scare up new business with a round of press releases a few days later. These releases were warning U.S. banks that they'd better prepare for the inevitable rise of interest rates in the next 9 to 12 months and FRE will be here to help them by buying their mortgage loans. Investors appear to be ignoring the new strategy. The stock has been in a rising channel (like most of the market) since early March. The stock tried to remain in that channel on Thursday with a nice bounce off the bottom and its 200-dma. Unfortunately, that failed with a gap down today and a close under the 200-dma and under the $58.00 level. The stock's PnF chart also looks pretty negative with a clear failure at overhead resistance and plenty of room to fall. The stock's 50-dma might offer some support but shares have pretty much ignored it for the last few months. Our short-term target would be $54.00 but if you look at the weekly, shares may have farther to go. We'll start the play with a stop at $60.51. Suggested Options: We're going to list June, July and October options but our suggestion would probably be the July's. This give us more time and the strikes have higher open interest. BUY PUT JUN 60 FRE-RL OI= 704 at $3.00 SL=1.50 BUY PUT JUL 60 FRE-SL OI=1565 at $3.70 SL=1.70 BUY PUT JUL 55 FRE-SK OI=1530 at $1.40 SL=0.80 BUY PUT OCT 55 FRE-VK OI=1290 at $2.75 SL=1.35 Annotated Chart of FRE: Picked on May 25th at $57.90 Change since picked: -0.00 Earnings Date 07/00/03 (unconfirmed) Average Daily Volume = 3.4 Million Chart link: --- Harley Davidson - HDI - close: 40.81 change: -2.47 stop: 43.75 Company Description: Harley Davidson is best known for its popular line of touring, custom and performance motorcycles. The Motorcycle and Related Products division designs, and sells the popular line of motorcycles, as well as a complete line of motorcycle parts, accessories and general merchandise. HDI's other segment, Financial Services, engages in the business of financing and servicing wholesale inventory receivables and consumer retail installment sales contracts (primarily motorcycles). Additionally, this division acts as an agency for certain unaffiliated insurance carriers to provide property/casualty insurance and extended service contracts to motorcycle owners. Why we like it: In the wake of the 9/11 attacks, the major auto manufacturers ushered in a series of incentives to keep consumers buying their products. In the past 20 months, these companies have figured out that they can't relax the incentives without losing market share. At the same time, they are finding that they can't raise prices enough to offset the additional costs, with the result that profits have been falling. Investors couldn't help feeling that they were experiencing a bout of deja vu on Friday as shares of HDI were down sharply following a research note out from UBS Warburg. In a survey this weak of 20 dealers, the firm learned of a financing promotion being offered across the US - 0% down on V-Rods. So it appears that the spending slowdown in the consumer sector is even starting to be felt by manufacturers of high-end products that have normally been more economically insensitive. The price chart speaks volumes, with Friday's 5.7% decline slicing through the $42 support level, the 50-dma ($41.73) and the ascending trendline from the March lows (currently $41.25). While the selloff wasn't quite enough to create a new PnF Sell signal, it was close. For that development, HDI will need to trade $40, and Friday's intraday low was $40.24. The gap left behind on Friday should present solid resistance in the $42.25- 43.00 area, and a reaction bounce anywhere near that level would be a gift of an entry point. More realistically, we'll likely have to settle for a bounce failure near the 50-dma. Due to the fact that HDI has already penetrated its lower Bollinger band, chasing the stock lower at this point does not make sense -- we need to wait for the rebound first. Once below $40, HDI will likely find some mild support near $39 on its way to our eventual target in the 436-37 area, where the stock found support in March and April. Our stop is initially set at $43.75, just above Thursday's intraday high and the 10-dma. Suggested Options: Short-term traders will want to focus on the June 42 Put, as it will provide the best return for a short-term play. Those looking for a larger move down below the $40 level will want to utilize the July 40 Put, which provides greater insulation from the spectre of time decay. BUY PUT JUN-42 HDI-RV OI=3465 at $2.50 SL=1.25 BUY PUT JUN-40 HDI-RH OI=2259 at $1.20 SL=0.60 BUY PUT JUL-40 HDI-SH OI= 71 at $1.80 SL=0.90 Annotated Chart of HDI: Picked on May 25th at $40.81 Change since picked: +0.00 Earnings Date 07/16/03 (unconfirmed) Average Daily Volume = 2.55 mln Chart link: ***************************Advertisement*************************** Thinking of retiring to Hawaii? Or a second home in Paradise? Here's a rare Real Estate offering, not yet listed. Ideal for the successful trader who would like to live, work and play on Maui - America's Magic Isle. Maui's Most Private Property - A 4br country home surrounded by 50,000 acres of pristine open space. Spectacular views of pastures, cane fields, ocean and three islands. Described as the "Crown Jewel of Privacy" you can be here for months and never see a soul! The land adjoins a 600-acre pasture where Jimmy Hendrix held his last concert. Look out the windows in the early morning and you'll see a herd of cows, wild boar, axis deer, circling owls and hundreds of pheasant - but no people. Four phone lines, DISH, Sky Fiber broadband and Roadrunner available. For more on Maui's ultimate retreat see http://www.mauimansions.com/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 05-25-2003 Sunday 4 of 5 In Section Four: Leaps: Complacency Reigns Traders Corner: Trading's Defective Detective Searches For Potential Trades Traders Corner: Alternation Traders Corner: Where is the Dow Going? Futures Corner: The Good and Bad of Scalping Futures ***************************Advertisement*************************** Thinking of retiring to Hawaii? Or a second home in Paradise? Here's a rare Real Estate offering, not yet listed. Ideal for the successful trader who would like to live, work and play on Maui - America's Magic Isle. Maui's Most Private Property - A 4br country home surrounded by 50,000 acres of pristine open space. Spectacular views of pastures, cane fields, ocean and three islands. Described as the "Crown Jewel of Privacy" you can be here for months and never see a soul! The land adjoins a 600-acre pasture where Jimmy Hendrix held his last concert. Look out the windows in the early morning and you'll see a herd of cows, wild boar, axis deer, circling owls and hundreds of pheasant - but no people. Four phone lines, DISH, Sky Fiber broadband and Roadrunner available. For more on Maui's ultimate retreat see http://www.mauimansions.com/OIN ********************************************************************* ***** LEAPS ***** Complacency Reigns By Mark Phillips mphillips@OptionInvestor.com What other explanation can there be for the action in the broad markets last week? Bond yields plunged to new 45-year lows, while the dollar index (DX00Y) tanked to its lowest level since late 1998 on Friday. How did investors respond? By buying the dips aggressively and driving the VIX back near the 21 level (actually 21.38) at Friday's close. Every talking head I listened to over the past few days was pounding the table about how we are in a new bull market. Maybe we are, but I'm going to require a lot more proof than what I've seen lately. Apparently, it is deemed that all the economic stimulus, along with the approved tax cut and super-low interest rates (which are expected to go lower soon) is supposed to be enough to stimulate improved business spending, hiring and improved profits due to something other than reducing expenses (read: firing employees). Call me a jaded cynic, but I've heard this same song and dance too many times in the past few years to believe it quite so easily. There is just no evidence that economic conditions are doing anything better than just "not getting worse". Sure the market is a discounting mechanism, so it is looking forward to future growth that maybe we can't see, but it has done that on several occasions in the past 3 years, and in every case it has been a painful experience for those that have heeded the siren's song. I've harped on this a lot lately, but we've got elevated bullish percent readings, a VIX which is very near levels that indicate a near-term market top, all the major indices have weekly Stochastics oscillators that are looking toppy in overbought territory and sentiment is skewed way too far into the bullish camp. As of last week, the latest from Investor's Intelligence shows the bullish advisors registering at 56%, while the bearish contingent has dropped to 20.9%. That's the most bullish reading for this group in 15 years! Just in the way of providing the updated benchmark on bullish percents, here's where the major indices rest as of Friday's close. NASDAQ-100 - 78% (12/02 high of 82%) NASDAQ Composite - 60.50% (highest reading going back to 1996) DOW - 70% (5/22/03 high = 73%, 11/02 = 73%, 4/02 = 76%) S&P 500 - 68.2% (12/02 high of 68%, 3/02 high of 77%) S&P 100 - 66% (12/02 high of 76%, 3/02 high of 79%) In all cases, the major indices BP is either in or very near overbought territory, but with further upside possible from a historical standpoint. The one notable exceptions is the COMPX, which is currently sporting its highest BP reading ever. I've mentioned this before, but I invite you to go over to stockcharts and look at the SharpChart for each of these bullish percent readings. In every case, the bullish percent is starting to flatten out, and is threatening to cross down below the 10-dma. Here's the link I use, for your convenience. http://stockcharts.com/def/servlet/SC.web?c=$bpspx,uu[w,a]dacaynay[dd][pb10][iLd20]&pref=G Here are the pertinent Bullish Percent symbols. DOW - $BPINDU SPX - $BPSPX OEX - $BPOEX NDX - $BPNDX COMPX - $BPCOMPQ As we've been discussing lately, I believe the markets are very near an important top (if they haven't already printed their highs) and it is time to position for the impending decline. As the old saying goes, "a picture is worth 1000 words" and I think this chart of the S&P 500 (which we've looked at numerous times over the past couple months) does a great job of conveying the big picture. Weekly Chart of the S&P 500 As you can see, we have yet to actually touch the top of that long-term descending channel (Log chart) and the weekly Stochastics are now deep into overbought territory. Potentially tilting things even further in the bears' favor, the higher high in the oscillator has not been confirmed by a higher high in price. That's classic bearish divergence, and now the SPX would have to trade an intraday high of at least 954.29 to break the divergence setup. Combined with all the other indications of a top-heavy market, there's very little to be gained by trying to play the upside in this market, except perhaps in some very narrow areas like the Biotechs, which are less sensitive to the overall economy and market fluctuations. As such, that is the way we've positioned our Watch List and Portfolio, with AMGN being our one remaining bullish play. Portfolio: AIG - I was feeling a bit nervous about AIG last weekend, as I noted in my commentary. And why not? The stock was pressing right up against the $58 level and threatening to challenge its recent highs. But then came Monday's selling frenzy, driving the stock back under $56 and I could breathe a sigh of relief. I like the way the 200-dma provided a firm top on the latest rebound attempt, but what I like even better is the way AIG diverged from the rest of the market in the latter half of the week. The SPX pushed back over the 930 level, and AIG closed back under $55, it's lowest close since April 25th. There's still some downside work to be done before we can start getting comfortable, but things are starting to work in our favor, especially with the weekly Stochastics now rolling down out of overbought territory. Next we need to see a close under $54.50, but the real test will come at the 50-dma (currently $54.21). A close below that level will give us the ability to tighten our stop to $59, just above the April highs. Watch List: NEM - There's nothing much to say here. We missed what I think was the ideal entry point back in the $25 area, and the stock has continued its relentless climb without us. For those that may have taken an entry into the play, I would suggest keeping stops rather tight (no lower than $28), as the stock is currently testing major resistance at $30. Not only that, but there is bearish divergence showing up on the daily Stochastics. I'm still going to leave NEM on the Watch List so that we can enter on the next oversold alignment on the Weekly Stochastics, but no entry action is advised until we see the next round of profit taking play out. AMZN - Finally, an entry. See below for details. DJX - The DOW was certainly looking a bit top-heavy a week ago, and the expected decline unfolded on Monday. But that was about all the bears could manage and the DJX spent the rest of the week clawing its way back up the chart. That plays right into our strategy, as next week could see the index pushing up into our desired entry zone. DOW Bullish Percent is getting extended here, dropping back from 73% to 70% on Friday and the VIX is back near the 21 level. All we need is one more surge higher and our entry target will be achieved. I don't expect the DJX to immediately fall apart, as there is still too much bullishness in the market, but a surge up to the $88-89 area should provide a very favorable long-term bearish entry point. GS - Still weakening and the decline early in the week was enough to trigger entry. Details below. AMGN - That didn't take long! A perfect entry setup on Wednesday was just too good to pass up. See below for all the details. Closing Thoughts: It was a very busy, although somewhat trying week with volatile chop in both directions, but in the end all of the major indices lost ground. Not much and we really haven't seen any significant internal weakening, as bullish percents remain quite high, as does the ratio of new highs to new lows that Linda and Jeff have been analyzing for us in the past week or so. Just to provide some perspective on my state of mind, here's a snapshot of what I've been doing with my own investments. I took advantage of the recent market strength to make some important moves in my own long-term holdings, as well as those of my family. All of the equity holdings (except for those related to gold and utilities) in my IRA, my wife's IRA, and my mother's 401K were moved to cash last week. Additionally, I finally convinced my dad to sell a sizeable chunk of his CSCO that he's been holding since the top in 2000. I don't mean this as a call to everyone to go out on Tuesday and liquidate all their equity holdings. What works for me, may not be appropriate for you. But I provide this personal snapshot in hopes that it will allow you to gain a greater understanding of my thinking. While I could be absolutely wrong and the market's are setting up to continue up the charts, in my opinion the risk of remaining in bullish long-term positions under the current extended technical conditions far outweighs the potential opportunity cost of a continued rally from here. Having that part of my financial life taken care of gives me the peace of mind and clarity of thought to pursue the more aggressive strategies that we employ here in the Land 'O LEAPS. One more thing before I sign off. You may start to notice some symbol changes on the '04 LEAPS either in the past couple weeks, or in the one to come. This is being done to make way for the 2006 LEAPS, which ought to begin to be issued in the next week or so. I need to do some digging next week to determine what the actual schedule will be this year, and I'll provide a complete roadmap next weekend. Have a great and safe weekend and don't forget to give thanks for those that have gone before us, ensuring that we have the freedom to pursue all the wonderful opportunities provided in this great country! Have a great week! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: AMGN 05/21/03 '04 $ 60 YAA-AL $ 7.00 $ 7.60 + 8.57% $58.50 '05 $ 60 ZAM-AL $10.90 $12.20 +10.66% $58.50 Puts: AIG 04/24/03 '04 $ 55 LAJ-MK $ 5.60 $ 5.50 - 1.79% $61.00 '05 $ 55 ZAF-MK $ 8.50 $ 8.50 + 0.00% $61.00 GM 05/13/03 '04 $ 35 LGM-MG $ 4.10 $ 5.30 +29.27% $36.50 '05 $ 30 ZGM-MF $ 4.60 $ 5.60 +21.74% $36.50 KO 05/15/03 '04 $ 40 LKO-MH $ 1.70 $ 1.85 + 8.82% $47.00 '05 $ 40 ZKO-MH $ 3.85 $ 4.00 + 3.90% $47.00 AMZN 05/20/03 '04 $ 30 ZQN-MF $ 4.10 $ 3.60 -12.20% $34.50 '05 $ 30 ZWE-MF $ 6.90 $ 6.50 - 5.80% $34.50 GS 05/20/03 '04 $ 75 KGS-MO $ 7.20 $ 6.50 - 9.72% $78.50 '05 $ 75 ZSD-MO $11.80 $10.50 -11.01% $78.50 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 AMGN 05/18/03 $59-60 JAN-2004 $ 60 YAA-AL CC JAN-2004 $ 55 YAA-AK JAN-2005 $ 60 ZAM-AL CC JAN-2005 $ 55 ZAM-AK PUTS: DJX 05/04/03 $88-89 DEC-2003 $ 84 DJX-XF DEC-2004 $ 84 YDJ-XF QQQ 05/25/03 $29 JAN-2004 $ 27 KLF-MA JAN-2005 $ 27 ZWQ-MA New Portfolio Plays AMGN - Amgen $60.69 **Call Play** That was a bit quicker than expected, but AMGN provided the perfect entry point on Wednesday, and it was too good to pass up. We were looking for a rebound from the $59-60 area, and with a dip to $59.89 and rebound back over $60, AMGN looked solid in a rather weak market. Of course it didn't hurt that the rebound came right at the 50-dma (then at $59.96) and just above the 8-month rising trendline, which is now at $59.85. Helping out the bulls last week was the Biotechnology index (BTK.X), which vaulted to a new high for the year ($433) on Friday after confirming the $400 level as new-found support. With weekly Stochastics already turning down from overbought, this play is a deviation from our normal strategy in the LEAPS column, which is to buy when the oscillators are turning bullish. But every prior bearish Stochastics signal since last spring has been an invitation for the bulls, with each successive dip growing shorter and shallower. AMGN looks like it still has room to run, especially now that it is solidly above its long-term descending trendline. There is substantial resistance to deal with, first at $64, then $67-68 and finally at $70. The PnF chart is still bullish, with a price target of $72, and we're going to see if it can get there. Due to the aggressive nature of the play and the possibility for some near-term weakness, I'm setting a fairly wide stop at $57, just below the consolidation zone from March. BUY LEAP JAN-2004 $60 YAA-AL $7.00 BUY LEAP JAN-2005 $60 AZM-AL $10.90 AMZN - Amazon.com $31.56 **Put Play** Ah, regret. Last week, I decided to set a lower entry target on our AMZN play, just so we wouldn't miss out on our entry. well Monday's selloff did the trick, dropping the stock below the support that had built up the prior week and it looked like the selloff was underway. But the dip buyers showed up, seemingly without a care in the world and by the end of the week had pushed AMZN back near the $33 level. Despite the fact we may not have gotten the best entry point, I still like this as a point to stake our claim on the downside. Traders that didn't take the entry on that breakdown can look to enter on any signs of weakness next week. Make no mistake, this is an aggressive play, as we're attempting to pick a top in a stock that has shown a lot of technical strength for the past several months. But it is deep in overbought territory as measured by weekly Stochastics and has gotten a bit far ahead of its 50-dma, which is clear down at $28.13. A retracement back to that level (also the top of the post-earnings gap) will be our first target, and then we can re- evaluate its further downside potential. Note that the symbol has changed for the '04 LEAP. This was done by the CBOE to make way for the issuance of the '06 LEAPS, which should be showing up in the next week or so. Our initial stop will be set at $34.50, which ought to provide enough room for the stock to vacillate near its recent highs (and possibly exceed them slightly) without being stopped out before the decline begins in earnest. BUY LEAP JAN-2004 $30 ZQN-MF $4.10 BUY LEAP JAN-2005 $30 ZWE-MF $6.90 GS - Goldman Sachs $74.35 **Put Play** False breakdowns were more common than ants at a summer picnic last week, as Monday's decline caused a lot of apparent breakdowns that were subsequently bought by eager bulls. Our GS play was just one of the many, as Monday's slide looked like the real deal. Follow through selling on Tuesday finally breached the $74 level, but buyers snapped up shares at the end of the day, levitating price back over that $74 level. In retrospect, it appears the 50- dma ($73.36) was the trigger point for the buyers to come in and we'll need to see a close below that average before the decline can really get underway. Despite that temporary setback, there are several encouraging signs for our play. First off, the pattern of lower highs from late April is still intact and weekly Stochastics have already entered their bearish decline phase. Additionally, the action last week in the Broker/Dealer index (XBD.X) looks supportive of the bears' case, as after Monday's plunge, the index was unable to reclaim the $465 support/resistance level. Light volume throughout the latter half of last week does make the price action rather difficult to read, but we should get some confirmation over the next week. Traders still on the sidelines may want to use another failure near $77 with the XBD holding below $465 to initiate new positions early next week. While it is a bit more liberal than I normally like, I don't want to be prematurely stopped out of this play, so I'm setting the stop initially at $79, just above the April intraday highs. BUY LEAP JAN-2004 $75 KGS-MO $ 7.20 BUY LEAP JAN-2005 $75 ZSD-MO $11.80 New Watchlist Plays QQQ - NASDAQ-100 Trust $28.13 **Put Play** Judging by the amount of email on the subject, many of you are wondering why we don't have a QQQ Put play on the Watch List to go along with the DJX play. Well, wonder no more! As noted several times in recent months, I expect the NASDAQ to perform better than the rest of the market for the remainder of the year. But that doesn't mean QQQ won't be susceptible to the downside over the near to intermediate term. With price testing its recent highs, the NDX bullish percent starting to look top-heavy just below 80% and the VXN (NASDAQ Volatility index ) closing at a new all-time low of 29.73 on Friday, conditions seem ripe for a bearish play in the Technology sector. Picking the entry point is always a challenge, but I think we can apply the same strategy as we've focused on for the DJX. Weekly Stochastics are already starting to show a bit of weakness up in overbought and weekly MACD is starting to flatten just above the zero line. There is significant historical resistance in the $28-30 area, and with the QQQ already so overbought and bullish percent so high, this looks like a good area in which to target new entries. The $30 level roughly equates to 1600 on the NASDAQ Composite, which is a pivotal level as well, going all the way back to the summer of 1997. Lacking a strong catalyst, the NASDAQ should not be able to sustain a move above this area without a substantial pullback first. Note that we're going to be more aggressive with our entry strategy on this play, looking to enter into strength rather than wait for a decline to prove weakness before entry. I'm looking for a move back to the $29 level to signal an entry point, and we'll set a rather liberal stop up at $31. BUY LEAP JAN-2004 $27 KLF-MA BUY LEAP JAN-2005 $27 ZWQ-MA Drops EMC - $9.30 After numerous forays above the $10 level, taunting us with the prospect of a move higher up the chart, EMC finally succumbed to weakness on Monday, falling under the weight of the broad market. While I won't complain too loudly after a solid play like that, I do wish it would have given us that one more push up towards $11 first. But our position management approach worked like a charm. As we got closer and closer to our desired profit target, we kept tightening the stop, forcing EMC to either pop to the target or stop us out. Either way, we win. The stock only moved $2.34 between our entry point and exit point, but it really puts things in perspective when you realize that was a 34% rise in the stock. Boy, I wish I could do that every week! But it feels good, regardless of the regularity. 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For more on Maui's ultimate retreat see http://www.mauimansions.com/OIN ********************************************************************* ************** TRADERS CORNER ************** Trading's Defective Detective Searches For Potential Trades By Mike Parnos, Investing With Attitude I'll order a MACD with extra cheese. When on vacation, I may surf an Elliott Wave (with my water wings, of course) and dine on some Fibonacci pasta (with Alfredo sauce). I may go to a Bollinger Band concert. I'll take a walk on the Wilder's Index side. I'll decline any advance lines. My relatives have no strength and I try to slow down my Stochastics (I'm not as young as I used to be). Many readers have inquired about how I select CPTI trades – the process and methods of entry. Well, like everything else in life, I try to keep it simple. There's no secret ingredient. It's not an exciting process. If there was, I'd bottle it and sell it. If people will pay $6 for a bottle of water and $5 for a cup of coffee, just think what they'd cough up for a magic trading formula. ______________________________________________________________ Let The Games Begin I don't have any of those sophisticated software programs that have elaborate screens that tell you the top ten of this or the bottom five of that. Granted, it's nice to have, but there's plenty of free information on the Internet. It may take a few extra clicks, but so what? Call me a cheap S.O.B. I've been called worse (and often). Each Stock Chart Is Like A Painting Like many of you, I only have very basic charting knowledge and I'm a very visual guy. I can recognize support and resistance lines. I can draw a mean trend line (up OR down. I'm very versatile). I've been known to look at moving averages – some simple, and even some exponential (when I'm in the right mood). I know about ascending and descending triangles. I can see consolidations and breakouts. All of the above pieces of information help us paint a picture – worth 1,000 words. These pictures can have predictive qualities. If the planets align, the chart can give us a glimpse into the future. But, beware! They've been known to speak with forked tongue. Therein lies the risk. Free Internet Charts Three of the easy to use free (the price is right) charting sites I use are: www.askresearch.com www.bigcharts.com www.stockcharts.com These are interactive charts that enable you to put in various moving averages and some of those other complicated indicators. Plus, these sites have links to other valuable information about the stocks or indexes you're checking out. There are other sites as well. Just do a little Googling and clicking. Getting Familiar With Your Underlying (it's OK if you do it in private) You'll notice that, in the CPTI portfolios over the past months, we have a tendency to use many of the same stocks/indexes again and again. Why? Because by watching the day to day movement of a stock or index, you get a feeling for how they react to the markets, the daily trading ranges, likelihood of gaps, etc. You'll get to know them better than your spouse(s). Then, though they may be tempermental and have monthly mood swings, you can choose your time and level of involvement – with no hard feelings or child support should you choose to exit early. We've used indexes (SPX, OEX, QQQ, BBH, SMH). Why? Because of their diversification, they're less vulnerable to severe movement – which is ideal for our conservative neutral premium selling style of trading. Certain stocks are slightly more predictable than others (MMM, MSFT). So, I first look to our old favorites to see if they're at one end of their trading range or the other or in the middle. Then I look to see if there are any visible patterns – either formed or forming. There's a good chance that one, or more, of them can be considered. Next, I do some numbers crunching to see which strategies make sense and which one will give me the best return along with a minimal amount of risk. You'll find end of day option quotes at www.cboe.com (an excellent and informative site). What strategy should we use? Iron condor, baby condor, minage-a-qua, straddle, strangle, horizontal calendar spread, diagonal calendar spread. They're all possibilities. If you've been following the CPTI columns, you should be pretty familiar with our strategies. If not, we'll be going over them again and again until you're comfortable with each one. Into The Confessional I Go OK. Let the truth be known. I watch CNBC sometimes. I also watch the Fox News Network on Saturday mornings from 10-12 a.m. (Eastern Time). I listen for ideas. There are usually plenty of them. I make notes. Then I pull up the charts and make my own decision. They're leads, that's all. Only a few pan out. In Summary I told you it wasn't complicated. It might take some time going through the charts, but it's based on some basic chart reading. Either get up off the couch or slide the computer over. Order some Chinese food and go to work. Look for areas of strong support or strong resistance in the stocks (or indexes). If you find both on one chart, you may be able to put on an iron condor – if the premiums are worthwhile. You know the criteria for the other strategies. Look at the charts one by one. Take your time. Don't ever force a position or compromise and put on a position because it offers a lot of premium. That's a tragedy waiting to happen. Remember that safety should be our primary consideration. _____________________________________________________________ Unofficial CPTI Replacement Position QQQ Strangle Let's have some fun – some cheap fun. We haven't done this before. Cheap fun is usually the best kind. If it doesn't cost a lot, we don't have unrealistic expectations. Buy 10 contracts of the QQQ June $31 calls @ $.10 Buy 10 contracts of the QQQ June $25 calls @ $.10 Total debit is only $200. Pretty cheap, huh? We're playing for a big move in the QQQs. If the QQQs move $3-4 in the next few weeks, our long put or call (depending on the direction of the move) could easily be worth $.75 - $1.25. We're only risking a total of $.20. That would be a nice return – IF it happens. If not, que sera sera – whatever will be will be. For greater risk takers (speculators), you can buy closer strikes. The $26 put and the $30 call would $.20 each or a total of $.40 ($400 for 10 contracts. The benefit is that the delta is slightly higher and a smaller move would be necessary to get into the profit zone. This is not an official CPTI position. We'll go with the four we have remaining. But this could be fun – and profitable. ______________________________________________________________ CPTI JUNE POSITION UPDATE June Position #1 – SPX Iron Condor – Currently at 933.22. We sold 5 contracts of SPX June 995 calls and 5 contracts of SPX June 895 puts. For protection we bought 5 contracts of SPX June 1010 calls and 5 contracts of SPX June 880 puts. Total net credit of $2.90. We're giving the S&P 500 a 100-point range. We'll get our maximum profit of $1,450 if SPX closes within a huge 895 to 995 range. Our exposure is $12.10 ($15 points less the $2.90 credit). If it works, it's about a 24% return on risk. ____________________________________________________________ June Position #2 - BBH Iron Condor – Gapped up Monday before the open and was aborted. _____________________________________________________________ June Position #3 – TOL – Bear Call Spread Plus – Currently at $27.53 Sell 10 contracts of June TOL $25 calls @ $1.40 Buy 20 contracts of June TOL $30 calls @ $.15 Net credit of $1.10 We're slightly bearish on the housing market and believe TOL will finish below $25. But, just in case we're wrong, we're buying 10 additional contracts of the $30 calls to protect ourselves. You might even be able to get the $30 calls for $.10 instead of $.15 on Monday. Maximum potential profit is $1,100. ______________________________________________________________ June Position #4 – COF Iron Condor – Currently at $44.95 Sell 10 contracts of June COF $47.50 calls @ $1.55 Buy 10 contracts of June COF $50 calls @ $.95 Net credit of $.60 Sell 10 contracts of June COF $40 puts @ $1.05 Buy 10 contracts of June COF $37.50 puts @ $.65 Net credit of $.40 Total credit of $1.00. We're giving COF a $7.50 range. This is a credit card stock that appears to have topped out and there's support around $40. We'll get our maximum profit of $1,000 if COF closes between $40 and $47.50. The nice part is that our exposure is only $1.25 ($2.50 less our $1.00 credit). If it works, it's an 80% return on risk. ______________________________________________________________ June Position #5 – QQQ ITM Baby Strangle – Currently at $28.10 Buy 10 contracts of the July QQQ $30 puts @ $2.05 Buy 10 contracts of the July QQQ $28 calls @ $1.80 Total debit of $3.85. The QQQs have made a big move up. It's either going to break through resistance or bounce of and head back down. Our objective is for a $3-4 move in the next month. One of our long options will hopefully pay for almost the entire position. That will leave our other long option, which is now practically free, poised for the bounce back as the QQQs reverse. Our exposure is only $1.85 because we have $2.00 of intrinsic value. This worked quite well in the past for us. It will take some time to play out so be a little patient. For those who want to review how this strategy works, go to: http://members.OptionInvestor.com/traderscorner/tc_082502_1.asp ______________________________________________________________ New To The CPTI? Are you a new Couch Potato Trading Institute student? Do you have questions about our plays or our strategies? Feel free to email me your questions. An excellent source for new students is the OptionInvestor archives where we've been discussing strategies and answering questions since last July. To find past CPTI (Mike Parnos) articles, look under "Education" and then click "Traders Corner." They're waiting for you 24/7. ______________________________________________________________ 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 ************** Alternation By Steve Gould I have these delusions of one day becoming a consummate public speaker. Don't laugh! It could happen. Speaking well is an acquired skill. I have been studying several high profile people trying to discern patterns and techniques. I have come to this conclusion. It is not so much what they say, but how they say it that makes them good. For example, I have noticed this one intriguing pattern, particularly in a guest pastor at our church and a renowned stock market radio show host. What I have observed is that the speaker will be explaining an idea and right in the middle of that explanation, he will mention an ancillary concept. Not wanting to go on a rabbit trail to explain the ancillary idea, he will just give a fast 10 second elucidation and then continue on with the original thought. I personally find this technique quite effective. Unwittingly, I find myself doing that in my writing. For example, in my article on corrections, I took a paragraph to explain the rule of Alternation. It was something I noticed on the chart as I was writing and I thought it deserved some clarification. I would like to expand upon this rule a bit more as it really does deserve a bit more "air time". The Rule of Alternation is not really a rule. It is more of a guideline. A rule, as the name implies, always applies to a wave. There are no exceptions. If a wave labeling breaks a rule, then the wave will have to be relabeled in such a way as to not break any rules. A guideline, on the other hand, is more of a frequently observed pattern. It is not necessarily required to label a wave, but the labeling is more preferred if guidelines are met. If a guideline is not adhered to, the wave count could still be valid. Given two wave counts, both satisfying all the rules, the preferred count will go to the wave labeling that satisfies the most guidelines. So even though I will speak of the Rule of Alternation, it is actually a guideline. Somehow the Guideline of Alternation just doesn't flow as nicely as the Rule of Alternation. The Rule of Alternation states that whatever happens in one type of wave will not be expected to happen again in the next incarnation of the same type of wave. If I went up to my daughter and asked her if she wanted to go to the mall for 4 hours with her friends and I would let her buy anything she wanted on my credit card, I could pretty much expect to get the exact same answer every time I asked. It wouldn't matter what day of the week or what time of day I asked her. School night, weekend, morning, noon, evening, the answer would always be the same. The Rule of Alternation does not apply to teenage daughters. (Honey, if you are reading this, don't get all excited. It won't happen.) In the stock market things are a little bit different. The only criteria that we need to meet is that the waves must be of the same genre. Waves come in basically two flavors, motive waves and corrective waves. Motive waves move in the direction of the overall trend. Waves 1, 3, 5, A and C are motive waves. Corrective waves, on the other hand, move counter the overall trend. Waves 2, 4 and B are corrective waves. A wave 1 is not the same type of wave as a wave 2. Wave 1 is a motive wave in the direction of the overall trend. Wave 2 is a corrective wave counter to the overall trend. The Rule of Alternation would not apply. Not all motive waves are the same type of wave. A wave 1 is not the same type of wave as a wave A. Wave 1 is a motive wave within a 5 wave basic pattern. Wave A is a motive wave within an A-B-C corrective pattern. The Rule of Alternation would not apply. Nor are all corrective waves the same type of wave. A wave 2 is not the same type of wave as a wave B. Wave 2 is a corrective wave within a 5 wave basic pattern. Wave B is a corrective wave within an A-B-C corrective pattern. The Rule of Alternation would not apply. But, wave 2 and wave 4 are the same type of wave. Both are corrective waves within a 5 wave basic pattern. Wave 1, wave 3 and wave 5 are also the same type of wave. All are motive waves within a 5 wave basic pattern. Wave A and wave C are the same type of wave. They are both motive waves within an A-B-C corrective pattern. Waves A, B and C are also considered as one group when applying the rule. Even though we have narrowed down the wave types of the same type to three main groups, Waves 2 and 4, Waves A, B and C, and Waves 1, 3 and 5, the Rule of Alternation really only applies to the corrective waves. Rather than apply the Rule of Alternation to wave 1, 3 and 5, Ellioticians look at each of the motive waves in terms of personalities. That, however, is a discussion for a different day. Let's look at each of the corrective waves. Wave 2 and wave 4 are both going to correct a 5 wave basic pattern. Generally there are only two types of corrections observed, a sharp correction or a sideways correction. If wave 2 is a sharp correction, expect wave 4 to be a sideways correction. Alternately, if wave 2 is a sideways correction, expect wave 4 to be a sharp correction. Chart: Dow Monthly since 1915 This is an exponential chart of the Dow on a monthly basis from 1915 to the present. This chart illustrates a classic expression of the Rule of Alternation. Look at the 5 wave basic pattern within the III wave. Wave 2 is a sharp correction. Wave 4 is a sideways correction. Now look at wave II. Notice how sharp it is. Using the Rule of Alternation, we can expect wave IV to be a sideways correction. This example was for a monthly chart spanning almost 100 years. But we could have just as easily looked at a daily, hourly or even a minute chart. The Rule of Alternation works on all levels. Chart: Footstar Alternations Here is a daily chart of Footstar (FTS) from the early part of 2001. Take a look at the 2 wave and 4 waves at all levels of division. Although some 2 and 4 waves appear to be not obeying the guideline, I would suspect that if we looked at hourly data, we could see a better differentiation. However, let me point out a few conforming examples. Within the blue circle 3 wave, the 2 wave is a sharp correction while the 4 wave is a sideways correction (1). Within the blue circle 5 wave, the 2 wave is sharp while the 4 wave is sideways (2). Let's now see how the Rule of Alternation applies within the A-B-C corrective pattern. In general, what traces out in wave A will be different than wave B, and wave C will not replicate either wave. If wave A is a zigzag, expect wave B to not be a zigzag. If wave A is a flat, expect wave B to not be a flat. If waves A and B are simple waves, expect wave C to be complex. If wave A is simple, expect wave B to be more complex and wave C to be even more complex. Chart: Dow Monthly since 1915 with A-B-C Labels Here is the Dow chart with the subdivisions of the corrective waves labeled. Within the wave 2 correction, the A wave is a sharp, short 5 wave basic pattern. The C wave, in contrast, is a flatter, longer (time-wise) 5 wave basic pattern. Within the wave 4 correction, the A wave is a mildly complex, expanded flat pattern. Wave B is a simpler zigzag while the wave C is a very complex contracting triangle. The Rule of Alternation is a useful predictive tool. It will not tell us what is going to happen in so much as it will tell us what will probably not happen. That in and of itself can be very valuable information. ************** TRADERS CORNER ************** Where is the Dow Going? By Steve Gould I sort of have mixed feelings about what happened in the Dow this week. On one hand, I am happy that I was correct and the Dow is now headed lower. Much lower. On the other hand, I really would like to see this economy improve and have stocks going up. But reality being what it is, I, unlike some New York Times Reporters, am going to report what I see. Let's start with the small picture and work our way up. Chart: Dow Hourly 5/23/2003 The wave pattern on the hourly chart is a bit clearer now than it was last week. I was thinking that the v (five) wave ended where the arrow is pointing because of the throw over. If that were the case, then the Dow would have already traced out a i, ii, iii, iv wave. However, that interpretation is not consistent with the oscillator. The oscillator under the arrow traced out the tallest peak more consistent with a 3 wave. Also remember that there must be divergence in the oscillator between the 3 wave and 5 wave in order to signal the end of a 5 wave basic pattern. We did not get the divergence needed until 5/16 (where the current v wave is). The Dow ended the C/v/ii wave on 5/16 at 9:30. The labeled v wave is actually a hair lower in price than where the arrow is pointing. The labeled v traced out a failed 5th wave and marked the end of the v wave The Dow has now started on the next 5 wave basic pattern down. The i wave is complete and we are toward the end of a wave ii correction. Chart: Dow Hourly 5/23/2003 wave ii The ii wave is already up against the 62% Fibonacci retracement level. I suspect that Tuesday the Dow would not trace much higher before it starts the wave iii down. (I am praying it is not because of a terrorist attack.) As a side note, see how the i wave traced down just past the previous iv wave. In general, the first target once the trend has changed is the last 4 wave of the old trend. Also note how the i wave traced out a near classic 5 wave basic pattern. I will leave it to the reader to label it as an exercise. Stepping back for a moment to look at the bigger picture, here is a chart of the Dow since January 2000. Chart: Dow Daily since January 2000 The Dow has been in a bear market since January 2000. The (up to now) 2 wave bear market rallies have only served to lure unknowing investors back into the market. The Dow just finished the latest of its bear market rallies and is now primed to head further down. The Dow is just now starting the (iii) wave of the (3) wave of the 3 wave. This next wave should be sharp and decisive. Chart: Dow Daily Since October 2002 By zooming in on the last several months we see that the daily chart confirms the wave pattern in the hourly chart. Waves 1 and 2 are in. Since the 1 wave was about 350 points, the Dow is positioned for a 3 wave down of at least 350 points. Following the 4 wave retracement, we should see new lows come summer time. Unless of course the Dow goes up. The President's tax cut passed through Congress on Friday. Friday was a light day as most traders were no doubt starting the 3 day weekend a bit early. Tuesday could see a spike up in the Dow as investors realize that dividends are going to be taxed less and they start buying dividend paying stocks. Some of my friends are concerned about this, yet they did not sell their Dow puts. I guess they are not that concerned. ************** FUTURES CORNER ************** The Good and Bad of Scalping Futures 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 Title: The Good and Bad of Scalping Futures Before I begin my article on something seemingly trivial by comparison, I would like to use this public space to extend a most sincere thank you to all those brave men and women who have served this country in its military. I preface this by saying I lack the word skills to reflect how sincerely I mean that. Memorial Day is a time to reflect upon what those few braves souls have done for us. How the sacrifices of a few have protected so many. Until 9-11-01, I would guess I was like most people. I had not served in the military myself, and only knew a few friends who were in. I might stop and think about their lives and what they do for the greater “us” at times, but not very often. 9-11 changed that for most of us. We certainly now are so much more mindful of how they really do protect our borders – our citizens – our children. I say thank you’ to all those who ever have proudly worn a US Military uniform, from the recent action in Iraq all the way back to the American Militia in the 1770s. We talk about Wall Street. I would like to talk about another WALL. If you ever find yourself in Washington DC : go to the Vietnam Wall around sunset on a nice spring evening when the smell of the famous Washington DC cherry trees are filling the air with their smell, when you have someone walking with you that you care deeply about emotionally, when you are dressed well and feeling on top of the world. If you are lucky, you will do as I did: know you were heading in the direction of the Wall, but actually stumbling onto it by accident and starting at the lower section, with the earliest years names of the US soldiers who died in the Vietnam War. You walk that wall slower and slower, and notice how the wall height grows higher and higher as more died as the years passed; until you get to the very end. You notice how all the flowers and letters and things left by loved ones is so much more impactful in person that what you may have seen on TV. You notice all the people touching names on the wall with tears in their eyes. You notice military people in uniform giving tribute to fallen comrades. There is a special kind of silence there, in that very small physical space. Those young men and women had so much to live for. Just as I did the first time I visited it – a person I cared about on my arm, so much enjoying the day, looking forward to a wonderful spring evening and to the future. Just like all those soldiers once had also been. Yes, people die every day but usually from illness or accidents, not from dying for their country. You find yourself overcome with tears and emotions by the time you reach the end of that Wall; and for me, that was perhaps the first time I ever had a better understanding of what Memorial Day is about. Professional soldiers hate and despise WAR more than we do, for they know much better how truly terrible it is. I was not in the military, and I have enough intelligence to respect that no words or movie could possible capture the horror of war and combat. I don’t think I ever had a true sense of how simply terrible it is until the film Saving Private Ryan’ and those scenes in that film. Most military people I have known have an honor and sense of duty that is much higher than average. Thank you one and all for going in Harm’s Way to protect this great country. Thank you to those have given the ultimate sacrifice of their lives for this country. Not many months ago, Colin Powell was in Europe on some political discussion back when the UN was talking about taking any action to stop the killing in Iraq. The room seemingly was full of top level politicians from all civilized countries and one of them accused Mr. Powell that the USA was acting in a very aggressive manner, almost as if the USA was excerting its superpower influence to take over any country it now felt like. I paraphrase, but Mr. Powell said something like “In the last 100 years, the United States of America has sent its young men and women to all corners of the earth to fight in wars, to fight and die in foreign countries to protect peace and keep the world a safer place. The ONLY land that the USA has ever asked for or taken, was land we asked for to bury those young sons and daughters who died in that foreign country.” And this silent respectful hush fell over those politicians. (I wish I could find the direct quote for it was so much better spoken than my memory of them). Thank you for reading my above words. The Good and Bad of Scalping Futures The last article was about using Size as a Trade Tool; that is deciding how many contracts to decide to put on the current particular trade entry. This article shall be about electing whether or not you at times will intentionally enter a trade with the desired goal of only +1 to +1.50 ES points. Trades of this nature are called SCALPS for obvious reasons. Allow me to say that in no way am I suggesting you should or should not scalp. That is a decision only you the reader can make. In a perfect world, we would start a new day by going Long ES at 920 right at the Open, hold the trade all day and sell the Long at 928 around 330pm for +8 pts. Then the next morning right at the open, we would Short ES at 931 and hold it all day and cover the short near the close at 923 for another +8. And then do these type trades each and every day. Back in year 1999 and 2000, one could hold trades for weeks! (it’s true, really [smiles]). We no longer live in a trading world such as that and this past week provided my thought for this article. This past week, each trade day provided no more than one or two “clean” great entries, often either right at the open or shortly after it. If one missed that entry, or (even worse) had been wrong and lost a few ES pts; then you had a harder trade day. Every day this week, over one-half of the entire trade day was more or less spent going sideways often in 3 and 4 pt ES ranges. No more, no less. Often, that range occurred during known trade pivots and everyone was waiting for breakouts or breakdown and often they did not, and just stayed in that thin range. The close on Friday was a great example: the tape stayed right between 935 and 931.50, never going under 931.50 nor over 935. Very often, after the tape has made that big morning move, it settles down into some type of trade range, usually between prior trade pivots that usually get identified in the Intraday Futures Monitor. You the reader are then forced to make a decision. Do I try and SCALP here or do I decide to simply not trade at all, and simply await the next big move. There is no right or wrong answer here, it is something only you can decide what to do. My own definition of a Scalp is goal of anywhere from +1 to +1.50 ES points. Usually, scalp entry trades will be entered with a 1 point stop loss. One small help if you goal right on this short from 923.00 is only +1 is to immediately enter a cover bid at 922.00 which gets your order in-line so to speak. If scalps are done with some careful focus on where the trade pivots are, one greatly increased the risk/reward odds of taking a winner vs. having your stop hit. As usual, this is often easier to show with some charts from this week from Wednesday May 21. Here is the ES chart from Wed May 21 from the Open to the Close. There were two good larger-possible-gain trade entries that day. There was a Long immediately at the open at 915-6, which would have given a 30minute gain of +5 to +7. After that, there was an immediate 10am reversal short entry at 923s which would have been good for +5 pts if the entry/exit was perfect. Frankly, if I would have done both those trades that perfectly and just made 12-4 ES points in under 2 hours, I would probably just take the rest of day off [grins]. As we all know, it is very easy to look at a chart afterwards and play arm-chair quarterback saying xyz trades would have been done. It is obviously a different matter actually trading it realtime live. Lets assume some bad things. Such as one shorted shortly after the open and took a 2 pt loss. Then you re-entered the short a second time and this time took a 1 pt loss. When the pop at 923 occurred, which you know to be a trade pivot. You consider another short, but your confidence is down and you wait until ES hits 920 before going short and are much quicker to cover at 917. Perhaps you simply were not at the computer until 12am and by then those two large moves were already over and done with. And as often can happen, by the time you play chart catchup, you have now just missed the next move from 918 to 922; and as time ticks by, the tape settles down and you quickly realize the tape is now going to be rangebound perhaps in the 919-923s range. By this time, perhaps you’ve lost some money in the morning, or missed the morning trades and are now faced with only two decisions after realizing the tape is going to be in a tight 919s- 923s range: 1. Do nothing at all for the last 3 hours of the trade day OR 2. Decide to do Scalp Trading into the close within that range. Ok, this article is not about how one figures out why you suspect the trade range is going to be 919s-923. As mentioned earlier, those pivots are discussed frequently throughout the trade day in the OI Futures Monitor. So you realize 919 is the bottom and 923 is the top with 922 right in the middle (see above chart). Every time ES dips to 920 area, you enter a LONG scalp and immediately park an offer for +1 to +1.50. When ES upticks to 923, you take a Short Scalp entry and immediately park a cover bid at 922 for the same +1 goal. SCALP GOAL : +1 to +1.50 SCALP STOP : 1 point Stop is 1pt each time; and 99% of the time, do not even consider allowing a wider stop for intentional scalp trading for that is where large losses can occur. Look again at the above afternoon chart and ask yourself if you might have been able to execute a few successful scalp trades there. One important comment: there are times when a normal (non-scalp) entry is made (LONG 925) and your goal might be 928-930 but if the tape stalls at 926.50 and you exit at 926 for a profit of 1 rather than the desired goal of 3-5 pts I would not label this a scalp, but simply a normal trade that made a small profit after not hitting the desired goal. After reviewing the three above charts on a smaller time frame, I would re-ask the same question; namely, how many scalp points do you think you might have been able to take out that tape? Would 3 or 4 +1 be possible? Perhaps 3 winners and 1 loser? One could actually find 8-10 possible scalp trades on this particular afternoon if you look hard enough. Would any of these trades provided more than 3 pts? Not really. In fact most of them would probably hit the breakeven stop or a -1 stop if you had entered the trade seeking 4 or 5 points. It would not help you very much watching the Futures Monitor as watching scalp entries occurring after you can possible enter them; HOWEVER, there are often times when the trades are coming within pivots, so it becomes possible to make trade posts such as “ES is chopping here at 921-22, seek a 923 short and if filled, go for a +1 scalp” So what’s the catch? Commissions are obviously a factor to your final profit. You will have stop very fast -1 pt stop losses hitting; sometimes within minutes of your entry which is never fun. Since we are taking about doing counter-trend entries here, such as shorting 923 and going long at 920s. If those two levels are indeed large support and resistance levels, it is very possible that a breakout over 923 might occur, or a breakdown under 920. Lets look at either happening: You take a short entry at 923 and then 5 minutes later, the tape rockets higher over that 923 resistance onward to 926s – but your 1 pt stop would have hit before then. RESULT -1 You take a long at 921 and before you can type in your exit at 922.50 for your +1.50 scalp goal – out of nowhere comes a rocket higher spike (something we have seen occur a great many times) and before you can even blink, ES has broken out over that known 923s resistance and it trades all the way to 928 and you take a trail stop exit at 927s for +5s. RESULT +5 Since no one knows for 100% certainity if a breakout or breakdown will occur, you have 50/50 odds of being on the right side of the trade when it occurs. Since these scalp entries use a tight 1pt stop; and there is a 50/50 chance of either having that -1 stop occur OR a profit of +5 if you happen to be holding the position when that breakout occurs. I am not a gambler, but 50/50 odds of -1 vs +5 in my view is good money management. So why not just wait until that breakout or breakdown occurs and then enter into a position? Assume you were flat and waiting for this breakout. It trades over 923s and by the time you notice it, it’s trading at 925 and you are faced with that tough decision to chase it or not as you know there’s a small pivot at 925-6 – sometimes chasing it works and sometimes it does not. Especially when we have seen trading like we have this last week. SUMMARY: By no means do I start out each trading day with the desire to do scalps. Far from it, I would rather take that morning entry and ride it all day long for a nice gain. However, and not to be boring, but this week probably spent one-half the entire week caught in 3-4 pt very tight ranges offering nothing but scalps during those multi- hour periods. There truly is nothing wrong with doing nothing during those periods; however, there is also nothing wrong with taking 1 to 3 scalps during periods such as those either. Very warmest, Alan Hewko ***************************Advertisement*************************** Thinking of retiring to Hawaii? Or a second home in Paradise? Here's a rare Real Estate offering, not yet listed. Ideal for the successful trader who would like to live, work and play on Maui - America's Magic Isle. Maui's Most Private Property - A 4br country home surrounded by 50,000 acres of pristine open space. Spectacular views of pastures, cane fields, ocean and three islands. Described as the "Crown Jewel of Privacy" you can be here for months and never see a soul! 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The Option Investor Newsletter Sunday 05-25-2003 Sunday 5 of 5 In Section Five: Covered Calls: Choosing The Best Option Naked Puts: Success With Naked-Puts Spreads/Straddles/Combos: Time For A Holiday! Updated In The Site Tonight: Market Posture: Treading Water ***************************Advertisement*************************** Thinking of retiring to Hawaii? Or a second home in Paradise? Here's a rare Real Estate offering, not yet listed. Ideal for the successful trader who would like to live, work and play on Maui - America's Magic Isle. Maui's Most Private Property - A 4br country home surrounded by 50,000 acres of pristine open space. Spectacular views of pastures, cane fields, ocean and three islands. Described as the "Crown Jewel of Privacy" you can be here for months and never see a soul! The land adjoins a 600-acre pasture where Jimmy Hendrix held his last concert. Look out the windows in the early morning and you'll see a herd of cows, wild boar, axis deer, circling owls and hundreds of pheasant - but no people. Four phone lines, DISH, Sky Fiber broadband and Roadrunner available. For more on Maui's ultimate retreat see http://www.mauimansions.com/OIN ********************************************************************* ************* COVERED CALLS ************* Trading Basics: Choosing The Best Option By Mark Wnetrzak One of the most common questions among new readers concerns which option to sell in a covered-call position. The #1 goal for most option traders is correctly predicting the future movement of the underlying stock or index. This fact also holds true for covered-call writers but after the decision to buy a particular stock has been made, the average investor will have trouble choosing which option to sell. To be successful in the derivatives market, you must be able to select the most favorable positions based on theoretical pricing and the time horizon of the play. The knowledge of option pricing comes from a study of the various mathematical relationships that exist between an option's fundamental components (the greeks) and the way they are affected by market factors such as supply and demand (implied volatility). The time frame of the position is important because it determines the amount of profit that must be earned to achieve a specific return on investment. The type of analysis that will be utilized in predicting the trend of the underlying issue should also be considered as some techniques require long periods for an accurate forecast. For example, investors who use fundamental valuations to predict future share prices would generally write out-of-the-money options with 2-3 months of time-value remaining, in order to reduce the overall basis in the underlying issue. In contrast, a trader who uses charting or sentiment analysis in would likely sell short- term, in-the-money options on technically favorable stocks. For those who choose long-term covered-call positions, the goal is to reduce the overall cost of the stock with the income from monthly sales of near-term options. Investors who participate in this strategy generally use out-of-the-money calls to reduce the chance of having their short positions exercised (in which case delivery of the underlying issue would be required). The problem with this technique is that when one sells an out-of-money option, the overall position tends to reflect more of the result of the stock price movement and less of the benefits of writing the call. This occurs because the premium from the out-of-the-money call is relatively small and the overall position is very susceptible to loss if the underlying stock declines. Conservative traders may find that a better alternative is to commit half of the position to in-the-money options and the other half to out-of-the-money options. By spreading the options among different strike prices, the call writer can acquire more favorable return potential as well as establishing adequate downside protection. Investors who have large positions in a specific stock can choose even greater diversification by spreading the sold calls over time as well as different strike prices. One can gain several benefits by writing a portion of the calls near-term and the remaining calls further in the future. In the event of large, unexpected move in the stock, the combination of time frames in each position reduce the need to make immediate adjustments. This type of activity may include buying-back one written call and selling another or simply having the stock called away, but with a mixture of sold options, all of the different positions will not need to be adjusted at the same time. Another advantage to this technique is that the level of option premiums may become more favorable than when the original series of calls were written. At worst, only one group of options would be sold when the premiums are small and hopefully they would increase in value before the next expiration period. This type of diversification will also allow you to establish various positions at different strike prices, smoothing the portfolio balance as the market fluctuates cyclically. It also prevents all of one's stock from being committed at a single price. Traders who choose (as we do) to concentrate on near-term options in covered call positions must still decide which option to sell. In most cases, short-term plays are much more successful if you write in- or at-the-money options. In this conservative approach, you should strive for position that return a minimum of 3%-5% per month while retaining downside protection of at least 10% of the current stock price. The overall position that is constructed with these guidelines will be a relatively low risk play (regardless of the volatility of the underlying stock) since the absolute levels of protection will be large and there is still the expectation of a reasonable return. 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 NOR 2.67 2.56 JUN 2.50 0.40 0.23* 8.8% ABGX 11.18 11.21 JUN 10.00 1.90 0.72* 6.7% MOSY 7.50 8.00 JUN 7.50 0.60 0.60* 6.3% IDNX 5.60 5.91 JUN 5.00 0.90 0.30* 5.5% TER 13.06 15.32 JUN 12.50 1.40 0.84* 5.2% OVER 14.55 15.60 JUN 12.50 2.75 0.70* 5.2% MDR 5.08 6.05 JUN 5.00 0.40 0.32* 5.0% PLUG 5.39 5.08 JUN 5.00 0.65 0.26* 4.8% FFIV 15.45 16.01 JUN 15.00 1.30 0.85* 4.4% GNTA 8.78 10.32 JUN 7.50 1.70 0.42* 4.3% MRVL 26.72 32.10 JUN 25.00 3.10 1.38* 4.2% CELG 31.48 31.10 JUN 30.00 2.80 1.32* 4.0% BRCM 21.40 22.03 JUN 20.00 2.25 0.85* 3.9% GP 17.99 17.17 JUN 17.50 1.40 0.58 2.5% * Stock price is above the sold striking price. Comments: The major averages stumbled on Monday as the dollar fell to new lows, though they did manage to rebound as the Memorial Day weekend approached. The covered-call portfolio weathered the pull-back fairly well and may even be causing some "call selling" regret in a few issues, notably; Marvell Technology (NASDAQ:MRVL), which exploded higher after reporting earnings on Thursday. Two issues will be on the watch list going into next week as they consolidate towards support and should be monitored closely: Abgenix (NASDAQ:ABGX) and Georgia-Pacific (NYSE:GP). 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 IPXL 7.86 JUN 7.50 UPR FU 0.80 463 7.06 27 7.0% PLUG 5.08 JUN 5.00 PQL FA 0.35 589 4.73 27 6.4% ALKS 12.84 JUN 12.50 QAL FV 0.95 460 11.89 27 5.8% FCS 12.55 JUN 12.50 FCS FV 0.60 465 11.95 27 5.2% AWE 7.64 JUN 7.50 AWE FU 0.45 24987 7.19 27 4.9% FEIC 17.65 JUN 17.50 FQE FW 0.85 220 16.80 27 4.7% PEGS 13.00 JUN 12.50 PUG FV 0.85 5 12.15 27 3.2% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** IPXL - Impax Labs $7.86 *** Next Leg Up? *** Impax Laboratories (NASDAQ:IPXL), formerly known as Global Pharmaceutical Corp., is a technology-based, specialty pharmaceutical company focused on the development and commercialization of generic and brand name pharmaceuticals. In the generic pharmaceuticals market, the company is mainly focusing its efforts on selected controlled-release generic versions of brand name pharmaceuticals. In the brand name pharmaceuticals market, the company is developing products for the treatment of central nervous system (CNS) disorders. Impax's initial brand name product portfolio consists of development-stage projects to develop differentiated, modified or controlled-release versions of marketed drug substances. The company intends to expand its brand name products portfolio primarily through internal development, and, in addition, through licensing and acquisition. IPXL continues to rally off the March lows on heavy volume and the issue recently moved above resistance near $7. Traders who believe the rally will continue can profit from that outcome with this position. JUN-7.50 UPR FU LB=0.80 OI=463 CB=7.06 DE=27 TY=7.0% ***** PLUG - Plug Power $5.08 *** Cheap Speculation *** Plug Power (NASDAQ:PLUG) designs, develops and manufactures on- site electric power generation systems utilizing proton exchange membrane (PEM) fuel cells for stationary applications. Plug's initial product is a fully integrated, grid parallel 5-kilowatt fuel cell system that operates on natural gas. This initial product is intended to offer quality power while demonstrating the market value of fuel cells as a preferred form of alternative distributed power generation. The company's R&D facility contains over 150 test stations where its conduct design optimization and verification testing, rapid-aging testing, failure mode and effects analysis, multiple technology evaluations, and endurance testing in the company's effort to accelerate the development and commercialization of its fuel cell systems. Shares of several fuel cell developers rallied recently on no news. Plug Power has been forging a Stage I base near $5 for almost a year and traders can use the inflated premiums to establish a bullish, low-risk position in the issue. Target-shooting a lower net-debit will reduce the cost basis and raise the potential yield in the play. JUN-5.00 PQL FA LB=0.35 OI=589 CB=4.73 DE=27 TY=6.4% ***** ALKS - Alkermes $12.84 *** On The Move! *** Alkermes (NASDAQ:ALKS) is a pharmaceutical company developing products based on applying its sophisticated drug delivery technologies to enhance therapeutic outcomes. The company's areas of focus include controlled, extended-release of injectable drugs using its ProLease and Medisorb delivery systems, and the development of inhaled pharmaceuticals based on its proprietary Advanced Inhalation Research pulmonary delivery system. Alkermes partners its proprietary technology systems and drug delivery expertise with many other pharmaceutical companies, and it also develops novel, proprietary drug candidates for its own account. The company has a pipeline of products in various stages of development. Alkermes recently received about $24 million from Johnson & Johnson's Janssen Pharmaceutica as a prepayment of the first two years of the minimum revenue guaranteed under an agreement between the parties over the manufacture of Risperdal Consta. There's not much news on Alkermes to explain the recent rally but it appears the issue has completed its consolidation phase and is poised for future gains. In addition, the fundamental outlook for the company is excellent and the drug sector continues to perform very well; both factors that lead to a bullish position in the issue. Due diligence is a must! JUN-12.50 QAL FV LB=0.95 OI=460 CB=11.89 DE=27 TY=5.8% ***** FCS - Fairchild $12.55 *** Bottom Fishing: Part I *** Fairchild Semiconductor (NYSE:FCS) designs, develops and markets analog, interface, discrete, standard logic, non-volatile memory and optoelectronic semiconductors through its subsidiary, Fairchild Semiconductor Corporation. The company is focused solely on multi- market products that are building block components for virtually all electronic devices, from sophisticated computers and Internet hardware to telecommunications equipment to household appliances. The company's products are organized into 4 product groups: analog and mixed signal products, discrete products, logic and memory products and optoelectronics products. Fairchild has been in a recovery mode since the rally off the October low and speculators looking to "bottom-fish" in the semiconductor industry can use this position to obtain a cost basis in the issue near technical support. JUN-12.50 FCS FV LB=0.60 OI=465 CB=11.95 DE=27 TY=5.2% ***** AWE - AT&T Wireless $7.64 *** Buyout Target? *** AT&T Wireless (NYSE:AWE) operates as a wireless communications service provider in the United States. The company provides wireless voice and data services over two separate, overlapping networks. One network uses time division multiple access (TDMA) as its signal transmission technology. It also provides voice and enhanced data services over a separate network that uses the signal transmission technology known as global system for mobile (GSM) communications and general packet radio service (GPRS). As of December 31, 2002, AT&T Wireless's two networks covered an aggregate of approximately 213 million population, or 74%, of the U.S. population, and operated in 83 U.S. metropolitan areas. There have been rumors that AT&T Wireless is up for sale or may be a buyout target. AT&T Corp. is talking to cable operators and wireless carriers about partnerships to resell their services, and may have a deal for a cable offering before the end of the year, according to John Polumbo, president of the company's consumer services division. We simply favor the bullish technical signals and our conservative position offers a method to participate in the future movement of the issue with relatively low risk. JUN-7.50 AWE FU LB=0.45 OI=24987 CB=7.19 DE=27 TY=4.9% ***** FEIC - FEI Company $17.65 *** Bottom Fishing: Part II *** FEI Company (NASDAQ:FEIC) is a supplier of equipment and solutions to the high-growth segments of the semiconductor, data storage and industry and institute markets. The company's solutions are based on a combination of patented and proprietary technologies that produce highly focused electron and ion beams. These solutions enable FEI's customers to view and analyze structures in three dimensions and to measure, analyze, diagnose and modify sub-micron and atomic structures below the surface in semiconductor wafers and devices, data storage components and biological and industrial materials. This enables the firm's customers to develop products faster, control manufacturing processes better and improve their production yields. FEI's Structural Process Management Solutions include focused ion beam equipment, scanning electron microscopes, transmission electron microscopes and also DualBeam systems, which combine the various microscopes on a single platform. In January, FEI and Veeco Instruments (NASDAQ:VECO) terminated their $1 billion merger due to difficult market and economic conditions and traders reacted favorably to the news. The stock continues to forge a Stage I base with technical support near the cost basis of this position. This position offers traders a good "target-shooting" opportunity in a stock with superb upside potential. JUN-17.50 FQE FW LB=0.85 OI=220 CB=16.80 DE=27 TY=4.7% ***** PEGS - Pegasus $13.00 *** Hotel Sector Recovery? *** Pegasus Solutions (NASDAQ:PEGS) is a provider of hotel room reservation services, reservation technology systems and hotel representation services for the global hotel industry. The company's customers include a significant number of world-wide travel agencies, more than 46,000 hotels around the world and more than 1,000 travel-related Websites. On April 3, 2000, Pegasus completed the acquisition of REZ, Inc., a provider of distribution services and solutions for the hotel industry. As a result of the REZ acquisition, Pegasus is organized into two reportable segments, technology and hospitality. Pegasus has been forging a Stage I base since October and rallied this week on an upgrade at Thomas Weisel. Analysts believe the the hotel industry may finally be in recovery mode and traders who agree can use this position to establish a low risk cost basis in the issue. JUN-12.50 PUG FV LB=0.85 OI=5 CB=12.15 DE=27 TY=3.2% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Option Option Last Open Cost Days Target Symbol Price Series Symbol Bid Int. Basis Exp. Yield OVER 15.60 JUN 15.00 GUO FC 1.60 7781 14.00 27 8.0% CPN 5.10 JUN 5.00 CPN FA 0.40 53216 4.70 27 7.2% GNTA 10.32 JUN 10.00 GJU FB 0.85 2800 9.47 27 6.3% NEOL 16.32 JUN 15.00 UOE FC 2.05 321 14.27 27 5.8% TER 15.32 JUN 15.00 TZY FC 1.05 1862 14.27 27 5.8% ADPT 7.54 JUN 7.50 APQ FU 0.40 270 7.14 27 5.7% MEDX 5.29 JUN 5.00 MWM FA 0.50 521 4.79 27 5.0% MACR 17.80 JUN 17.50 MRQ FW 1.05 1148 16.75 27 5.0% SOHU 24.48 JUN 22.50 UZK FX 2.90 1105 21.58 27 4.8% AVID 30.42 JUN 30.00 AQI FF 1.65 190 28.77 27 4.8% GERN 5.30 JUN 5.00 GQD FA 0.50 2813 4.80 27 4.7% DAL 13.55 JUN 12.50 DAL FV 1.55 4390 12.00 27 4.7% TALX 14.89 JUN 15.00 TUB FC 0.55 153 14.34 27 4.3% SCSS 15.62 JUN 15.00 QSL FC 1.15 378 14.47 27 4.1% MCDTA 10.66 JUN 10.00 MQG FB 1.00 1738 9.66 27 4.0% ICN 13.08 JUN 12.50 ICN FV 0.95 1014 12.13 27 3.4% ***************** NAKED PUT SECTION ***************** Options 101: Success With Naked-Puts By Ray Cummins With the number of new subscribers growing in recent weeks, it's a good time to review the fundamental goals of this section and the selection process we use to identify favorable candidates for the strategy of selling puts. First, thanks to all the subscribers who read this section on a regular basis. Our target audience is primarily new traders as they need simple strategies. To generate the majority of plays, we search through lists of issues with overpriced options (the OTM positions), reviewing the technical outlook of the underlying and its industry group/sector. If we feel the issue has bullish potential and there is a fair risk-reward outlook, then it goes on a final list of candidates. After we have all the possible plays for a specific day, we simply choose those which (in our opinion) appear most favorable. In most cases, we try to achieve a 4-6% monthly return (based on the minimum collateral requirements) with at least 15-20% downside protection. Of course, if the options market has relatively low implied volatility, that can be a very difficult task. In addition, writing "covered" calls and selling "naked" puts are generally not favorable strategies for a bearish market but we produce the section every week as most readers want plays regardless of the overall trend. One thing you can be sure of: If we don't have confidence in what we have to offer, it won't be published, and that's the overriding measure of any position we list in the section. We also provide a selection of additional candidates to supplement the search for profitable positions. For one reason or another, they simply did not make the final list; which is usually limited to 7 or 8 candidates. Obviously, the process of selecting the "published" plays is very subjective and there are always other issues that warrant consideration. That is why we include some of the stocks that just missed our final list (for various reasons), so that YOU may decide if they meet your criteria for a favorable play. Remember, our job is to provide a list of potential plays, greatly reducing your research time. Your job is to decide which positions fit your risk-reward profile and hopefully (with further scrutiny and analysis far beyond that which we can provide in the few hours between Friday market close and the Saturday publishing deadline), you will select only those that are winners. As far as ongoing position management, we try to monitor the plays in the section regularly but we do not make specific suggestions about when they should be closed or adjusted. Again, our job is to provide candidates for your (more thorough) examination and also to identify positions that have a favorable risk-reward outlook. The determination to trade is solely yours. We will however, attempt to point out those occasions when a play offers a favorable "early exit" return, or when we see an issue that has reversed direction and may require closure or adjustment of the underlying position. Keep in mind that we usually have over 100 plays in four sections to track on a daily basis and we may not always notice the crucial turning point or "change in character" of a specific issue. The weekly "comments" section is not intended as a substitute for your own trading techniques nor does it replace your duty to manage the positions in your portfolio. In addition, any actions taken based on the commentary would be far too late to be effective. As far as the target success ratio/average returns; this strategy, when employed correctly and managed diligently, can yield a 4-8% monthly (annualized) profit. Regardless of how you utilize our research, we hope you will eventually benefit from some of the plays offered in this section. At the same time you must remember, they are all just candidates and should only be considered with respect to your personal risk-reward attitude and trading style. 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 USG 11.85 10.25 JUN 7.50 0.35 0.35* 4.3% 11.2% ANPI 28.27 28.45 JUN 22.50 0.80 0.80* 3.2% 10.8% CTIC 10.21 11.96 JUN 7.50 0.25 0.25* 3.0% 9.5% ANPI 25.20 28.45 JUN 17.50 0.75 0.75* 3.2% 9.4% IMCLE 21.20 19.85 JUN 15.00 0.50 0.50* 3.0% 9.2% OVTI 28.64 30.92 JUN 22.50 0.80 0.80* 2.7% 8.9% APPX 27.77 32.20 JUN 22.50 0.65 0.65* 2.6% 8.7% NVDA 21.37 20.87 JUN 17.50 0.55 0.55* 2.3% 7.6% CELG 27.42 31.10 JUN 22.50 0.70 0.70* 2.3% 7.5% ITMN 23.89 24.03 JUN 20.00 0.60 0.60* 2.2% 6.9% ITMN 25.76 24.03 JUN 22.50 0.60 0.60* 2.4% 6.8% SOHU 22.83 24.48 JUN 17.50 0.35 0.35* 1.8% 6.2% SFA 20.29 19.12 JUN 17.50 0.35 0.35* 1.8% 5.4% NVDA 21.26 20.87 JUN 17.50 0.30 0.30* 1.5% 5.2% APPX 23.40 32.20 JUN 15.00 0.35 0.35* 1.7% 5.0% ARTI 22.75 19.95 JUN 20.00 0.50 0.45 1.7% 4.8% * Stock price is above the sold striking price. Comments: Friday's lackluster activity held few surprises for investors, despite the approval of President Bush's $350 billion tax-cut package. Comments overheard among market bulls suggest that the favorable effects of the legislation, which lowers the top tax rate on dividends and accelerates scheduled income tax cuts, were already "factored-in" to current share values. If that is the case, the recent rally in stock prices may be due for some "backing and filling." Traders are encouraged to be vigilant in their position management and discerning in their play selection. Issues on the "watch" list include Intermune (NASDAQ:ITMN) and USG Corp. (NYSE:USG). Previously Closed Positions: Artisan (NASDAQ:ARTI), which is currently profitable. 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 CTIC 11.96 JUN 10.00 CUC RB 0.30 2004 9.70 27 3.5% 10.8% OVTI 30.92 JUN 25.00 UCM RE 0.45 1143 24.55 27 2.1% 7.3% OSIP 26.08 JUN 22.50 GHU RX 0.40 1127 22.10 27 2.0% 6.2% CELG 31.10 JUN 25.00 LQH RE 0.35 6287 24.65 27 1.6% 5.9% ANPI 28.45 JUN 22.50 AUJ RX 0.30 890 22.20 27 1.5% 5.6% CYBX 23.31 JUN 20.00 QAJ RD 0.30 96 19.70 27 1.7% 5.4% APPX 32.20 JUN 25.00 AQO RE 0.30 1416 24.70 27 1.4% 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). ***** CTIC - Cell Therapeutics $11.96 *** The Rally Continues! *** Cell Therapeutics (NASDAQ:CTIC) develops and commercializes novel treatments for cancer. The firm's lead product is called arsenic trioxide (Trisenox), which was acquired in January 2000. Trisenox is marketed for patients with a type of blood cell cancer, called acute promyelocytic leukemia, who have relapsed or failed standard therapies. The company is also developing a new way to deliver cancer drugs more selectively to tumor tissue in order to reduce the toxic side effects and also improve the anti-tumor activity of existing chemotherapy agents. In addition, the firm has identified a novel drug target, lysophosphatidic acid acyltransferase (LPAAT-_) that, when inhibited, has been shown to reduce tumor cell growth in preclinical models. CTIC shares vaulted to another 52-week high this week on heavy volume and the break-out from a 2-month trading range (near $9) suggests further upside potential in the near-term. This conservative position offers a way to participate in the future movement of the issue with relatively low risk. JUN-10.00 CUC RB LB=0.30 OI=2004 CB=9.70 DE=27 TY=3.5% MY=10.8% ***** OVTI - OmniVision $30.92 *** Onward And Upward! *** 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 traded 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 $25. JUN-25.00 UCM RE LB=0.45 OI=1143 CB=24.55 DE=27 TY=2.1% MY=7.3% ***** OSIP - OSI Pharmaceuticals $26.08 *** Drug Speculation! *** OSI Pharmaceuticals (NASDAQ:OSIP) is a biotechnology firm focused on the discovery, development and commercialization of oncology products that both extend life and improve the quality of life for cancer patients worldwide. OSI has created a balanced pipeline of oncology drug candidates including both next-generation cytotoxic chemotherapy agents and mechanism-based, gene-targeted therapies. OSI's most advanced drug candidate, Tarceva (erlotinib HC1), is a small-molecule inhibitor of the epidermal growth factor receptor. The protein product of the HER1/EGFR gene is a receptor tyrosine kinase that is over-expressed or mutated in many solid tumors. Shares of OSIP have been active recently on speculation over the prospects for its cancer drug Tarceva. Traders who have a bullish outlook on the issue can speculate on OSIP's future performance with this position. JUN-22.50 GHU RX LB=0.40 OI=1127 CB=22.10 DE=27 TY=2.0% MY=6.2% ***** CELG - Celgene $31.10 *** 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 $25 should consider this position. JUN-25.00 LQH RE LB=0.35 OI=6287 CB=24.65 DE=27 TY=1.6% MY=5.9% ***** ANPI - Angiotech $28.45 *** 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. The mid-week move to a new yearly high suggests further upside potential and traders can profit from that outcome with this position. JUN-22.50 AUJ RX LB=0.30 OI=890 CB=22.20 DE=27 TY=1.5% MY=5.6% ***** CYBX - Cyberonics $23.31 *** Testing 52-Week Highs! *** Cyberonics (NASDAQ:CYBX) designs, develops, manufactures and markets the NeuroCybernetic Prosthesis, an implantable medical device that delivers a novel therapy, Vagus Nerve Stimulation, for treating epilepsy and debilitating neurological, psychiatric diseases and other disorders. In July 1997, the NCP System was approved by the United States Food and Drug Administration for commercial distribution in the United States for the treatment of epilepsy, which the firm sells using its own employee-based direct marketing organization. In addition, the NCP System is marketed internationally for the treatment of epilepsy (mainly in Europe) using a combination of Cyberonics' own direct sales organization and independent distributors. During fiscal 2001, the firm obtained approval for commercial distribution of the NCP System for the treatment of depression in Europe and Canada. CYBX is in a bullish sector and the company has a product that is proven and well known for treating epilepsy. In addition, the firm's fundamentals are improving with 6 straight quarters of 20% or better revenue growth. Investors can establish a cost basis near $20 in the issue with this position. JUN-20.00 QAJ RD LB=0.30 OI=96 CB=19.70 DE=27 TY=1.7% MY=5.4% ***** APPX - American Pharmaceutical $32.20 *** 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). APPX 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-25.00 AQO RE LB=0.30 OI=1416 CB=24.70 DE=27 TY=1.4% 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 LGND 10.78 JUN 10.00 LQP RB 0.35 547 9.65 27 4.1% 10.2% CPTS 13.70 JUN 12.50 UCP RV 0.40 30 12.10 27 3.7% 9.6% MLNM 14.26 JUN 12.50 QMN RV 0.35 1807 12.15 27 3.2% 9.2% VGR 15.98 JUN 15.00 VGR RC 0.45 40 14.55 27 3.5% 8.6% AAPL 18.32 JUN 17.50 AAQ RS 0.45 3459 17.05 27 3.0% 7.3% SOHU 24.48 JUN 20.00 UZK RD 0.35 614 19.65 27 2.0% 7.0% MRVL 32.10 JUN 30.00 UVM RF 0.70 312 29.30 27 2.7% 6.9% ISIL 21.72 JUN 20.00 UFH RD 0.40 943 19.60 27 2.3% 6.1% IGEN 35.54 JUN 27.50 GQ RY 0.35 1745 27.15 27 1.5% 5.3% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Time For A Holiday! By Ray Cummins The major equity averages ended higher Friday amid optimism over the new tax-cut legislation and its future affects on the health of the U.S. economy. The Dow Jones Industrial Average climbed 7 points to 8,601 on strength in AT&T (NYSE:T), Altria Group (NYSE:MO) and Eastman Kodak (NYSE:EK). The NASDAQ Composite Index added 2 points to close at 1,510 with shares of Marvell Technology (NASDAQ:MRVL) among the best performers. Shares of MRVL soared over 15% after the firm announced favorable first-quarter sales and projected strong growth for the second quarter amid increased demand for its gigabit Ethernet and storage chips. The Standard & Poor's 500 Index added 1 point to end at 933 with biotech and utility issues enjoying increased buying pressure. Trading volume was under 1.2 billion shares on the New York Stock Exchange, below the average of about 1.4 billion, and just over 1.4 billion on the NASDAQ. Winners outnumbered losers by a 2 to 1 margin on the Big Board, and by 3 to 2 on the technology exchange. The bond market was upbeat as prices rose, driving the yield on the 10-year note down to 3.30%. With regard to money flows, Trim Tabs estimated that equity funds had outflows of $1.4 billion over the week ended May 21, compared with outflows of only $300 million in the prior week. Bond funds had inflows of $2 billion for the second consecutive week. ***************** PORTFOLIO SUMMARY ***************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position 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 BZH 71.80 81.33 JUN 60 65 0.55 64.45 $0.55 Open CECO 60.52 57.40 JUN 50 55 0.50 54.50 $0.50 Open FDC 40.22 40.16 JUN 35 37 0.30 37.20 $0.30 Open RCII 65.35 64.71 JUN 55 60 0.50 59.50 $0.50 Open ADTN 45.05 45.40 JUN 35 40 0.45 39.55 $0.45 Open KLAC 42.49 39.92 JUN 35 37 0.30 37.20 $0.30 Open LLTC 36.34 33.65 JUN 30 32 0.30 32.20 $0.30 Open ROST 40.09 40.08 JUN 35 37 0.40 37.10 $0.40 Open BSX 48.70 50.51 JUN 38 40 0.25 39.75 $0.25 Open UNH 95.41 95.48 JUN 85 90 0.55 89.45 $0.55 Open WLP 81.05 84.80 JUN 70 75 0.40 74.60 $0.40 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss Career Education (NASDAQ:CECO), KLA-Tencor (NASADQ:KLAC) and Linear Technology (NASDAQ:LLTC) are now on the "watch" list. CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status PG 90.15 89.80 JUN 100 95 0.40 95.40 $0.40 Open GS 75.00 76.15 JUN 85 80 0.60 80.60 $0.60 Open MMM 122.81 123.50 JUN 135 130 0.50 130.50 $0.50 Open ANF 27.25 26.63 JUN 32 30 0.20 30.20 $0.20 Open GM 34.41 33.26 JUN 40 37 0.25 37.75 $0.25 Open JCI 81.61 80.70 JUN 90 85 0.55 85.55 $0.55 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss The Nabors Industries (NYSE:NBR) position has previously been closed to limit potential losses. CALL DEBIT SPREADS ****************** Symbol Pick Last Month LC SC Debit B/E G/L Status AXP 38.46 39.99 JUN 32 35 2.20 34.70 0.30 Open GENZ 41.47 44.86 JUN 35 37 2.20 37.20 0.30 Open BSX 46.91 50.51 JUN 37 40 2.25 39.75 0.25 Open MERQ 35.75 36.36 JUN 30 32 2.25 32.25 0.25 Open LC = Long Call SC = Short Call B/E = Break-Even G/L = Gain/Loss PUT DEBIT SPREADS ***************** Symbol Pick Last Month LP SP Debit B/E G/L Status WMT 52.92 52.00 JUN 60 55 4.50 55.50 0.50 Open LP = Long Put SP = Short Put B/E = Break-Even G/L = Gain/Loss SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status SMH 26.43 27.03 AUG 30 22 0.10 1.20 Open MRVL 26.72 27.98 JUN 30 22 (0.20) 2.50 Open Marvell Technology (NASDAQ:MRVL) 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 Semiconductor Holdrs (AMEX:SMH) play has achieved a favorable profit. The speculative position in Silicon Laboratories (NASDAQ:SLAB) has previously been closed to limit potential losses. SYNTHETIC (BEARISH) ******************* No Open Positions CALENDAR & DIAGONAL SPREADS *************************** Stock Pick Last Long Short Current Max. Play Symbol Price Price Option Option Debit Value Status BMET 28.52 28.43 JUL-30C JUN-30C (0.70) 0.40 Open ESI 29.11 26.72 OCT-30C JUN-30C 1.35 1.60 Open? FILE 13.75 15.72 JUL-15C JUN-15C 0.10 0.20 Open IBM 87.57 85.26 JUL-90C JUN-90C 0.25 1.20 Open? GDT 39.98 42.18 OCT-45C JUN-45C 1.45 1.55 Open NSM 21.80 22.43 JAN-25C JUN-25C 2.10 2.40 Open BRCM 21.40 22.03 JAN-25C JUN-25C 2.15 2.40 Open SRNA 19.71 18.38 AUG-22C JUN-22C 0.70 0.60 Open VRTY 18.85 19.63 SEP-20C JUN-20C 1.00 1.15 Open The speculative calendar spread in SRNA is the only position of immediate concern as the issue fell almost 7% after the company said its current quarter's profit could fall shy of consensus estimates. Our "time-selling" position expires in August, but a continued retreat in the issue's share value will make it very difficult to achieve a profit in the play. With that outlook in mind, traders are reminded to use sound money-management to limit potential losses in the position. CREDIT STRANGLES **************** Symbol Pick Last Month SC SP Credit C/V G/L Status NXTL 13.60 14.88 JUN 15 12 0.75 $1.10 (0.35) Open SC = Short Call SP = Short Put C/V = Current value G/L = Gain/Loss DEBIT STRADDLES *************** 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. ***** BSX - Boston Scientific $50.51 *** New All-Time High! *** 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 $50.51 PLAY (less conservative - bullish/credit spread): BUY PUT JUN-40.00 BSX-RH OI=24180 ASK=$1.05 SELL PUT JUN-42.50 BSX-RV OI=7836 BID=$1.35 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$42.10 ***** PHM - Pulte Homes $63.71 *** Homebuilders Rally! *** Pulte Homes (NYSE:PHM) is a holding company whose subsidiaries engage in the homebuilding and financial services businesses. The company's direct subsidiaries include Pulte Diversified Companies, Inc. (PDCI), Del Webb Corporation and others that are engaged in the homebuilding business. PDCI's operating subsidiaries include Pulte Home Corporation (PHC), Pulte International Corporation and other subsidiaries that are engaged in the homebuilding business. The company also has a mortgage banking company, Pulte Mortgage Corporation, which is a subsidiary of PHC. PHM - Pulte Homes $63.71 PLAY (less conservative - bullish/credit spread): BUY PUT JUN-55.00 PHM-RK OI=1071 ASK=$0.25 SELL PUT JUN-60.00 PHM-RL OI=349 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$59.50 ***** BRL - Barr Laboratories $52.56 *** Drug Sector Sell-Off! *** Barr Laboratories (NYSE:BRL) is a specialty pharmaceutical company primarily engaged in the development, manufacture and marketing of generic and proprietary prescription pharmaceuticals. The company manufactures and distributes more than 100 different dosage forms and strengths of pharmaceutical products in core therapeutic categories, including oncology, female healthcare (including hormone replacement and oral contraceptives), cardiovascular, anti infective and psychotherapeutics. In addition, the company has a proprietary, novel vaginal ring drug delivery system it is using to develop products intended to address a variety of female health issues and unmet medical needs. BRL - Barr Laboratories $52.56 PLAY (less conservative - bearish/credit spread): BUY CALL JUN-60.00 BRL-FL OI=832 ASK=$0.25 SELL CALL JUN-55.00 BRL-FK OI=818 BID=$0.85 INITIAL NET-CREDIT TARGET=$0.65-$0.75 POTENTIAL PROFIT(max)=15% B/E=$55.65 ***** CCMP - Cabot Microelectronics $41.55 *** Trading Range? *** Cabot Microelectronics (NASDAQ:CCMP) is a global supplier of high performance polishing slurries used in the manufacture of advanced integrated circuit (IC) devices, within a process called chemical mechanical planarization (CMP). CMP is a polishing process used by IC device manufacturers to planarize or flatten many of the multiple layers of material that are built upon silicon wafers and necessary in the production of advanced ICs. Planarization is a polishing process that levels, smoothes, and removes the excess material from the surfaces of these layers. CMP slurries are liquid formulations that facilitate and enhance this polishing process and generally contain engineered abrasives and proprietary chemicals. CMP enables IC device manufacturers to produce smaller, faster and more complex IC devices with fewer defects. CCMP - Cabot Microelectronics $41.55 PLAY (conservative - bearish/credit spread): BUY CALL JUN-50.00 UKR-FJ OI=843 ASK=$0.10 SELL CALL JUN-45.00 UKR-FI OI=1484 BID=$0.55 INITIAL NET-CREDIT TARGET=$0.45-$0.55 POTENTIAL PROFIT(max)=9% B/E=$45.45 ***** KSS - Kohl's Corporation $51.22 *** Retail Sector Slump! *** Kohl's (NYSE:KSS) operates family-oriented, specialty department stores. 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 traditional, full-line department stores, but offer customers assortments of merchandise displayed in complete selections of styles, colors and sizes. Since 1992, the company has increased square footage an average of 22% per year, expanding from 79 stores located in the Midwest to a total of over 400 stores with a presence in six regions. New markets include Chicago, Illinois; Detroit, Michigan; Ohio; Boston, Massachusetts; Philadelphia, Pennsylvania; St. Louis, Missouri, and the New York region. KSS - Kohl's Corporation $51.22 PLAY (conservative - bearish/credit spread): BUY CALL JUN-60.00 KSS-FL OI=3685 ASK=$0.15 SELL CALL JUN-55.00 KSS-FK OI=4636 BID=$0.55 INITIAL NET-CREDIT TARGET=$0.45-$0.50 POTENTIAL PROFIT(max)=9% B/E=$55.45 ************* 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. ***** HDI - Harley-Davidson $40.81 *** Demand Waning? *** Harley-Davidson (NYSE:HDI) operates in the motorcycles and other related products segment and the financial services segment. The motorcycles and related products segment includes the group of companies doing business as Harley-Davidson Motor Company, subsidiaries of H-D Michigan, and Buell Motorcycle Company LLC. The motorcycles segment designs, manufactures and sells primarily heavyweight touring, custom and performance motorcycles, as well as a complete line of motorcycle parts, accessories, clothing and collectibles. The financial services segment consists of the firm's subsidiary, Harley-Davidson Financial Services, and its various subsidiaries. HDFS is engaged in the business of financing and servicing wholesale inventory receivables and consumer retail installment sales contracts (primarily motorcycles and aircraft). HDI - Harley-Davidson $40.81 PLAY (moderately aggressive - bearish/debit spread): BUY PUT JUN-45.00 HDI-RI OI=3342 A=$4.40 SELL PUT JUN-42.50 HDI-RV OI=3465 B=$2.30 INITIAL NET-DEBIT TARGET=$2.05-$2.10 POTENTIAL PROFIT(max)=19% B/E=$42.90 **************** 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. ***** VIA - Viacom $44.95 *** Back In A Comfort Zone? *** Viacom (NYSE:VIA), together with its subsidiaries, is a widely diversified worldwide entertainment company. The company owns and operates advertiser-supported basic cable television program services through MTV Networks and BET: Black Entertainment TV and and premium subscription television program services through the Showtime Network in the United States and internationally. The Television segment consists of the CBS and UPN television networks. Infinity's operations are focused on "out-of-home" media with operations in radio broadcasting. The Entertainment segment's principal businesses are Paramount Pictures, which produces and distributes motion pictures. The company operates in the home video retail business, which includes both rental and sale of videocassette and DVD products. The company also publishes and distributes consumer hardcover books. VIA - Viacom $44.95 PLAY (conservative - bullish/calendar spread): BUY CALL AUG-47.50 VIA-HW OI=426 ASK=$1.60 SELL CALL JUN-47.50 VIA-FW OI=203 BID=$0.40 INITIAL NET DEBIT TARGET=$1.10-$1.15 INITIAL TARGET PROFIT=$0.45-$0.70 ******************* 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. ***** ICOS - ICOS Corporation $29.85 *** Speculation Only! *** ICOS Corporation (NASDAQ:ICOS) develops pharmaceutical products with significant commercial potential by combining its unique capabilities in molecular, cellular and structural biology, high-throughput drug screening, medicinal chemistry and gene expression profiling. The firm applies its integrated approach to erectile dysfunction and other urologic disorders, sepsis, pulmonary arterial hypertension and cardiovascular diseases, as well as inflammatory diseases. The company has established collaborations with pharmaceutical and biotechnology companies to enhance its internal development capabilities and to offset a substantial portion of the financial risk of developing its product candidates. ICOS - ICOS Corporation $29.85 PLAY (very speculative - bullish/synthetic position): BUY CALL JUL-35.00 IIQ-GG OI=812 ASK=$0.85 SELL PUT JUL-25.00 IIQ-SE OI=1796 BID=$0.85 INITIAL NET CREDIT TARGET=$0.10-$0.20 INITIAL TARGET PROFIT=$0.55-$0.80 Note: Using options, the position is similar to being long the stock. The minimum initial margin/collateral requirement for the sold option is approximately $800 per contract. However, do not open this position if you can not afford to purchase the stock at the sold put strike price ($25). *********************** STRADDLES AND STRANGLES *********************** Based on analysis of the historical option pricing and technical background, these positions meet the fundamental criteria for favorable volatility-based plays. ***** TYC - Tyco International $17.27 *** Reader's Request *** Tyco International (NYSE:TYC) is a diversified manufacturing and service company. Tyco is the world's largest manufacturer and servicer of electrical and electronic components; the largest designer, manufacturer, installer and servicer of undersea telecommunications systems; the largest manufacturer, installer and provider of fire protection systems and electronic security services and the largest manufacturer of specialty valves. The Electronics segment designs, manufactures and distributes various electrical and electronic components and designs, manufactures, installs, operates and maintains fiber-optic undersea telecom communications systems. The Healthcare and Specialty Products segment designs, manufactures and distributes medical devices and supplies and other specialty products. The Engineered Products and Services segment designs, manufactures, sells and services engineered products including industrial valves and controls and steel tubular goods and provides environmental consulting services. TYC - Tyco International $17.27 PLAY (speculative - neutral/debit straddle): BUY CALL JUL-17.50 TYC-GT OI=49667 ASK=$0.85 BUY PUT JUL-17.50 TYC-ST OI=19068 ASK=$1.10 INITIAL NET-DEBIT TARGET=$1.80-$1.90 INITIAL PROFIT TARGET=0.40-$0.75 ***** ***************************Advertisement*************************** Thinking of retiring to Hawaii? Or a second home in Paradise? 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